Vakil Help Desk News: the NCLAT has confirmed that interest-free maintenance security (IFMS) and maintenance charges paid to a builder are not a 'financial debt' under the Insolvency and Bankruptcy Code, so a residents' association cannot start insolvency proceedings against the builder to recover them.
Vakil Help Desk News, RWA & Housing Societies. Associations sometimes try to use the insolvency route to force a builder to hand over maintenance funds. The National Company Law Appellate Tribunal (NCLAT), upholding the tribunal below, has clarified that this does not work.
The dispute
A residents' association sought to start a corporate insolvency process against a builder under Section 7 of the Insolvency and Bankruptcy Code (IBC), claiming the builder had collected a large interest-free maintenance security (IFMS) and maintenance corpus but not handed it over as the conveyance deed required.
What the Tribunal held
- IFMS and maintenance charges are collected to fund upkeep — they are not 'disbursed against consideration for the time value of money'.
- Section 7 of the IBC can be triggered only by a 'financial creditor' owed a 'financial debt' under Section 5(8); maintenance deposits do not meet that test.
- The real nature of the transaction must be examined first — here it was an advance for services, not a loan.
- The insolvency application was not maintainable and was dismissed.
Why it matters
Insolvency is a powerful tool, but it is the wrong one for recovering maintenance funds. Associations must use the correct remedy instead — recovery suits, RERA, or action under the conveyance/maintenance agreement.
What this means for you
If your society or association is trying to recover maintenance deposits (IFMS) or an unremitted maintenance corpus from a builder, insolvency proceedings under the IBC are not the route — such deposits are not a 'financial debt'. The right remedies are a civil recovery suit, RERA action, or enforcement of the conveyance/maintenance agreement. Keep the conveyance deed and deposit records. We advise associations on recovering maintenance funds and on builder disputes.