Dated 2nd September, 2020
Homebuyers as defined under Section 2(d) of the Real Estate (Regulation and Development) Act, 2016 were given the status of “Financial Creditors” under the Insolvency and Bankruptcy Code (Amendment) Act, 2018. The 2018 Amendment brought a significant change as now the Homebuyers can initiate the Insolvency proceedings against a Corporate Debtor under Section 7 of the IBC in case of any default on part of the Corporate Debtor.
However, in a recent order issued by the National Company Law Appellate Tribunal (NCLAT) dated 14th August 2020 in the case of Sushil Ansal v. Ashok Tripathi, NCLAT held that the Homebuyers cannot initiate Corporate Insolvency Resolution Process (CIRP) against a Realty Company in order to recover the monies awarded to them by a Real Estate Regulator. The NCLAT set aside the order of the National Company Law Tribunal (NCLT) whereby NCLT admitted the application of two Homebuyers filed against Ansal Properties and Infrastructure Limited (APIL) on basis of a recovery certificate issued by the Uttar Pradesh Real Estate Regulatory Authority (UP RERA) and thereafter appointed an Interim Resolution Professional and declared a moratorium on the assets of APIL.
Facts
- Two Homebuyers in the present matter had jointly booked two dwelling units at Sushant Golf City, Lucknow with APIL.
- Subsequently, an agreement was executed in September 2014 wherein APIL was required to complete the construction within a period of two years from the date of commencement of construction.
- However, APIL failed to complete the construction within the stipulated time period and then the Homebuyers accordingly approached RERA.
- When APIL failed to make payments to the Homebuyers, UP RERA then granted a decree to the homebuyers for an amount of about Rupees Seventy-Three Lakhs.
- The homebuyers then approached the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code”) as Financial Creditors to initiate CIRP of APIL.
- The homebuyers approached the NCLT on account of non-payment of the principal amount along with the penalty as decreed by the UP RERA besides the recovery certificate constituting it as the default of financial debt committed by APIL.
- Instead of seeking execution of the decree under civil law, the homebuyers approached the NCLT to initiate insolvency proceedings against APIL.
- The NCLT thereafter admitted the application, appointed an Interim Resolution Profession (IRP), and declared a Moratorium on the assets of the APIL. The IRP received claims from more than two hundred and fifty (250) allottees. APIL’s director Mr. Sushil Ansal, thereafter, approached the NCLAT contesting the order passed by the NCLT.
Issue
The major issue for which the case is in headlines is – Whether the Application under Section 7 preferred by the Homebuyers as Financial Creditors to initiate CIRP of APIL is maintainable?
Analysis and Reasoning
To commence with, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 added a proviso to Section 7 prescribing a threshold limit to initiate CIRP at the instance of Allottees under Real Estate Project providing that the application shall be filed jointly by not less than one hundred of such allottees or not less than 10% of the total number of such allottees under a particular project, whichever is less. Thus, it is clear that an application preferred by a single allottee or a group of allottees falling short of the prescribed threshold would not be entertained.
While dealing with the main question of whether a decree-holder covered by the definition of ‘creditor’ would fall within the ambit of ‘Financial Creditor’ under IBC, NCLAT observed that the case set up by the Homebuyers before the Adjudicating Authority is not on the strength of a transaction having the commercial effect of borrowing, thereby clothing them with the status of ‘Financial Creditors’ but on the strength of being ‘decree-holders’ which owed its origin to the recovery certificate issued by the UP RERA.
As per Sub-clause (f) of sub-section (8) of Section 5 and the proviso added in 2018 the relevant consideration for determination of ‘financial debt’ would be whether the debt was disbursed against the consideration for the time value of money which may include the amount raised from an allottee under a Real Estate Project, the transaction deemed to be amount having the commercial effect of a borrowing. A ‘decree-holder’ is undoubtedly covered by the definition of ‘Creditor’ under Section 3(10) of the IBC but would not fall within the class of ‘Financial Creditor’ unless the debt was disbursed against the consideration for the time value of money or falls within any of the clauses thereof as the definition is inclusive in nature.
In the present case, RERA had initiated recovery proceedings at the instance of the Homebuyers against APIL. As a result, the recovery certificate was issued and an order under Section 40 of the Real Estate (Regulation and Development) Act, 2016, directing the concerned authority to recover a number of about Rupees Seventy-Three Lakh form APIL as an arrear of land revenue was effectuated. In view thereof, a decree-holder would not fall within the definition of ‘financial creditor’ as the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value and does not fall within the ambit of any of the clauses enumerated under the definition of ‘financial debt’ under Section 5(8) of the I&B Code.
Further, while deciding whether the execution of the decree on the strength of Recovery Certificate issued by the ‘UP RERA’ would justify triggering of the CIRP, NCLAT observed that UP RERA has already forwarded the Recovery Certificate to the Competent Authority for effecting recovery in the manner and as an arrear of land revenue from the Corporate Debtor and while the process was underway the Homebuyers sought to trigger CIRP against APIL. Therefore, the homebuyers had approached the NCLT only with a view to execute the decree in the nature of the recovery certificate and recover the amount due thereunder.
Conclusion
Thus, the homebuyers projected in the capacity of Decree-Holders seeking execution of money due under a recovery certificate could not maintain an application under Section 7 as ‘Financial Creditors’. Further, in the present case, ‘decree-holder’ although included in the definition of ‘creditor’ would not fall within the definition of ‘financial creditor’ and thus the homebuyers could not seek initiation of CIRP on that basis.
Article by Ms. Purvi Devpura under internship of Adv Shankarlal Raheja
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