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Landmark Judgements under IBC Real Estate

  • Facts – Corporate Debtor (Respondent) had to refund 2 Crores to Appellant for a cancelled MoU between them. The Financial Creditor and Corporate Debtor entered into a settlement agreement dated 10th April 1996 whereby the Financial Creditor/Appellant was allotted 34000 sq. ft. area of built-up area. It was also agreed upon that in case the project is delayed, the Financial Creditor would get an additional 5100 sq. ft area of built- up area. Financial Creditor contends that the allotment as per settlement agreement to the Financial Creditor was in lieu of claim of Financial Creditor against the Corporate Debtor for utilization of Rs.2 Crores beyond the due date.
  • Issues – (1) Whether ‘debt’ as alleged by the Appellant is a financial debt as defined under Clause (8) (f) of Section 5 of the I&B Code, 2016? (2) Whether Corporate Debtor committed ‘default’ by not allotting 39100 sq. ft. built-up area of land, in terms of Section 3(12) of the I&B Code, 2016?
  • Held – (1) Allotment of built-up area against the consent decree & settlement terms is not Financial Debt under Sec. 5(8) (f) since no sum has been raised from an allottee under the Real Estate Project. (2) If time for performance has not arrived yet, then even if the consent decree is a ‘debt’, even then there is no Default by the Corporate Debtor in terms of the Code.
  • Facts – (Corporate Debtor) has preferred the instant appeal against the order of admission of application under Section 7 of the Code filed by Mr. Ashok Tripathi and Mr. Saurabh Tripathi claiming to be the Financial Creditors.\The orders dated 16th November, 2017 and 13th December, 2018 coupled with the Recovery Certificate dated 10th August, 2019 issued by the ‘Uttar Pradesh Real Estate Regulatory Authority’ (“UP RERA”) to establish existence of financial debt and liability of Corporate Debtor to the tune of Rs.73,35,686.43/-, the Adjudicating Authority observed that the claim of allottees having arisen out of the Orders and Recovery Certificate issued by the “UP RERA” determining an ‘adjudicated debt’, Ordinance dated 28th December, 2019 prescribing a threshold limit for initiation of CIRP at the instance of allottees of a Real Estate Project was not attracted.
  • Ratio – (1) Execution of decree/ recovery of amount due under Recovery Certificate issued by RERA would not justify triggering of Corporate Insolvency Resolution Process. (2) A ‘decree holder’ is undoubtedly covered by the  definition  of ‘Creditor’ under Section 3(10) of the ‘I&B Code’ but would not fall within the class of creditors classified as ‘Financial Creditor’ unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of ‘financial debt’ is inclusive in character.

Ratio –

  • One of the essential features for consideration of an Application under Section 9 of I &B Code is service of notice.
  • It is to be relevantly pointed out that a ‘dispute’; does not mean a mere denial viz. no payment is due because there is a dispute. It is to be remembered that I & B Code is not substitute for ‘Debt Enforcement Procedure’.
  • If a ‘Debt’ is due and payable one to the ‘Operational Creditor’ by the ‘Operational Debtor’ then the said ‘Debtor’ will squarely come within the purview of the ingredients of the definition of Section 5(21) of the Code. In a given case, if it is exhibited that there is a clear default of minimum of Rs. 1/- Lakh, then the dispute in regard to quantum of the amount claimed cannot be an hindrance in admitting an Application/Petition filed either under Section 7 or 9 of the I &B Code.
  • The aspect of ‘Addition of Parties’ in a given proceeding is within the exclusive domain of a concerned Court/Tribunal. A party/parties are not to be added/arrayed as parties in a given application to introduce a fresh/new cause of action.
  • Supreme Court order dated 16th June 2020
  • Issued notice to Centre and extended protection to all petitions filed u/s 7 those do not meet 10% requirement
  • Sec 3 condition is stringent and onerous
  • Bench asked to maintain status quo on all applications
  • Sec 3 amendment is violative of article 14 of Constitution
  • Ratio – If the Apartment was ready for delivery, handed over and the petitioner has accepted the same, as such now he can’t choose to claim the money back as Financial Creditor. The right to claim money by the allottee of a Residential Apartment eminates only in the event of non- delivery of the apartment to the allottee.

Case Brief: The Appellants were the Original Allottees who initially moved application under Section 7 of the Code and  the Adjudicating Authority by impugned order dated 27.01.2020 adjourned the matter for 5th March in view of pendency of the case before the Hon’ble Supreme Court on the ordinance dated 28th December, 2019 .                       

In the present case the question to be decided is to whether the Appellants filed their claim independently as Financial Creditors as defined under Section 5(7) & (8) of the Code pursuant to the agreement of refund or as the allottees..

NCLAT Held :

That  Since such issue is required to be determined, therefore, we remit the matter to the   Adjudicating  Authority to decide the issue as to:

  1. Whether Appellants filed application as an independent “Financial Creditor” as defined under Section 5(7) & (8) of the Code or as “allottees”.
  2. If they have not claimed for allotment of flats or shops but prayed for initiation of insolvency proceeding as Financial Creditors, the Adjudicating Authority will decide the said issue without  awaiting the decision of the Hon’ble Supreme Court.
  3. If it is decided that the application has been filed by the Appellants as allottees, in such case the Adjudicating Authority will await for the decision of the Hon’ble Supreme Court.
  • The Adjudicating Authority taking into consideration the fact of existence of financial debt and non-delivery of the possession of the project within time prescribed and for non-refund of the amount paid, held that there is a default and admitted the application.

NCLAT, while allowing the appeal held

  • Flat Allottee(s)’s Agreement was not referred by AA while admitting the Application.
  • Admittedly, the allottee too defaulted to pay the demand amounts as per agreement
  • The Project was effected by ‘force majeure’ due to imposition of ban by Green tribunal
  • Allottee did not wait for RERA order but filed application u/s 7 of the Code
  • Meanwhile Allottee and CD have entered into a settlement agreement on 24th Oct 2019
  • The application u/s 7 was fit to be rejected and accordingly set aside the order of AA dated 9th Oct 2019
  • The Appellant is directed to adhere to the terms of “Settlement Agreement

Held by NCLAT, while dismissing the appeal,

  • NCLAT referring the decision of Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India, 2019
  • Held that it falls upon the adjudicating authority or the NCLAT to decide whether the default has been caused due to the fault of the corporate debtor, or whether it a force majeure condition that has resulted in a failure of the corporate debtor to comply with its financial and other obligations.
  • Moreover, if the default has not been caused due to the acts or omissions of the corporate debtor, but due to any force majeure event, it can be deduced that the corporate debtor is not at fault
  • Ratio – If the two ‘Corporate Debtors’ collaborate and form an independent corporate unit entity for developing the land and allotting the premises to its allottee, the application under Section 7 will be maintainable against both of them jointly and not individually against one or other.