Home » Between The Lines » NCLAT: Decree holder cannot be classified as a financial creditor for the purpose of initiating Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016

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The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated August 14, 2020 (“Judgment”) in the matter of Sushil Ansal v. Ashok Tripathi and Others [Company Appeal (AT) (Insolvency) No. 452 of 2020], held that a decree holder cannot be classified as a financial creditor for the purpose of initiating Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts
Brief facts of the case are that on August 5, 2014, one Mr. Ashok Tripathi (“Respondent No. 1”) and Mr. Saurabh Tripathi (“Respondent No. 2”) (collectively, “Respondents”) had jointly booked a unit bearing No. 0073, admeasuring 3746 sq. ft., with M/s. Ansal Properties and Infrastructure Limited (“Corporate Debtor”) in one of their real estate projects namely, Sushant Golf City, in Lucknow, for a total consideration of INR 1,62,43,133/- by paying an amount of INR 8,37,300/- towards booking advance. In a separate transaction, Respondent No. 2 had on July 16, 2014, booked another unit bearing No. B7/GF/01, admeasuring 1229 sq. ft. in the same project, by paying an amount of INR 1,63,994/- as booking advance. A joint “built up agreement/builder buyer agreement” dated September 12, 2014, in respect of the unit bearing No. 0073 and a “Flat Buyer Agreement” dated September 28, 2014 in respect of the unit bearing No. B7/GF/01 was executed between the respective Respondents with the Corporate Debtor. Pursuant to execution of the aforementioned agreements, allotment letters pertaining to the said units were issued by the Corporate Debtor to each of the Respondents.

The Corporate Debtor undertook to complete the construction of the said units and to deliver possession thereof to the said Respondents within 2 years from the date of commencement of construction. Since the project commencement date notified on the website of RERA was September 22, 2015, the Corporate Debtor was required to deliver possession of the unit bearing No. 0073 to both the Respondents by September 22, 2017 and deliver possession of the unit bearing No. B7/GF/01 to the Respondent No. 2 within 36 months from the date of the building plan being sanctioned. However, even after the passing of 5 years of the aforementioned time frame, the Corporate Debtor failed to complete the construction of the said units or refund the amounts paid as booking advance, to the Respondents.

Aggrieved by the above, the Respondents lodged a complaint before the Uttar Pradesh Real Estate Regulatory Authority (“UP RERA”) to establish the existence of a financial debt and liability of the Corporate Debtor to the tune of INR 73,35,686.43. Pursuant to this, on November 16, 2017, the UP RERA directed the Corporate Debtor to refund the amount repayable to the Respondents with respect to the unit bearing No. 0073 in 6 instalments within a period of 9 months. Subsequently, on December 13, 2018, the UP RERA further directed the Corporate Debtor to refund the amount paid with respect to the unit bearing No. B7/GF/01 to Respondent No.2 in 10 monthly instalments along with interest. Consequently, a Recovery Certificate dated August 10, 2019 (“Recovery Certificate”) was issued by the UP RERA in this regard and forwarded to the concerned authority for effecting the recovery of INR 73,35,686.43 from the Corporate Debtor. However, the Respondents chose to file an application under Section 7 of the IBC for initiation of CIRP before the National Company Law Tribunal, New Delhi (“NCLT”) even though they were entitled to seek disbursement of the above mentioned amount of INR 73,35,686.43 from UP RERA upon its recovery.

The NCLT observed that the claim of the allottees had arisen out of the aforementioned orders and Recovery Certificate issued by the UP RERA and termed such claim as an ‘adjudicated debt’. It therefore held that the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (“Ordinance”) promulgated on December 28, 2019, which prescribes a minimum threshold limit of not less than 100 allottees or not less than 10% of the total number of allottees under the same real estate project, whichever is less, for initiation of CIRP at the instance of allottees of a real estate project, was not attracted in the present case, as the Respondents went before the NCLT as decree-holders and not as allottees. Thus, the NCLT, vide its impugned order dated March 17, 2020 (“NCLT Order”), admitted the application of the Respondents for initiating CIRP. Aggrieved by the said NCLT Order, Mr. Sushil Ansal, a former director and shareholder of the Corporate Debtor (“Appellant”), filed the present appeal before the NCLAT.

Issues

  • Whether this is a fit case for invoking Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”) to allow the parties to settle the dispute?
  • Whether the application filed by the Respondents under Section 7 of the IBC was not maintainable?

Arguments

Contentions raised by the Appellant:

The Appellant inter alia contended that the application filed by the Respondents under Section 7 of the IBC was not maintainable as the Respondents did not meet the required criteria of either constituting 100 allottees or 10% of the total allottees as mandated under the Ordinance, and therefore were ineligible to by themselves file an application under Section 7 of the IBC for initiation of CIRP against the Corporate Debtor. The Appellant argued that the Ordinance was promulgated and came into force during the pendency of the applications filed by the Respondents before the NCLT and therefore the NCLT should have insisted upon compliance with the mandate under the Ordinance regarding the threshold limit before proceeding to pass the impugned order. It was further argued that the Ordinance was followed by the passing of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“Amendment Act”) which incorporated the provisions of the Ordinance, and in effect crystallised the legal position pertaining to eligibility for initiating of CIRP, and therefore the application filed by the Respondents under Section 7 was not maintainable. It was also urged that classification of allottees as Financial Creditors was not permissible and merely because the Respondents had obtained a RERA decree in their favour, it did not alter their status. Therefore, the finding recorded by the NCLT that the allottees who have obtained a decree in their favour would not be hit by the requirement of threshold limit under the Ordinance followed by the Amendment Act was flawed. It was further submitted that the dispute stood settled between the Corporate Debtor and the Respondents in terms of an amicable settlement between the parties pursuant to which they had filed a joint application for withdrawal and termination of CIRP of the Corporate Debtor.

Contentions raised by the Respondents:

The Respondents on the other hand contended that they had settled all their disputes with the Appellant in relation to the unit bearing no. 0073 and they do not have any pending claims against the Corporate Debtor. The Respondents accordingly prayed for invoking Rule 11 of the NCLAT Rules to set aside the order of admission and terminate the CIRP against the Corporate Debtor. It was further submitted that the dispute was settled prior to constitution of a committee of creditors and therefore there was no legal impediment in allowing such settlement and permit withdrawal and termination of CIRP. In so far as the claims of other home buyers/ creditors was concerned, it was submitted that they could pursue their claims independently on their own merits through any remedy as may be available under law. As regards the instant appeal, it was submitted that the Respondents did not wish to contest the issue raised by the Appellant regarding maintainability of the application under Section 7 filed by them and, therefore, agreed and subscribed to the arguments advanced by the Appellant.

Observations of the National Company Law Appellate Tribunal, New Delhi:

The NCLAT observed that a Corporate Debtor was permitted to seek exit from CIRP at the pre-admission stage. It could also seek exit at the post admission stage, but before constitution of the Committee of Creditors. It was manifest that a party to CIRP could approach the adjudicating authority directly for exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016 for withdrawal of the application under Section 7 of the IBC or disposal of such application on the basis of a settlement worked out by the parties. However, exercise of inherent power on the part of adjudicating authority or even by the NCLAT in appeal would depend on consideration of all relevant facts of the case. The adjudicating authority or the appellate tribunal would have to keep in view the interest of various stakeholders and claimants before allowing such withdrawal or settlement. Admittedly, the interim resolution professional had received 283 claims against the Corporate Debtor from allottees of different projects, financial creditors, operational creditors, other creditors and employees. The Settlement Deed executed between the Respondents and the Corporate Debtor did not take into consideration the interest of such other claimants. Therefore, allowing the withdrawal of application under Section 7 of the IBC on the basis of such settlement between the Respondents and the Corporate Debtor was not all-encompassing and detrimental to the interests of the other claimants, including the other allottees, and accordingly would not be in consonance with the object of the IBC and the purpose of invoking of Rule 11 of the NCLAT Rules.

With respect to maintainability of the application under Section 7 of the IBC, the NCLAT observed that the dictum of law was loud and clear. An application for initiating CIRP against the Corporate Debtor by allottees under a real estate project was required to 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 the same real estate project. It is therefore clear that an application at the instance of a single allottee or by a group of allottees falling short of the prescribed threshold limit would not be maintainable.

It was further observed by the NCLAT that, the Respondents’ contention of coming within the purview of ‘financial creditors’ rested on strength of the definition of ‘creditor’ in terms of the provision under Section 3(10) of the IBC which includes a decree-holder within its fold. The question that arose for consideration was whether a decree-holder, though covered under the definition of ‘creditor’, fell within the definition of a ‘financial creditor’ as per of Section 5(7) of the IBC. On a plain reading of the provision, it is clear that ‘Financial Creditor’ encompasses any person to whom a financial debt is due. It would, therefore, be relevant to ascertain the nature of debt styled as ‘financial debt’ within the ambit of Section 5(8) of the IBC. Since the initial transaction was an allotment under a real estate project, there could be no doubt that such transaction had the contours of a borrowing as contemplated under Section 5(8)(f) of the IBC. However, the case set up by the Respondents before the NCLT was not on the strength of a transaction having the commercial effect of a borrowing thereby giving them the status of ‘financial creditors’ but on the strength of being ‘decree-holders’. It was noted that, the Respondents had staked claim as ‘decree-holders’ before the NCLT and therefore they could not later claim to be allottees, classifying the amounts raised from them to have the commercial effect of a borrowing, and hence, cloaking them with the capacity of being ‘financial creditors’. Hence, it was required to be determined whether a ‘decree-holder’ could maintain an application under Section 7 as a ‘financial creditor’.

The NCLAT further noted that a ‘decree-holder’ would undoubtedly be covered by the definition of ‘creditor’ under Section 3(10) of the IBC, but cannot be classified as a ‘Financial Creditor’, unless the debt was disbursed against the consideration for time value of money or falls within any of the provisions thereof, as the definition of ‘financial debt’ is inclusive in character. In the instant case, RERA had conducted the recovery proceedings at the instance of the Respondents against the Corporate Debtor which culminated in the issuance of the Recovery Certificate and passing of an order directing the concerned authority to recover an amount of INR 73,35,686.43 from the Corporate Debtor as arrears towards land revenue. However, instead of pursuing the matter before the competent authority, the Respondents sought to trigger CIRP against the Corporate Debtor. Therefore, the answer to the question on whether a decree-holder would fall within the definition of ‘Financial Creditor’ in such a scenario had to be an emphatic ‘No’ as the amount claimed under the decree was an adjudicated amount and not a debt disbursed against the consideration for the time value of money and therefore did not fall within the ambit of any of the provisions under Section 5(8) of the IBC. It was indisputable that the Recovery Certificate sought to be executed was the end product of an adjudicatory mechanism under the Real Estate (Regulation and Development) Act, 2016, and realisation of the amount due under the Recovery Certificate tantamount to recovery effected under a money decree, though the mode of execution was slightly different. In view of the aforesaid observations, the NCLAT was of the view that the application of the Respondents under Section 7 of the IBC was not maintainable.

Decision of the National Company Law Appellate Tribunal, New Delhi

In allowing the appeal, the NCLAT noted that the Respondents could not claim to be allottees of a real estate project after issuance of the Recovery Certificate by UP RERA directing recovery of INR 73,35,686.43 as arrears towards land revenue. The NCLAT stated that the Respondents were decree-holders seeking execution of money due under the Recovery Certificate, which is impermissible within the ambit of Section 7 of the IBC. Therefore, their application for triggering of CIRP was not maintainable as allottees. Decree-holders, though included in the definition of ‘creditor’, did not fall within the definition of ‘financial creditor’ and hence a ‘decree-holder’ could not seek initiation of CIRP as a ‘financial creditor’.

In view of the conclusion reached and findings on the issues recorded, the NCLAT was of the opinion that the impugned NCLT Order initiating CIRP against the Corporate Debtor was not sustainable. The NCLAT was also of the firm view that the application of Respondents was moved for execution/recovery of the amount due under the Recovery Certificate and not for insolvency resolution of the Corporate Debtor. The NCLAT was of the view that the said NCLT Order suffered from grave legal infirmity and could not be supported and accordingly set it aside.

Vaish Associates Advocates View

In passing this judgement, the NCLAT appears to have disregarded the legislative intent and judicial precedents laid down by the NCLAT as well as the Supreme Court with respect to K.Kishan v. Vijay Nirman Company [(2018) 150 SCL 110 (SC)]. It may be noted that in the case of M/s. Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 984 of 2019], the NCLAT had held that if a petition is filed for recovery of decretal amount, it cannot be dismissed on the ground that the applicant should have filed for execution in a civil court. Although the said judgment was referred by the NCLAT in the present case, it deviated in its view while passing the said order by disqualifying a decree-holder from filing an application under Section 7 of the IBC on the ground that the amount in a decree is not a financial debt but an adjudicated amount. This is in divergence with the framework under the IBC, which recognises an adjudicated amount to also be a financial debt.

Having said the above, even though there is a similarity that in both the cases, the applicants were decree holders and thereby were attempting to initiate a CIRP, the point to be noted is that the nature of debt in both the decrees’ was different. In the present case, the debt arose out of a Builder/Buyer agreement which was not a debt disbursed against the consideration for time value of money but an adjudicated amount. However, in the Ugro Capital’s case the debt was disbursed against the consideration for time value of money by the NBFC. Hence the deviance of NCLAT while passing the said order. It will remain to be seen if NCLAT’s views in arriving at its decision are upheld or its decision is overruled in subsequent appeal(s), in the event its judgement is appealed before the appropriate forum.

For more information please write to Mr. Bomi Daruwala at [email protected]

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