NCLAT: No default by real estate developer if possession delayed due to reasons beyond control February 25, 2020
Published in: Between The Lines
Disclaimer: While every care has been taken in the preparation of this Between the Lines to ensure its accuracy at the time of publication, Vaish Associates Advocates assumes no responsibility for any errors which despite all precautions, may be found therein. Neither this bulletin nor the information contained herein constitutes a contract or will form the basis of a contract. The material contained in this document does not constitute / substitute professional advice that may be required before acting on any matter. All logos and trademarks appearing in the newsletter are property of their respective owners.
An application had been filed by home buyers, Shilpa Jain and Akash Jain (collectively, “Respondents”) under Section 7 of the Insolvency and Bankruptcy Code, 2016, to initiate Corporate Insolvency Resolution Process (“CIRP”) against Raheja Developers (“Corporate Debtor”). The National Company Law Tribunal, Special Bench at New Delhi (“NCLT”) by order dated August 20, 2020 (“Impugned Order”), initiated CIRP against the Corporate Debtor. The promoter/shareholder Navin Raheja (“Appellant”) thereafter filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) in order to challenge the Impugned Order on two primary grounds: (i) that there was fraudulent and malicious initiation of the CIRP; and (ii) that the application filed by the Respondents was barred by limitation and not maintainable on several other grounds. The NCLAT by its judgement dated January 22, 2020 held that if the delay was not due to the Corporate Debtor, it could not be alleged that the Corporate Debtor had defaulted.
The Respondents had booked an apartment in the residential project of the Corporate Debtor, in respect of which the Corporate Debtor had: (i) issued a joint allotment letter dated August 3, 2012; and (ii) executed a Flat Buyer’s Agreement dated August 3, 2012 (“Buyer’s Agreement”). In pursuance of the same, the Corporate Debtor received a total amount of INR 86,62,691 from the Respondents. As per Clause 4.2 of the Buyer’s Agreement, possession of the apartment was to be provided within thirty-six months, that is, by August 3, 2015. As per the said clause, in the event the construction could not be completed by the Corporate Debtor within the allotted time frame, the Corporate Debtor was under an obligation to pay the Respondents compensation at the rate of INR 7 per square feet of the super area per month for the entire period of the delay commencing from the time the apartment was to be conveyed. Thereafter, the Respondents filed an application under Section 7 of the IBC (initiation of corporate insolvency resolution process by financial creditor) before the NCLT. They were seeking a refund of the entire principal amount of INR 86,62,691 along with interest at the rate of 18% per annum.
(i) Whether the Corporate Debtor had committed a default if the offer of possession had been delayed due to reasons beyond the control of the Corporate Debtor.
(ii) Whether the Respondents had filed the application before the NCLT with a fraudulent and malicious intent for reasons other than for resolution of insolvency or liquidation.
Contentions raised by the Appellant:
(I) The Corporate Debtor had taken the plea before the NCLT that it had issued a notice of possession for the apartment on November 15, 2016, and even after repeated requests, the Respondents had refused to take possession of the apartment.
The Corporate Debtor had also informed the NCLT that it had already filed a writ petition before the Supreme Court (“SC”) against the application filed by the Respondents. Under the said writ petition, the Corporate Debtor had challenged the constitutional validity of explanation to Sections 5(8)(f), 7, 21(6A)(b) and 25A of the IBC which respectively deal with any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing, initiation of corporate insolvency resolution process by financial creditor, application for appointment of insolvency professional other than interim resolution professional for certain class of creditors and rights and duties of authorized representative of financial creditors. Herein, the SC had also issued a notice staying all proceedings before the NCLT. Despite the same, and not considering the decision of the SC in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [2019 SCC Online SC 1005], the Impugned Order was passed.
(ii) The Corporate Debtor had also informed the NCLT that as per the Buyer’s Agreement, the possession of the apartment was to be handed over to the allottees subject to certain force majeure conditions. In this instance, any delay could be attributed to these force majeure conditions and not to the Corporate Debtor.
The Corporate Debtor had completed the construction in advance and further, an occupation certificate was also applied for by the Corporate Debtor in the year 2013. As such, the Corporate Debtor had complied with all obligations under the Buyer’s Agreement. It was also contended that any delay in processing of the application for the occupation certificate could be attributed to the delay of the relevant authority. Therefore, such delay was clearly beyond the control of the Corporate Debtor or the promoter. Despite such delays, the Corporate Debtor had managed to secure the occupation certificate in 2016. In pursuance of the receipt of the said certificate, the possession of the apartment was offered to the Respondents by way of the notice of possession on November 15, 2016. However, the Respondents conveniently chose to file a petition under Section 7 of the IBC after the expiry of a period of two years from the notice of possession. The Respondents had also failed to comply with the various formalities provided for by the Corporate Debtor in the notice of possession. Such conduct of the Respondents only reflects their mala fide intention.
(iii) In addition, the Corporate Debtor had also annexed a demand letter seeking payment of an outstanding amount of INR 86,62,851. The Respondents had also defaulted to make the aforesaid payment and had deliberately suppressed such fact. The Respondents were now seeking a refund of the entire amount along with interest, totaling to INR 87,32,108, which was higher than the principal amount paid by the Respondents. It was notable that the Respondents were also given the discretion to accept the money deposited by them if they did not intend to accept possession.
Observations of the NCLAT
As per Clause 4.4 of the Buyer’s Agreement, the construction was subject to force majeure conditions which, inter alia, included the condition for delay in grant of completion/ occupation certificate by the Government and/ or any other authority or if non-delivery of possession is beyond the control of the company. In such a case, the Corporate Debtor was entitled to a reasonable extension of time for delivery of the possession depending on the prevailing circumstances.
The Corporate Debtor also reserved the right to alter the terms and conditions of allotment or even suspend the scheme in case the circumstances warrant the same. As per Clause 5.1 of the Buyer’s Agreement, the Appellant had a right to cancel the allotment upon refunding payment along with interest at the rate of 5% per annum. In essence, it could not be stated that the Respondents were remedy less. The NCLAT observed that in the case of Pioneer, the SC had held that the Real Estate (Regulation and Development) Act, 2016 (“RERA”) was in addition to and not in derogation of the provisions of any other law for the time being in force. Therefore, the remedies under RERA were additional and not exclusive to the remedies under IBC. Thus, the provisions of IBC would also apply in addition to RERA.
The SC had also noted in the aforesaid judgement that under Section 19 (rights and duties of allottees) of RERA, an allottee was entitled to claim possession of the apartment, plot or building, as the case may be, or refund of amount paid along with interest in accordance with the terms of the agreement for sale. In addition, all allottees were responsible for making necessary payments in instalments within the time specified in the agreement for sale and were also liable to pay interest at such rate as may be prescribed for any delay in such payment. Further, an allottee was duty bound to take physical possession of the apartment, plot or building, as the case maybe, within a period of two months of issuance of the occupancy certificate.
The SC had also taken note of the Andaman and Nicobar Islands Real Estate (Regulation and Development) (General) Rules, 2016, that made provisions for ‘interest payable by promoter and allottee’ and the ‘timelines for refund’, wherein it had observed that once a default relating to amounts due and payable to the allottee was made out in an application under Section 7 of the IBC, the burden shifted on the promoter/ real estate developer to point out that allottee himself was a defaulter. Further, it was also important for the promoter/real estate developer to point out under Section 65 of the IBC that CIRP has been invoked fraudulently. This could be done by showing that: (i) the allottee was only a speculative investor and not genuinely interested in purchasing the apartment; and (ii) the allottee did not want to fulfil his obligation to take possession of the apartment under RERA in light of a failing real estate market. The NCLAT noted that as per the judgement of the SC in Pioneer, the Corporate Debtor could now refer to Section 65 of the IBC to show that the proceedings had been invoked fraudulently or maliciously.
The NCLAT observed that in a large number of cases, the allottees happened to be speculative investors. They simply wanted to forsake possession and seek monies already paid. The NCLAT noted that the NCLT had refused to accept the notice of possession, wherein a further period of four months and a further period of three months were sought for handing over possession and registration, respectively.
As such, the NCLAT also noted that the Appellant had taken a stand before the NCLT in respect of non-availability of necessary infrastructure facilities by the government for carrying out developmental activities.
Further, the Appellant had also agreed to pay the amount with interest but the Respondents wanted a higher percentage of money at the rate of 18% per annum.
While the Respondents haven’t denied that they were offered possession, the fact remains that after two years, they did not seek possession and only wanted their money back. As per Clause 4.4 of the Buyer’s Agreement, the Corporate Debtor could not be made responsible if there was a delay on account of non-availability of necessary infrastructure facilities being provided by the government for carrying out developmental activities. The delay in providing the occupation certificate therefore, fell squarely within the said clause.
Decision of the NCLAT
The NCLAT held that the Respondents had filed the application under Section 7 of the IBC fraudulently with malicious intent, and only wanted to jump ship and retrieve the amount paid by employing coercive measures. Delay in grant of approval by the relevant competent authority could not be taken into consideration in holding that the Corporate Debtor had delayed in delivering possession. Further, the NCLT had also ignored the decision of the SC, which though delivered prior to the admission of the application was binding on all courts.
The NCLAT held that the case fell within the ambit of Section 65 of the IBC. It also imposed penalty on the Respondents in addition to setting aside the Impugned Order and dismissing the application under Section 7 of the IBC. The NCLAT also observed that before admitting any case, it would be desirable for the NCLT to enquire if the intention of the allottees was to seek refund and not the possession of the apartment.
Moreover, if the delay was attributable to force majeure and not to the fault of the Corporate Debtor, it could not be alleged that the Corporate Debtor had defaulted in delivering the possession.
Vaish Associates Advocates View:
This is a welcome move by the NCLAT in reaffirming the judgement of the SC in Pioneer and acknowledging that allottees cannot simply jump ship by attuning their decision to seek possession of the apartment/ refund of amounts paid as per the prevailing real estate market.
The decision imposes a duty upon the NCLT to place an application filed by the allottee under strict scrutiny to determine the true intent of the allottee. As such, once a prima facie case is made out by the applicant, the real estate developer is given an opportunity to prove that the allottee was himself a defaulter and point out, as under Section 65 of the IBC, that the allottee had in fact filed an application only with a fraudulent intent.
Further, the decision also reinforces a protection to the real estate developer if the possession was delayed due to reasons beyond control.
For more information please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER