In a recent order issued by the National Company Law Appellate Tribunal (“NCLAT“) in the case of Sushil Ansal Vs. Ashok Tripathi1, the NCLAT has held that a decree-holder cannot be treated as a financial creditor for the purpose of triggering insolvency proceedings against a company. The NCLAT while doing so, set aside the order dated March 17, 2020 of the National Company Law Tribunal, New Delhi (“NCLT“) whereby the NCLT had earlier admitted an application filed against Ansal Properties and Infrastructure Limited (“APIL“). The NCLT had in the APIL case based on a recovery certificate issued by the Uttar Pradesh Real Estate Regulatory Authority (“UP RERA“) to two (2) homebuyers allowed the appointment of an interim resolution professional and had declared moratorium on the APIL’s assets. The NCLAT has now set aside the orders issued by the NCLT and held that a decree granted by RERA to homebuyers cannot be the basis for initiating insolvency.

Facts

The two (2) homebuyers in this case, had jointly booked two (2) units under the real estate project at Sushant Golf City, Lucknow with APIL. In September 2014, builder buyer agreements had been executed and as per the agreements, APIL was required to complete construction within two (2) years from the date of commencement of construction. However, APIL had failed to complete the projects within the stipulated time period and the homebuyers accordingly approached RERA. RERA in this case issued recovery certificates to the homebuyers against APIL. UP RERA then granted a decree to the homebuyers for an amount of about Rupees Seventy Three (73) Lakhs, after APIL failed to make the payments to the homebuyers. The homebuyers then as financial creditors approached the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code“). The homebuyers approached the NCLT against the default of financial debt committed by APIL, on account of non-payment of the principal amount along with the penalty as decreed by the UP RERA besides the recovery certificate. 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 and declared a moratorium on the assets of APIL and appointed an interim resolution profession who 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 NCLT.

It is pertinent to note that during the pendency of the appeal at the NCLAT, APIL and the two (2) homebuyers filed a joint application before the NCLAT for withdrawal of the application under Section 7 of the I&B Code on the basis of a settlement deed having been executed between the parties on June 1, 2020 by invoking Rule 11 of the NCLAT Rules, 2016.

Issues

  1. Whether this is a fit case for invoking Rule 11 of the NCLAT Rules to allow the parties to settle the dispute?
  2. Whether the application filed by the homebuyers under Section 7 of the I&B Code was not maintainable?

Reasoning and Analysis

On the first issue, the NCLAT states that a corporate debtor is permitted to seek exit from Corporate Insolvency Resolution Process (“CIRP“) at the pre-admission stage. It can also seek exit at the post admission stage before constitution of the committee of creditors. The NCLAT further states that while a party to CIRP can approach the NCLT directly for exercise of its inherent powers under Rule 11 of the NCLT, Rules 2016 for withdrawal of application under Section 7 of the I&B Code or disposal of such application based on the settlement worked out by the parties, however, such power can be exercised by the NCLT only before constitution of the committee of creditors. Further, exercise of such inherent powers is discretionary and must only be invoked to meet the ends of justice or prevent abuse of process of court. Accordingly, on analysing the facts and circumstances surrounding the present case, the NCLAT refused to invoke Rule 11 and held that while the committee of creditors had not been constituted, invoking such settlement would be detrimental to the interests of the other claimants including the other allottees and would not be in consonance with the object of the I&B Code. The NCLAT held that in a case where interests of the majority of stakeholders are in serious jeopardy, it would be inappropriate to allow settlement with only two (2) creditors which may amount to perpetrating of injustice. Exercise of inherent powers is such cases would be a travesty of justice.

On the second issue, the NCLAT analyses the scope of Section 7 of the I&B Code and states that it is clear that an application for initiation of CIRP by allottees under a real estate project is required to be filed jointly by not less than one hundred (100) of such allotees or not less than ten percent (10%) of the total number of allotees thereunder. Thus, it is 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.

The NCLAT then considers the question on whether a decree-holder though covered by the definition of ‘creditor’ would fall within the definition of a ‘financial creditor’ under the I&B Code. The NCLAT observes that the case set up by the homebuyers in the present case is not on the strength of a transaction having the commercial effect of a borrowing thereby clothing the status of ‘financial creditor’ but instead is on the strength of being ‘decree-holders’, which owed its genesis to the recovery certificate issued by the UP RERA. In view thereof, the NCLAT then proceeded to determine whether in the homebuyers projected capacity as ‘decree-holders’, they could maintain an application under Section 7 of the I&B Code. The NCLAT observed that a ‘decree-holder’ is undoubtedly covered by the definition of ‘creditor’ under the I&B Code but would not fall within the ambit of ‘financial creditor’ unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses enumerated under the definition of ‘financial debt’ under the I&B Code. In the present case, the RERA had conducted recovery proceedings at the instance of the homebuyers against APIL which culminated in the issuance of the recovery certificate and passing of an order under Section 40 of the Real Estate (Regulation and Development) Act, 2016, directing the concerned authority to recover an amount of about Rupees Seventy Three (73) Lakh form APIL as an arrear of land revenue. In view thereof, the NCLAT held that the answer to the question as to whether a decree-holder would fall within the definition of ‘financial creditor’ has to be an empathetic ‘No’ 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.

While determining whether execution of a decree on the strength of recovery certificate issued by the UP RERA would justify triggering of CIRP, the NCLAT observed that the UP RERA had already forwarded the recovery certificate to the competent authority for effecting recovery in the manner and as an arrear of land revenue from APIL and the process was underway when the homebuyers sought triggering CIRP against APIL. Thus, the NCLAT held that the homebuyers had approached the NCLT only with a view to execute the decree in the nature of recovery certificate and recover the amount due thereunder. It is indisputable that the recovery certificate sought to be executed is 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 tantamounts to recovery effected under a money decree though mode of execution may be slightly different. Thus, an application of the homebuyers in their projected capacity as decree-holders was no maintainable under Section 7 of the I&B Code.

Holding

The NCLAT held that on their own showing, the homebuyers were decree holders seeking execution of money due under the recovery certificate which is impermissible within the ambit of Section 7 of the I&B Code. Clearly the homebuyers application for triggering of CIRP would not be maintainable as allottees. 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. Accordingly, the NCLAT set aside all orders passed by the NCLT on March 17, 2020 in relation to the insolvency proceedings initiated against APIL.