In a recent order issued by the
Facts
The two (2) homebuyers in this case, had jointly booked two (2) units under the real estate project at Sushant Golf City,
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
Issues
- Whether this is a fit case for invoking Rule 11 of the NCLAT Rules to allow the parties to settle the dispute?
- 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
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
Footnote
1. Company Appeal (AT) (Insolvency) No. 452 of 2020
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