Insolvency proceedings cannot be initiated for recovery of RERA awards – NCLAT

In an interesting development that may have far-reaching consequences for the home buyers across the country, the NCLAT (National Company Law Appellate Tribunal) has overturned the order passed by the NCLT that allowed the initiation of the CIRP process against Ansal Properties and Infrastructure Limited. The NCLT in March 2020 had allowed the initiation of insolvency proceedings against M/s Ansal Properties under Section 7 of the IBC. Following the order, Mr. Amarpal was appointed as the IRP.

Mr. Sushil Ansal, Former Director and Shareholder of ‘M/s. Ansal Properties and Infrastructure Limited’- (Corporate Debtor) had filed an appeal against the order ( passed on17th March 2020 by the NCLT) of admission of application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by Mr. Ashok Tripathi and Mr. Saurabh Tripathi claiming to be the Financial Creditors. The NCLAT overturned the order and stopped the CIRP process against the corporate debtor on the grounds that the decree holders can’t be classified as Financial Creditors under IBC.

Background

Mr. Ashok Tripathi and Mr. Saurabh Tripathi booked dwelling units under a Real Estate Project namely ‘Sushant Golf City’ developed at ‘High Tech Township’, Lucknow in August 2014. When the developer failed to deliver the properties in time, the buyers approached the Uttar Pradesh Real Estate Regulatory Authority’ (UP RERA). The UP RERA passed orders dated November 2017 and December 2018 and further issued a Recovery Certificate dated 10th August 2019 for a sum of Rs.73,35,686.43/-. Armed with the RERA recovery certificate, the homebuyers preferred to initiate insolvency proceedings against the Corporate Debtor, Ansal Properties and Infrastructure Limited at the NCLT bench of New Delhi.

NCLT’s observations

The NCLT took note of the fact that the Corporate Debtor had agreed to refund the amount as emanating from order dated 16th November, 2017 of the “UP RERA” and that the part payment of the decretal amount had already been made by the Corporate Debtor. It also noticed that the allottees had approached the Adjudicating Authority (NCLT) in the capacity of decree-holder against the default of the financial debt committed by the Corporate Debtor on account of the non-payment of the principal amount along with penalty as decreed by the “UP RERA” vide orders dated 16th November, 2017 and 13th December, 2018 besides Recovery Certificate dated 10th August, 2019.

The NCLT relied on the “M/s. Ugro Capital Limited v. Company Appeal (AT) (Insolvency) No. 452 of 2020 Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd.- Company Appeal (AT) (Insolvency) No. 984 of 2019” wherein it observed that the definition of word ‘creditor’ in ‘I&B
Code’ includes decree-holder and a petition filed for realisation of decretal amount could not be dismissed on the ground that the creditor
should have taken steps for filing execution case in Civil Court. The Adjudicating Authority, accordingly, proceeded to pass the impugned
order admitting the joint application of homebuyers.

NCLAT’s observations

  1. The allottees can no more claim to be allottees of a Real Estate Project after issuance of Recovery Certificate by ‘UP RERA’ directing recovery of Rs.73,35,686.43/- due thereunder as arrears of land revenue by the Competent Authority. On their own showing, they are the 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 their application for triggering of Corporate Insolvency Resolution Process is not maintainable as allottees.
  2. Decree-holder, though included in the definition of ‘Creditor’, does not fall within the definition of ‘Financial Creditor’ and cannot seek initiation of Corporate Insolvency Resolution Process as ‘Financial Creditor’.
  3. It would be appropriate to notice that development took place during the pendency of the instant appeal. The parties filed joint application before this Appellate Tribunal for withdrawal of the application under Section 7 on the basis of a Settlement Deed having been executed between them on 1st June, 2020. Prayer was made for the exercise of power under Rule 11 of the NCLAT Rules to give effect to the Settlement Terms reached between the parties prior to constitution of Committee of Creditors and permitting the withdrawal of application under Section 7

The order

  1. we are of the considered view that the impugned order dated 17th March 2020 initiating Corporate Insolvency Resolution Process against Corporate Debtor cannot be sustained. NCLT has landed in grave error in admitting the application under Section 7. execution of decree/ recovery of amount due under Recovery Certificate would not justify triggering of Corporate Insolvency Resolution Process.
  2. The ‘Corporate Debtor’ (company) is released from all the rigour of law and is allowed to function independently through its Board of Directors from immediate effect.
  3. The Adjudicating Authority will fix the fee of ‘Interim Resolution Professional’ for the period he has functioned.

reference: Company Appeal (AT) (Insolvency) No. 452 of 2020

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