IBC UPDATE | DECREEHOLDER - NOT A FINANCIAL CREDITOR?
A three-member bench of the National Company Law Appellate Tribunal (NCLAT) in a recent case of Sushil Ansal v Ashok Tripathi and Ors held that a homebuyer who had obtained a decree in his favour from a competent court or authority ceases to be the Financial Creditor within the scope of the Insolvency and Bankruptcy Code, 2016 (IBC). In this update, we will analyse this unique judgment delivered by the NCLAT.
- Mr Ashok Tripathi (Homebuyer) entered into an agreement (Agreement) dated 12 September 2014 with Ansal Properties and Infrastructure Limited (APIL).
- APIL failed to provide possession to the Homebuyer within the time stipulated in the Agreement, the Homebuyer approached the Uttar Pradesh-Real Estate Regulatory Authority (RERA). RERA adjudicated upon the dispute, deciding in favour of the Homebuyer and issued a Recovery Certificate dated 10 August 2019 (RC), directing APIL to refund the monies. APIL failed to refund the entire amount within the time stipulated under the RC, however, part payment of the money was made.
- The Homebuyer thus moved the New Delhi bench of the National Company Law Tribunal (NCLT) under Section 7 of the IBC as a Financial Creditor, in the capacity of decree-holder against the default of the financial debt committed by Mr Sushil Ansal of APIL (Corporate Debtor) on account of the non-payment of the principal amount along with penalty as decreed by the RERA. NCLT admitted the petition and directed the appointment of IRP. The said order (Impugned Order) was challenged in the present case.
- Whether this is a fit case for invoking Rule 11 of the NCLAT Rules, 2016 to allow the parties to settle the dispute?
- Whether an application filed by Respondent Nos. 1 & 2 under Section 7 of the IBC was not maintainable?
- While holding for the first issue that allowing to settle the matter with only 2 creditors would jeopardise the interest of majority stakeholders, being about 300 allottees, the NCLAT ruled out the possibility of any settlement.
- The more important aspect of the decision however lies in the second issue. While deciding the maintainability of the Petition under Section 7 as a Financial Creditor, the NCLAT held as follows (Paragraph 23 (ii)):
“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”.
- The principal reason cited for holding that the Decree Holding Homebuyer ceases to be the financial creditor was that the Agreement between the parties is terminated as soon as a decree or an RC is issued by a court/ authority having competent jurisdiction. Thus, despite being a creditor, a petition under Section 7 of the IBC was held to be not maintainable.
We believe the judgment of NCLAT seems to raise issues in 2 ways (i) It goes squarely against its own precedents in a number of matters and (ii) It deprives the homebuyers of the remedy under IBC which was available to them under the previous decisions of NCLAT.
One of the most landmark precedents which the present NCLAT failed to consider is the case of Urgo Capital Limited vs. Bangalore Dehydration and Drying Equipment Co wherein it was held that a creditor under the IBC includes a decree-holder and is entitled to file an application under section 7 of the IBC on the basis of the decree. The said decision was also delivered by a 3-member bench of the NCLAT. Therefore, the question of law now remains to be decided by the Supreme Court now.
If the principle laid down by the NCLAT in the present case remains unchallenged, it would render a homebuyer in limbo with regards to its remedy under IBC. The homebuyers were deemed to be financial creditors and capable of filing a petition under Section 7 of the IBC for providing an efficient remedy to the homebuyers. NCLAT has held that by obtaining a decree or RC from the RERA, the homebuyers would cease to avail the remedy under the IBC. They can take refuge in the process of execution of the decree as provided under the Code of Civil Procedure, 1908. However, the said process is long-drawn and tedious. The remedy under the IBC on the other hand could prove to be more efficient. This decision of the NCLAT closes this door for the decree-holding homebuyers.
This update was released on 11 Nov 2020.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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