IBC UPDATE | MAINTAINABILITY OF DEBT BASED ON THE ORIGINAL NATURE OF TRANSACTION
The recent judgement of Shreepati Build Infra Investment vs Abhiyan Developers, NCLT illustrates amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) can significantly impact the maintainability of insolvency proceedings. This case revolves around a dispute stemming from a real estate transaction and hinges on the crucial provisions of the IBC that dictate the eligibility of applicants to initiate Corporate Insolvency Resolution Process (CIRP).
The dispute centres on a real estate transaction between Abhiyan Developers Private Limited (Financial Creditor) and Shreepati Build Infra Investment Limited (Corporate Debtor). The Financial Creditor entered into an agreement to purchase a flat for consideration of INR 3,50,00,000. However, due to inadequate permissions and approvals, the Corporate Debtor was unable to proceed with construction. Subsequently, the amount was restructured into a loan account, with an agreement for repayment, inclusive of a 15% cumulative interest, compounded quarterly. Despite these terms, no payment was forthcoming.
On 10 August 2018, the Financial Creditor filed a company petition under Section 7 of the IBC, which was admitted on 29 October 2021. However, the Corporate Debtor challenged the admission order, leading the NCLAT to set it aside and remand the case back to the NCLT.
Thereafter, the Corporate Debtor filed an Interim Application (IA) under Section 60(5) of the IBC, along with Rule 11 of the NCLT Rules, 2016 to bring forth the NCLAT's order and to consider the objection regarding the maintainability of the case, particularly in light of the amended provisions of the IBC.
The NCLT allowed the IA while holding that the CIRP application filed by the Financial Creditor is not maintainable. The NCLT’s decision was profoundly influenced by the amended provisions of the IBC, particularly Section 7, which reads in the following manner:
“7. Initiation of corporate insolvency resolution process by financial creditor.—
(1) A financial creditor either by itself or jointly with 5 [other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government,] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. ….
Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less: …”
Nature of Transaction: The NCLT affirmed the core nature of the transaction as a builder-allottee relationship, as per the agreement dated 15 February 2011. According to the NCLT, even in the presence of subsequent agreements, the fundamental nature of the transaction remained unaltered. Consequently, the Financial Creditor retained its status as an allottee within the purview of Section 2(d) of the Real Estate (Regulation and Development) Act, 2016 (RERA). This classification positioned it as a "financial creditor" to whom a "financial debt" is owed, as per Section 5(7) and Section 5(8)(f) of the IBC respectively.
Amendment to Section 7: The NCLT drew attention to the critical amendment to Section 7 of the IBC, which came into effect on 28 December 2019. This amendment, as extracted hereinabove, stipulated that applications for initiating CIRP against Corporate Debtors involved in real estate projects must be filed by not less than 100 allottees under the same real estate project or not less than 10% of the total number of such allottees, whichever is less.
Non-Maintainability: The pivotal outcome was that the main Company Petition had been filed by a single allottee, without complying with the revised provisions, rendering it non-maintainable. The Financial Creditor had not taken the necessary measures to ensure that the application was jointly filed by the required number of allottees.
The above-mentioned case underscores the critical significance of the amended provisions in the IBC, particularly the requirement for not less than 100 allottees or not less than 10% of the total number of such allottees to initiate CIRP proceedings against a Corporate Debtor in the context of real estate transactions.
However, the Hon’ble NCLT seems to have forgone one of the cardinal rules of contractual relations i.e., parties to the contract are free to alter its terms by mutual consent as long as such alterations are permissible by law. Despite the Corporate Debtor having consented to change the amount given as a loan transaction, the NCLT chose to stick to its original nature. This draws attention to the extent to which the NCLT can go in order to determine the true nature of a debt and where it falls under the scope of IBC. In essence, it highlights the need for stakeholders to stay abreast of changes in the law and adapt their strategies accordingly to navigate the complex terrain of insolvency in the real estate sector.
Author: Bhushan Shah - Partner | Aditya Sarangarajan - Associate
This update was released on 13 Sep 2023.
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