CS Divesh Goyal

IBC is not a Recovery Law, it is Revival Law

Short Summary:

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as “IBC”) in relation to treatment of advance amount of Home / Flat buyer against the corporates.”

Treatment of advance of Flat Buyers against Builders (corporates) is greater significance in present era, because many real estate giants are facing insolvency proceedings in various NCLT under IBC.

The main drive of the broadsheet, on the other hand, is upon the “Whether Flat Buyer can initiate Insolvency process against Builders under Insolvency and Bankruptcy Code (IBC) or Whether Flat buyer can claim for refund of their dues from Insolvency Professional.”

This is article no. 260 of the series of editorials written by the author on corporate laws
{Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

In this editorial author discuss the decisions of Hon’ble National Company Law Tribunal (NCLT), New DelhiBench in case of Col. Vinod Awasthy v. AMR Infrastructures Ltd. and Nikhil Mehta & Sons (HUF) & ors V. AMR Infrastructures Ltd. There are some other cases also on the same ground and decisions.

Provisions under the Law:

A. WHO CAN FILE APPLICATION?

As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by;

  • Financial Creditor
  • Operational Creditor and
  • Corporate Debtor

B. IBC Law divides Creditors into Two categories:

operational Creditor

The ‘locus standi’ of the flat buyers for initiating Insolvency Resolution Process against the defaulting Real Estate Developer Companies is a grey area. Legal question as to whether a flat purchaser who invested his hard earned money for purchasing residential/ commercial flats would come in any of the above category, is still not attained finality by any of the judicial pronouncements….

CASE LAW

CASE – I – CASE ELEMENT:

Case Name Col. Vinod Awasthy v. AMR Infrastructures Ltd.
Bench Name The National Company Law Tribunal (NCLT), Principle Bench
Link: http://nclt.gov.in/Publication/Principal_Bench/2017/Others/Col.%20Vinod%20Awasthy%20(Final).pdf
Date of Order 20th February, 2017
Order Passed by Chief Justice M.M. Kumar, President

R VaraDharan, Judicial Member

Section 9
Type of Creditor Operational Creditor

A. Factual Background:

i. Application filed under Section 9 of IBC. The petitioner booked a flat for a total consideration of INR 1,980,000. Petitioner paid advance amount of Rs. 987,284/-. MOU entered between both the Parties.

ii. Respondent Company undertaken to pay a sum of INR 9,050/- every month as ‘assured return’ till the date of possession of advanced amount. Respondent pay the assured return for some time but failed to pay thereafter.

iii. It was agreed to handover the flat till December, 2014 however no possession given till date.

iv. According to the Petitioner this advance against the property should consider as Operational Creditor.

B. In Short:

In this case, the petitioner had paid a real estate developer, AMR Infrastructures Ltd. (“AMR”), a certain sum in 2011 as an advance for booking a flat, with possession of the flat to be delivered subsequently. However, AMR failed to deliver possession within the stipulated time and stopped making the assured return payments to the petitioner after December 2013. The petitioner filed an “operational creditor” application under Section 9 of the Code to commence insolvency resolution proceedings against AMR.

C. Provisions relating to Operational Creditor under the IBC, 2016:

as per Section 5(20)operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

as per Section 5(20)“operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

D. Findings of the NCLT Bench: 

The issues the Tribunal considered were whether the petitioner qualified as an “operational creditor” and whether the payments owed by AMR constituted “operational debt” under the Code?

Based on the above factual background, the NCLT dismissed the case and held as follows:

  • That “operational debt “as defined in Section 5(20) of the Code was debt that may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority.”
  • That, petitioner in the present case has neither supplied any goods nor has rendered any service to acquire the status of an ‘Operational Creditor’. The payments owed by AMR could, therefore, not be considered “operational debt” and the petitioner could not be considered an operational creditor.
  • We are further of the view that given the time line in the code it is not possible to construe section 9 read with section 5(20) & (21) of the code so widely to include within its scope even the cases where dues are on account of advance made to purchase the flat or a commercial site from a construction company like the Respondent in the present case especially when the petitioner has remedy available under the consumer protection act and the general law of the land. Therefore, we are not inclined to admit the petition.

CASE – II – CASE ELEMENT:

The Tribunal, Principal Bench also passed very similar orders in two other cases with nearly identical facts, including another case against the same developer, AMR (Mukesh Kumar v. AMR Infrastructure (C.P. No. (IB)-30(PB)/2017) March 31, 2017; PawanDubey&Anr v. JBK Developers Pvt. Ltd. (C.P. No. (IB)-19(PB)/2017) March 31, 2017).

Case Name Nikhil Mehta & Sons (HUF) &ors V. AMR Infrastructures Ltd
Bench Name The National Company Law Tribunal (NCLT), Principle Bench
Link: http://nclt.gov.in/Publication/Principal_Bench/2017/Others/AMR%20Infrastructure%20Ltd.%20(Nikhil%20Mehta).pdf
Date of Order 23rd January, 2017
Order Passed by Chief Justice M.M. Kumar, President
R VaraDharan, Judicial Member
Section 7
Type of Creditor Financial Creditor

A. Factual Background:

I. This application filed under Section 7 of IBC. The petitioner booked two office space under the project known as “Kessel-I- Valley” and executed MOU on 12.07.2007. Petitioner paid advance for flats.

II. Respondent Company undertaken to pay a sum of INR 82,214/- every month as ‘assured return’ till the date of possession of the unit was delivered to the applicant. Respondent started paying the monthly “Assured Returns”. It is alleged that the cheques issued by the Respondent was dishonored for the reasons, inter alia, of insufficient funds.

III. It is alleged that a number of persons have initiated winding up proceedings against the Respondent Company which are pending in the High Court of Delhi, and are listed for 28.03.2017. Copy of order dated 30.05.2016 passed by High Court Delhi has been placed on record.

IV. The petitioner issued 3 legal notices demanding different amounts being the amount of month “assured returns” due as per the MOU and payable to the applicant.

V. The aforesaid amount is an admitted debt by respondent. Therefore, the instant application has been filed for corporate insolvency resolution process under section 7 of the Act.

VI. As per petitioner the default of the amount of “Assured Returns” payable by the Respondent would be sufficient to satisfy the requirement of Section 7 read with Section 5(7) and (8) of the IBC.

B. Provisions relating to FINANCIAL Creditor under the IBC, 2016:

as per Section 5(7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

as per Section 5(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;

C. Findings of the NCLT Bench: 

The issues the Tribunal considered were whether the petitioner qualified as an “Financial creditor” and if the payments owed by AMR constituted “Financial debt” under the Code

Based on the above factual background, the NCLT dismissed the case and held as follows:

  • The agreement to sell a flat or office space etc. Merely because some “assured amount” of return has been promised and it stand breached, such a transaction would not acquire the status of a ‘financial debt’ as the transaction does not have consideration for the time value of money, which is a substantive ingredient to be satisfied for fulfilling requirements of the expression ‘Financial Debt’.
  • Essentially in the case in hand ‘Assured Returns’ is associated with the delivery of possession of the aforementioned properties and has got nothing to do with the requirements of Section 5(8). It is the consideration for the time value of the money which is ‘mercifully missing’ in the transaction in hand.
  • As per the discussion, we are unable to persuade ourselves to accept that the applicants are covered by the expression “Financial Creditor” in term. The arrears of “Assured returns” would also not be covered by the expression ‘financial debt’.

IMPACT

A perusal of the above judicial pronouncements shows that still the question whether a flat buyer can approach the NCLT with an application for Resolution Process is not finally determined.

Based on the above judgments NCLT one can opine that advance given to the Company for “Property/ Flat/ etc” neither falls under Operational Creditor nor under Financial Creditor.”

“How Home Buyers can file the claim TO IRP”

Amendment by the Insolvency Board

Insolvency and Bankruptcy Board of India issued a Notification dated 16th August, 2017 regarding amendment in IBC regulation. These regulations may be called the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2017.

By this Amendment after section 9 of IBC a new section 9A inserted as follow:

9A Claims by other creditors.

(1) A person claiming to be a creditor, other than those covered under regulations 7, 8, or 9, shall submit proof of its claim to the interim resolution professional or resolution professional in person, by post or by electronic means in Form F of the Schedule.

(2) The existence of the claim of the creditor referred to in sub-section (1) may be proved on the basis of –

(a) the records available in an information utility, if any, or

(b) other relevant documents sufficient to establish the claim, including any or all of the following:—

(i) documentary evidence demanding satisfaction of the claim;

(ii) bank statements of the creditor showing non-satisfaction of claim;

(iii) an order of court or tribunal that has adjudicated upon non-satisfaction of claim, if any.”

How Flat Owner can File Claim:

(Proof of Claim by Creditor (other than Financial / Operational Creditor)

Step – I ……Download the Form – F from the link;

Step –II ……Form can be file through Post or through electronic means; . (submission

by hand delivery is not allowed)

Step –III ……Proof shall be submitted with Interim resolution professional;

Step –IV ……Document Attachment with the Form;

i. Documentary evidence demanding satisfaction of the claim;

ii. Bank Statement of the Creditor showing non-satisfaction of claim;

iii. an order of court or tribunal that has adjudicated upon non-satisfaction of claim, if any”

iv. Duly Notarized Affidavit – prescribed with Form F.

CONCLUSION

Based on the above mentioned case laws and pursuant to provisions of IBC, it is clear that Flat / Home buyers doesn’t fall under category either Financial Creditor or Operational Creditor, due to this they can’t file petition against the builder (corporate)   in NCLT as Creditor. However, Flat/ Home buyers can apply before the Insolvency Resolution Professional their Claim in Form – F.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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