Homebuyers Cannot Initiate Insolvency To Execute RERA Decrees, Says NCLAT

A decree, granted by the real estate regulator, in favour of a homebuyer cannot be the basis of an insolvency action, the National Company Law Appellate Tribunal has said.

In doing so, the appellate tribunal has set aside the National Company Law Tribunal's order that allowed initiation of insolvency proceedings against Ansal Properties and Infrastructure Ltd.

The order implies not all recoveries by homebuyers warrant initiation of insolvency proceedings, Ashoo Gupta, partner at Shardul Amarchand Mangaldas & Co., said.

Decree Makes Homebuyer A Financial Creditor, NCLT Held

This case emanates from a 2014 “builder buyer agreement”, which entailed construction and delivery of home units within a stipulated time. Two allottees filed a complaint with the Uttar Pradesh RERA after Ansal Properties failed to honour the timelines under the agreement.

Against this complaint, the real estate regulator granted a decree last year for a sum of Rs 73 lakh in favour of the homebuyers after Ansal Properties failed to repay the directed installments. A decree under the Indian law is an order by the court which conclusively determines the rights of the parties. The law allows courts as well as regulators to grant decrees, which can be executed through various means like attachment or setting a charge on the debtor’s property.

Instead of seeking execution of this decree under the civil law, the homebuyers filed an insolvency application against the company.

The NCLT upheld the homebuyers’ assertion, declared a moratorium and appointed an interim resolution professional for the company, who received claims from more than 250 allottees.

But before the constitution of the committee of creditors, the two allottees and the company proposed a settlement.

Decree Holder ≠ Financial Creditor, NCLAT Says

To seek approval for the settlement, Sushil Ansal, former director of the company, approached the NCLAT. He also contested the tribunal's order saying that the homebuyers were speculative buyers and initiated the proceedings only to harass the company. Further, the homebuyer’s petition was not maintainable since a recent amendment to the Insolvency and Bankruptcy Code had introduced a minimum threshold for triggering insolvency which was not being met in this case.

A three-member bench of the NCLAT refused to invoke its inherent powers to allow a settlement between the parties as any such move could put the rights of other allottees in jeopardy.

But more importantly, they cannot seek initiation of insolvency as a financial creditor to recover the amount, the NCLAT held. It set aside the tribunal’s order saying it suffers from a “grave legal infirmity”.

It pointed out that -

• The IBC classifies a person as financial creditor only if a financial debt is due.
• A financial debt means a debt which is disbursed against a consideration for time value of money.
• Based on these definitions, the decretal amounts cannot be said to have a commercial effect of borrowing, which is a pre-requisite for a financial creditor to initiate insolvency.
• A decree cannot be executed under a Section 7 application as ruled by the apex court in the Eswara Rao case. The section allows financial creditors to initiate insolvency proceedings for a default on dues exceeding Rs 1 crore. In Eswara Rao’s case, the apex court had said that a decree granted by a debt recovery tribunal cannot be executed by filing an application as a financial creditor.

The NCLAT has rightly set aside the order by distinguishing between a decree holder and a financial creditor, Gupta said. The order sets a precedent that decree holders are “creditors” but not financial creditors. The definition of creditor under IBC includes a decree holder — so he is a creditor but not a financial creditor since the element of time value of money is absent, Gupta said.