August 18, 2020
Home-buyers cannot invoke insolvency process to recover RERA awards: NCLAT
[ by Legal Era News Network ]
The National Company Law Appellate Tribunal (NCLAT) has ruled that home-buyers cannot use the insolvency process for recovering monies awarded to them by a real estate regulator (RERA) against realty companies. According to the NCLAT, a decree granted by RERA in favour of a homebuyer cannot be the basis of an insolvency action.
The NCLAT ruled that a home-buyer cannot be included in the category of a financial creditor in cases where the real estate company is unable to honour a decree awarded by the State-level Real Estate Regulatory Authority (RERA). The NCLAT ruled that home-buyers will have to take recourse to the civil law to recover their money.
In this case, the appellate tribunal set aside the National Company Law Tribunal’s (NCLT) order which allowed initiation of insolvency proceedings against Ansal Properties and Infrastructure Ltd.
This case dates back to a 2014 agreement between the builder (Ansal Properties) and the home-buyer, which entailed construction and delivery of home units within a stipulated time. After the builder failed to honour the timelines under the agreement, two allottees filed a complaint with the Uttar Pradesh RERA.
Against this complaint, last year the Uttar Pradesh RERA granted a decree for a sum of Rs. 73 lakh in favour of the homebuyers after Ansal Properties failed to repay the directed instalments. Instead of seeking execution of this decree under the civil law, the homebuyers took the insolvency recourse and 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.
Ansal Properties approached the NCLAT and contested the NCLT’s order saying that the homebuyers were speculative buyers and initiated the proceedings only to harass the company. Further, the builder also contended that the homebuyer’s petition was not maintainable as the minimum threshold for triggering insolvency was not being met in this case.
A three-member bench of the NCLAT headed by Acting Chairperson Justice Bansi Lal Bhat 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. According to the NCLAT, home-buyers cannot seek initiation of insolvency in the capacity of financial creditors to recover the amount. The NCLAT ruling is in line with the 2019 amendment that only a minimum of 100 buyers or 10% of all home-buyers in a project (whichever is lower) can file for bankruptcy.
The NCLAT relied on ‘G. Eswara Rao v. Stressed Assets Stabilisation Fund and Ors.’ wherein it was held that an application under Section 7 of the Insolvency & Bankruptcy Code (IBC) cannot be filed for execution of a decree.
It also held that a ‘decree-holder’ although covered by the definition of ‘Creditor’ under Section 3(10) of the IBC, would not fall within the class of creditors classified as ‘Financial Creditor’ unless the debt was disbursed against the consideration for time value of money or falls within any of the clauses thereof as the definition of ‘financial debt’ is inclusive in character. According to the NCLAT the case before the NCLT was not on the strength of a transaction having the commercial effect of a borrowing, to cover them under the ambit of ‘Financial Creditors’ but on the strength of being ‘decree-holders’.
It therefore set aside the NCLT’s order citing that the NCLT order suffered from grave legal infirmity.
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