2025 (4) TMI 1405 - AT - IBC

Admission of Section 7 of the Insolvency and Bankruptcy Code 2016 (IBC) - application was barred by limitation or not - default date and the date of filing - Petition lacked threshold support or not - fraudulent claims and material suppression. Whether the appeal is time barred or not? - HELD THAT - The limitation period under the Limitation Act 1963 is governed by Section 22 which provides that in the case of a continuing breach limitation runs afresh with each successive instance of default. The Corporate Debtor s failure to hand over possession of the flats and its continuing default in refunding amounts to the allottees constitute a continuous cause of action. The directions issued by UP RERA from time to time including the refund order dated 13.10.2020 its amendment on 18.06.2022 and the project registration cancellation on 24.12.2022 reaffirm the subsistence of debt and the ongoing breach by the Corporate Debtor. Furthermore the acknowledgement of debt in the Corporate Debtor s balance sheet on 30.06.2022 extends the limitation period under Section 18 of the Limitation Act 1963. It is to be noted that an acknowledgement of liability within the limitation period gives rise to a fresh period of limitation. Therefore the present petition filed on 09.01.2024 is well within time - the Appellant s contention that the Company Petition is barred by limitation is misconceived. The present Application which was filed on 19.01.2024 is found to have been filed within the limitation period as per Section 18 of the Limitation Act 1961 and there are no infirmity in the orders of the AA on this count. Threshold required under Section 7(1) of IBC - H ELD THAT - It is noted that whether they have obtained recovery certificates or not the Respondents - Allottees remain Financial Creditors under Section 5(8)(f) of the Code as they have not received possession of the allotted flats and their deposited amounts have not been refunded in full. The Corporate Debtor s claim that certain Applicants have settled their dues is also unsupported as their outstanding amounts continue to reflect in the Corporate Debtor s financial statements. Therefore for the purpose of determining the threshold under the second proviso to Section 7(1) of the Code Answering Respondent including those holding recovery certificates will be considered Financial Creditors. Whether the Company Petition under Section 7 of the Code has been initiated fraudulently and with malicious intent? - HELD THAT - The Adjudicating Authority has held that the Corporate Debtor failed to produce any documentary evidence to substantiate its claim that the present proceedings were initiated with fraudulent or malicious intent. The mere fact that some applicants may have obtained recovery certificates does not preclude them from initiating proceedings under the Code as long as the fundamental criteria of debt and default are satisfied which has been established in this case. This Appellate Tribunal in Monotrone Leasing Pvt. Ltd. v. PM Cold Storage Private Ltd. 2020 (8) TMI 386 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI had held that penal action under Section 65 of the Code can only be taken where there is substantial evidence proving that the insolvency resolution process has been initiated fraudulently or for an ulterior motive. The proceedings under the Code are summary in nature and the burden of proving fraudulent intent lies upon the party alleging it. In the present case the Appellant has failed to produce any cogent evidence to support its allegations. The mere assertion that the applicants are engaging in forum shopping or that some allotments are disputed does not meet the rigorous standard required to invoke Section 65 of the Code. Moreover even if certain allottees are excluded the number of remaining applicants still satisfies the statutory threshold rendering the present application maintainable. In view of the above the allegation of fraudulent and malicious intent is completely baseless and has been rightly rejected by the Adjudicating Authority. We don t find any infirmity in the Impugned Order on this count. The burden of proving fraudulent intent lies with the Appellant and mere assertions by the Appellant cannot be used to invoke penal action under Section 65 of the IBC. There are no material evidence on record to suggest any malicious and fraudulent intent on the part of the Applicants Homebuyers - In the present case the total number of units in the project is 247 and the Answering Respondent collectively hold 34 allotted units thereby meeting the statutory threshold. The Appellant s objection regarding the eligibility of certain allottees is without merit as the Answering Respondent satisfy the threshold requirement under Section 7(1) of the Code. Conclusion - i) The petition is not barred by limitation due to continuing default and acknowledgment of debt. ii) The Respondents satisfies the statutory threshold to initiate CIRP. iii) No fraud or malicious intent is established to invoke Section 65 penalties. iv) The Corporate Debtor is liable for pre-existing debts despite conversion. v) The Adjudicating Authority did not err in admitting the petition and initiating CIRP. Appeal dismissed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal were:

1. Whether the Company Petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") was barred by limitation, considering the default date alleged and the date of filing.

2. Whether the acknowledgment of debt in the Corporate Debtor's financial statements and orders passed by the Uttar Pradesh Real Estate Regulatory Authority ("UPRERA") extended the limitation period under the Limitation Act, 1963.

3. Whether the Respondents (homebuyers/allottees) satisfied the statutory threshold under the second proviso to Section 7(1) of the IBC for initiating Corporate Insolvency Resolution Process ("CIRP") against a real estate developer.

4. Whether the Respondents who had obtained Recovery Certificates ("RC") or decrees under the RERA Act ceased to be financial creditors and thus were ineligible to file the Company Petition under Section 7.

5. Whether the Company Petition was instituted fraudulently or with malicious intent, warranting penal action under Section 65 of the IBC.

6. Whether the conversion of the partnership firm into the Corporate Debtor company absolved the latter of pre-existing liabilities and obligations.

7. Whether the Adjudicating Authority erred in admitting the Company Petition without proper consideration of the factual and legal contentions raised by the Appellant-Corporate Debtor.

Issue-wise Detailed Analysis

1. Limitation of the Company Petition

Legal Framework and Precedents: The limitation period for filing a petition under Section 7 of the IBC is governed by the Limitation Act, 1963. Section 22 of the Limitation Act provides that in cases of continuing breaches, limitation runs afresh with each successive default. Section 18 of the Limitation Act allows extension of limitation where there is an acknowledgment of liability. The Supreme Court judgments in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal and related cases emphasize that entries in the balance sheet may amount to acknowledgment of debt, but such acknowledgment must be unequivocal and free from caveats.

Court's Reasoning and Findings: The Tribunal noted that the default date alleged was 10.12.2015, while the petition was filed on 12.01.2024, nearly eight years later. However, the Tribunal observed that the Corporate Debtor's failure to deliver possession and refund amounts constituted a continuing default under Section 22 of the Limitation Act. Further, the Corporate Debtor acknowledged the outstanding amounts in its balance sheet dated 30.06.2022 without any caveats, thereby extending the limitation period under Section 18. The Tribunal also factored in the Supreme Court's suo moto extension of limitation due to the COVID-19 pandemic, which excluded the period from 15.03.2020 to 31.05.2022 from limitation calculation.

The Tribunal distinguished the Appellant's reliance on judgments that required strict pleadings on limitation, noting that the Company Petition clearly mentioned continuing default and attached relevant documents, including the RERA orders and balance sheet entries. The Tribunal held that limitation is a mixed question of law and fact and can be adjudicated even without specific pleadings on limitation, citing Sesh Nath Singh vs Baidyabati Sheoraphuli Co Operative.

Application of Law to Facts: The continuing default, acknowledgment in balance sheets, and regulatory orders collectively established that the petition was within limitation. The Appellant's contention that the accounts filed with UPRERA did not amount to acknowledgment was rejected as the financial statements were found to be unqualified acknowledgments.

Conclusion: The Company Petition was not barred by limitation.

2. Threshold Requirement under Section 7(1) of the IBC

Legal Framework and Precedents: The second proviso to Section 7(1) requires that for a real estate developer, at least 100 allottees or 10% of the total allottees (whichever is lower) must file the application. The Supreme Court in Vishal Chelani v. Debashis Nanda clarified that allottees who become decree holders under RERA remain financial creditors for IBC purposes.

Court's Reasoning and Findings: The project comprised 247 units, and the Respondents collectively held 34 units, satisfying the threshold. The Appellant's claim that certain allotments were forged or fully repaid was not substantiated with credible evidence. The Tribunal noted that even excluding disputed units, the remaining units met the threshold. The Tribunal also rejected the contention that allottees with recovery certificates ceased to be financial creditors, relying on the Supreme Court's and this Tribunal's recent rulings.

Application of Law to Facts: The Respondents met the statutory threshold. The Corporate Debtor's balance sheet continued to reflect outstanding deposits, corroborating the existence of debt.

Conclusion: The statutory threshold requirement under Section 7(1) was satisfied.

3. Status of Recovery Certificate Holders as Financial Creditors

Legal Framework and Precedents: Section 5(8)(f) of the IBC defines financial creditors to include allottees. The Supreme Court in Vishal Chelani held that allottees who obtain recovery certificates under RERA remain financial creditors. This was reaffirmed by this Tribunal in Rahul Gyanchandani & Ors. v. Parsvnath Landmark Developers Pvt. Ltd.

Court's Reasoning and Findings: The Tribunal held that obtaining recovery certificates or decrees under RERA does not alter the status of allottees as financial creditors. The Corporate Debtor's argument that such persons are not eligible to initiate proceedings under Section 7 was rejected.

Application of Law to Facts: The Respondents, including those holding recovery certificates, were financial creditors entitled to initiate CIRP.

Conclusion: Recovery certificate holders remained financial creditors under the IBC.

4. Allegations of Fraud and Malicious Intent under Section 65 of the IBC

Legal Framework and Precedents: Section 65 penalizes initiation of CIRP with fraudulent or malicious intent. The burden of proof lies on the party alleging such intent. The Tribunal in Monotrone Leasing Pvt. Ltd. v. PM Cold Storage Private Ltd. held that penal action requires substantial evidence of fraud or ulterior motive.

Court's Reasoning and Findings: The Appellant alleged forgery, suppression of facts, and that some allottees were speculative investors or had withdrawn from the project. However, the Tribunal found no documentary evidence substantiating fraudulent or malicious intent. The Adjudicating Authority had already rejected these claims after detailed examination. Even excluding disputed allottees, the remaining applicants met the threshold. The Tribunal emphasized the summary nature of IBC proceedings and the high standard of proof required for penal action.

Application of Law to Facts: The allegations were unsubstantiated and insufficient to invoke Section 65.

Conclusion: No fraud or malicious intent was established; thus, no penal action was warranted.

5. Effect of Conversion of Partnership Firm into Corporate Debtor Company

Legal Framework: Sections 369 and 370 of the Companies Act, 2013 provide that registration of a company by conversion does not affect existing liabilities or pending legal proceedings. The company continues to bear all pre-existing debts and obligations.

Court's Reasoning and Findings: The Corporate Debtor was incorporated by conversion of the partnership firm M/s Nikhil Associates. The Tribunal held that this conversion did not absolve the Corporate Debtor of liabilities. The Statement of Affairs filed post-conversion correctly reflected outstanding liabilities, including those to the allottees.

Application of Law to Facts: The Corporate Debtor remained liable for all pre-existing debts and obligations.

Conclusion: Conversion did not affect the Corporate Debtor's liabilities or the maintainability of the petition.

6. Adjudicating Authority's Admission of the Company Petition

Court's Reasoning and Findings: The Tribunal found no infirmity in the Adjudicating Authority's order admitting the petition. The Authority had comprehensively considered limitation, threshold, allegations of fraud, and the status of recovery certificate holders. It had found the petition within limitation, the applicants genuine financial creditors, and no evidence of malafide intent.

Application of Law to Facts: The Adjudicating Authority's findings were supported by evidence and legal principles.

Conclusion: The admission order was upheld.

Significant Holdings

"As the outstanding deposits from the Applicant Financial Creditors against the flats booked by them have been acknowledged by the Respondent Corporate Debtor in its Balance Sheet as recently as up to 30.06.2022, the present Application filed on 19.01.2024 is found to have been filed within limitation period even as per section 18 of the Limitation Act, 1961."

"The Corporate Debtor cannot evade its pre-existing commitments by merely undergoing a change in its legal structure. The principles enshrined in Section 369 reaffirm that the entity continues to bear the same financial and contractual responsibilities, and the present proceedings must be adjudicated considering the continuity of obligations post-conversion."

"Section 65 of the Code provides for penal action for initiating Insolvency Resolution Process with a fraudulent or malicious intent for any purpose other than for the resolution. However, the same cannot be construed to mean that if a petition is filed under Section 7, 9 or 10 of the Code without any malicious or fraudulent intent, then also such a petition can be rejected by the Adjudicating Authority on the ground that the intent of the Applicant/Petitioner was not resolution for Corporate Insolvency Resolution Process."

"The mere fact that some applicants may have obtained recovery certificates does not preclude them from initiating proceedings under the Code, as long as the fundamental criteria of 'debt' and 'default' are satisfied."

"The Company Petition was filed within the limitation period as the default was continuing, and the Corporate Debtor had acknowledged the debt in the balance sheet, thereby extending limitation under Section 18 of the Limitation Act."

"The statutory threshold prescribed under the second proviso to Section 7(1) of the Code was satisfied by the Respondents, and the objections regarding eligibility of certain allottees were without merit."

Final Determinations

The Tribunal dismissed the appeal and upheld the Adjudicating Authority's order admitting the Company Petition under Section 7 of the IBC. It held that:

• The petition was not barred by limitation due to continuing default and acknowledgment of debt.
• The Respondents satisfied the statutory threshold to initiate CIRP.
• Recovery certificate holders remain financial creditors for IBC purposes.
• No fraud or malicious intent was established to invoke Section 65 penalties.
• The Corporate Debtor remained liable for pre-existing debts despite conversion.
• The Adjudicating Authority did not err in admitting the petition and initiating CIRP.