2020 (8) TMI 396 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Settlement of disputes between the parties - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not. Whether this is a fit case for invoking Rule 11 of the NCLAT Rules to allow the parties to settle the dispute? - HELD THAT - Whether the allottees in the instant case are speculative investors or want to jump the ship, is for the Adjudicating Authority to determine when approached under Section 65 of the I B Code . That situation is not obtaining in the instant case as of now the joint Settlement of the Corporate Debtor with Respondent Nos.1 and 2 is confined to their claims and nothing beyond that. No issue of the nature referred to hereinabove has been raised in this appeal, therefore, the same does not require consideration. Admittedly, the Interim Resolution Professional has received 283 claims from allottees of different projects, Financial Creditors, Operational Creditors, other Creditors and Employees as detailed in para 10 of the reply filed by Respondent No.3 and the Settlement Deed does not take care of the interest of Claimants other than Respondent Nos.1 2. Therefore, allowing of withdrawal of application on the basis of such Settlement which is not all-encompassing and being detrimental to the interests of other Claimants including the allottees numbering around 300 would not be in consonance with the object of I B Code and purpose of invoking of Rule 11 of the NCLAT Rules. In a case where interests of the majority of stakeholders are in serious jeopardy, it would be inappropriate to allow settlement with only two creditors which may amount to perpetrating of injustice. Exercise of inherent powers in such cases would be a travesty of justice. Whether application filed by Respondent Nos. 1 2 under Section 7 of the I B Code was not maintainable? - HELD THAT - The impugned order dated 17th March, 2020 initiating Corporate Insolvency Resolution Process against Corporate Debtor cannot be sustained. The Adjudicating Authority has landed in grave error in admitting the application of Respondent Nos.1 and 2 under Section 7 who claimed to be the Financial Creditors in their capacity as decree-holders against the Corporate Debtor on account of non-payment of the amount due under the Recovery Certificate dated 10th August, 2019 issued by the UP RERA while execution of decree/ recovery of amount due under Recovery Certificate would not justify triggering of Corporate Insolvency Resolution Process. We are also of the firm view that the application of Respondent Nos. 1 and 2 was moved for execution/ recovery of the amount due under the Recovery Certificate and not for insolvency resolution of the Corporate Debtor. The impugned order suffers from grave legal infirmity and cannot be supported. Application dismissed.

Issues Involved:
1. Whether this is a fit case for invoking Rule 11 of the NCLAT Rules to allow the parties to settle the dispute?
2. Whether the application filed by Respondent Nos. 1 & 2 under Section 7 of the ‘I&B Code’ was maintainable?

Issue-Wise Detailed Analysis:

Issue 1: Invocation of Rule 11 of the NCLAT Rules for Settlement
10. The Real Estate Project "Sushant Golf City, Hi-Tech Township, Lucknow" has largely been completed. The Corporate Debtor entered into Builder-Buyer Agreements with Respondent Nos.1 and 2 for two units. Respondent Nos.1 and 2 lodged complaints with ‘UP RERA’ for refund due to non-completion of units. ‘UP RERA’ directed the Corporate Debtor to refund the amounts in installments. Recovery proceedings were initiated under Section 40 of the ‘Real Estate (Regulation and Development) Act, 2016’, leading to a Recovery Certificate issued on 10th August, 2019. Respondent Nos.1 and 2 filed an application under Section 7 of the ‘I&B Code’ for initiation of Corporate Insolvency Resolution Process (CIRP), which was contested by the Corporate Debtor.

11. Corporate Debtor can seek exit from CIRP at the pre-admission stage or post-admission before the constitution of the Committee of Creditors (CoC). The Hon’ble Apex Court in "Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India (UOI) and Ors." clarified that a party can approach the NCLT directly for withdrawal or settlement before the CoC is constituted, using inherent powers under Rule 11 of the NCLT Rules, 2016.

12. The exercise of inherent powers is discretionary and should consider the interests of various stakeholders. Scuttling CIRP cannot jeopardize the legitimate interests of other stakeholders, especially in a Real Estate Project with numerous allottees.

13. Whether the allottees in this case are speculative investors or want to jump the ship is for the Adjudicating Authority to determine under Section 65 of the ‘I&B Code’. This situation is not obtaining in the instant case as the joint Settlement is confined to Respondent Nos.1 and 2.

14. The Interim Resolution Professional (IRP) has received 283 claims from various creditors and allottees. The Settlement Deed does not address the interests of other claimants. Allowing withdrawal based on such a Settlement would be detrimental to other claimants, including around 300 allottees. Therefore, invoking Rule 11 for withdrawal is inappropriate.

Issue 2: Maintainability of Application under Section 7 of the ‘I&B Code’
15. Section 7 of the ‘I&B Code’, as amended by the ‘Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019’, requires that an application by allottees under a Real Estate Project must be filed jointly by not less than one hundred allottees or ten percent of the total allottees. This threshold limit must be met within thirty days of the commencement of the Amending Act, failing which the application shall be deemed withdrawn.

16. The amendment mandates a minimum threshold limit for applications under Section 7 for Real Estate Projects. Applications by individual or insufficiently grouped allottees are not maintainable.

17. Respondent Nos.1 and 2 approached the Adjudicating Authority as decree-holders, not as allottees. Their claim rests on being decree-holders under Section 3(10) of the ‘I&B Code’, which includes decree-holders within the definition of ‘Creditor’. However, the definition of ‘Financial Creditor’ under Section 5(7) requires a financial debt disbursed against the consideration for the time value of money.

18. Section 5(8) defines ‘financial debt’ and includes debts disbursed against the consideration for the time value of money. The initial transaction with Respondent Nos.1 and 2 was an allotment under a Real Estate Project, deemed to be having the commercial effect of a borrowing. However, Respondent Nos.1 and 2 sought initiation of CIRP as decree-holders, not as allottees.

19. The claim of Respondent Nos.1 and 2 as decree-holders does not meet the definition of ‘Financial Creditor’ under Section 5(7) and (8). Their application is based on a Recovery Certificate issued by ‘UP RERA’, not on a financial debt disbursed for the time value of money.

20. A decree-holder cannot seek initiation of CIRP as a ‘Financial Creditor’. Execution of a decree through Section 7 of the ‘I&B Code’ is impermissible.

21. The Recovery Certificate issued by ‘UP RERA’ directed recovery as arrears of land revenue. Respondent Nos.1 and 2 sought execution of this Recovery Certificate through CIRP, which is not permissible.

22. The application under Section 7 was not for insolvency resolution but for executing the Recovery Certificate. This is not a valid ground for triggering CIRP.

23. Summary of Findings:
- Respondent Nos.1 and 2 cannot claim to be allottees after issuance of the Recovery Certificate. Their application for CIRP is not maintainable as allottees.
- A decree-holder does not fall within the definition of ‘Financial Creditor’ and cannot seek initiation of CIRP.

24. The impugned order dated 17th March, 2020, initiating CIRP against the Corporate Debtor, is unsustainable and is set aside. The application under Section 7 by Respondent Nos.1 and 2 is dismissed.

25. All orders and actions taken by the IRP are declared illegal and set aside. The Corporate Debtor is released from all CIRP-related restrictions.

26. The Adjudicating Authority will fix the fee of the IRP for the period he functioned.

27. Claimants, including allottees, may seek legal remedies independently. The period from the filing of claims before the IRP to the disposal of this appeal is excluded from the limitation period.

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