Decree Holder cannot be treated equal to a Financial Creditor: NCLAT

Recent ruling of NCLAT that a decree holder cannot be treated as a financial creditor and he is not allowed to initiate CIRP under the IBC.

Introduction

As of very recently under the case of Sh. Sushil Ansal Vs Ashok Tripathi and Ors The National Company Law Appellate Tribunal, Delhi (NCLAT) has provided that no decree holder who is covered within the definitions of a creditor given under Section 3(10) of the Insolvency and Bankruptcy Code (IBC) can come within the ambit of the class of a financial creditor. This implies that a decree holder is not permitted to incorporate any corporate insolvency resolution process (CIRP) against any corporate debtor with the soul objective of executing a decree under it.

Facts of the Case
  • Under the case, the Respondents 1 as well as 2 were the allottees of a house under a certain housing project located in Lucknow.
  • These respondents (allottees) approached the Uttar Pradesh Real Estate Regulatory Authority (UP RERA) in order to claim certain dues owed to them b the developer of the project, namely, Ansal Properties and Infrastructure Limited who is the Corporate Debtor herein.
  • The respondents claimed that the Corporate Debtor had failed to abide by the time period which had been stipulated under the Builder-Buyer Agreement leading to the current conflict.
  • This resulted in a grant of orders along with a recovery certificate issued under the UP RERA authorities in the favour of both the respondents against the Corporate Debtor in order to claim the amount for recovery as arrears for land revenue accrued.
  • However, instead of choosing the usual recourse of filing for an execution before the civil court, the respondents, instead sought to approach the NCLT, Delhi for initiating a CIRP proceeding against the said Corporate Debtor under section 7 of the IBC, claiming themselves as the decree holders therein.
  • While relying upon the previous decision of NCLAT in Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Co Pvt Ltd. The NCLT, Delhi accepted the application while appointing an interim resolution professional for the same.
  • After this appointment, the appellant who was the former director as well as a shareholder of the Corporate Debtor, challenged the order of the NCLT by filing an appeal for the same and while the appeal was still pending, the parties sought to opt instead, for a settlement which resulted in the appeal not being contested by either of the respondents due to maintainability of the application under Section 7 of the IBC.
  • In order to examine the maintainability of the Section 7 application made therein by the respondents. The NCLAT subsequently analysed the definition of a financial creditor as well as financial debt as defined under Section 5(7) and 5(8) under the IBC and stipulated that under sub-clause (f) of Section 5(8) the IBC states that any amount which is raised under any transaction, which would include forward sale or purchase agreements with a commercial effect over the borrowing must fall within the ambit of a financial debt.
  • The explanation of the section further stipulated that I any amount of money has been raised from any allottee within a real-estate project, then the same shall be deemed as an amount which has a commercial effect over this borrowing.
  • Hence, in order to arrive at a proper determination of a financial debt, it is necessary to analyse if such a debt had been disbursed against the consideration for the time value of money which could include any amount which has been raised through an allottee under the real estate project along with an analyses of whether the transaction has a commercial effect over such a borrowing in itself.
  • Considering the above, the NCLAT made the distinction about the fact that the respondents had come before the NCLT as decree holders and not as allottees in the said real estate project and thus NCLAT deemed it right to hold that even though a decree holder has been covered within the definition of a creditor given under Section 3(10) of the IBC, the same decree holder would not fall within the ambit of the definition of creditors which have been classified as financial creditors. Thus such decree holders are not permitted to initiate any CIRP proceedings under Section 7 of the IBC whatsoever.
  • Thus as given by the NCLAT under the present case, the respondents had approached the NCLT with the sole objective of executing a decree that had been issued under the UP RERA relying solely on the decision given prior to this in the case of G. Eswara Rao Vs Stressed Assets Stabilisation Fund and Ors. Thus it was found by NCLAT that the application made by the respondents could not be maintainable and thus it set it aside NCLT Delhi’s impugned order which admitted this application under Section 7 under the IBC.
 
Conclusion

Section 7(1) of the Insolvency and Bankruptcy Code, 2016 has now been amended since it now prescribes a minimum threshold limit for the initiation of any insolvency proceedings by home buyers or any allottees under a real estate transaction. This amendment states the following parameters:
  • The newly amended Section 7 maintains that a CIRP needs to be initiated by not less than one hundred allottees or not less than ten per cent of the total number of allottees under the real estate project in question, whichever is less.
  • However, the validity of the 2020 Amendment Act is still being challenged before the Supreme Court.
Even though there are many remedies available to allottees against such developers under the Real Estate (Regulation and Development) Act, 2016 (RERA 2016) as well as under the IBC it is important to note that after an allottee acquires the said recovery certificate under the RERA, 2016, the same cannot be executed through the invocation of Section 7 under the IBC and thus the allottee must then resort to execution proceedings in order to recover his dues against any such builder or developer therein.