The Existential Crisis of a Decree-Holding Homebuyer under IBC

[Mayank Udhwani is a graduate of National Law University, Jodhpur]

The decision of the National Company Law Appellate Tribunal (“NCLAT”) in Sushil Ansal v. Ashok Tripathi  has become a cause for concern for the homebuyers. In this decision, the NCLAT has held that a homebuyer, who has obtained a decree in its favor from a court of competent jurisdiction, ceases to be a financial creditor. In this post, the author contests the validity of this decision.

Background

The factual matrix of the case was that Mr. Ashok Tripathi (“Homebuyer”) had purchased a flat under a real estate project developed by Ansal Properties and Infrastructure Limited (“APIL”). Owing to the failure of APIL to complete the project within stipulated time, the Homebuyer approached the Uttar Pradesh Real Estate Regulatory Authority (“UP RERA”). Thereafter, the UP RERA issued a Recovery Certificate (“RC”) in favor of the homebuyer, directing APIL to refund the money. As the APIL failed to refund the amount stipulated under the RC, the Homebuyer filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against APIL. Interestingly, the Homebuyer had filed the aforementioned application not in the capacity of a homebuyer but as a decree holder. Although the application under section 7 of the IBC was admitted by the New Delhi bench of the National Company Law Tribunal (“NCLT”), the same was set aside in appeal by the NCLAT. While setting aside the decision of the NCLT, the NCLAT categorically ruled that “Decree-holder, though included in the definition of ‘Creditor’, does not fall within the definition of ‘Financial Creditor’ and cannot seek initiation [CIRP] as Financial Creditor”.

Analysis of the decision

The author contends that the NCLAT erred in categorically holding that decree holders are not financial creditors for two reasons:

  1. By going against the precedents on the subject matter, the NCLAT has created a lacuna in law which hitherto did not exist.

  2. The decision of the NCLAT has left the decree-holding homebuyers without remedy under IBC.
The NCLAT went against its own precedents

By holding that decree holders cannot be financial creditors, the NCLAT went against at least two of its previous decisions. In Urgo Capital Limited vs. Bangalore Dehydration and Drying Equipment Co., the NCLAT held that a creditor under the IBC includes a decree-holder and is entitled to file an application under section 7 of the IBC on the basis of the decree. While ruling in favor of the decree-holder, the NCLAT further clarified that “if a petition is filed for the realization of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in Civil Court”.

Similarly, in V.R. Hemantraj v. Stanbic Bank Ghana Ltd., the NCLAT allowed initiation of CIRP on the basis of an ex-parte foreign decree. The NCLAT, while relying upon the decision of the Supreme Court in Innoventive Industries Ltd v. ICICI Bank, held that an application under section 7 of the IBC has to be admitted as long as there is a default on a debt. It was further noted that a decree is a proof of debt. Hence, the decree holder was allowed to file an application under section 7 of the IBC if it could be shown that no payment had been made pursuant to that decree.

Furthermore, the Supreme Court, in K. Kishan v. Vijay Nirman Company has also held that a person who holds an arbitral award in his favor may initiate CIRP if the limitation period for challenging the award under section 34 of the Arbitration and Conciliation Act, 1996 ([“Arbitration Act”) has elapsed. This judgment becomes relevant in light of  section 36 of the Arbitration Act which provides that an award shall be enforced “in the same manner as if it were a decree of the Court”. On the basis of the foregoing, the author contends that if an arbitral award (which is placed on the same pedestal as a decree) can be used to initiate CIRP, then there ought not be any bar for a decree-holder to seek initiation of CIRP.

Reliance may be placed on  the decision of the NCLAT in Digamber Bhondwen v. JM Financial Asset Reconstruction Company  to contest that a decree holder cannot be a financial creditor. However, such a reliance would be misplaced. In Digamber, the NCLAT held that a decree-holder, although falling under the definition of a creditor under section 3(10) of the IBC, will not be entitled to file an application under section 7 or section 9 of the IBC as the definition of a ‘financial creditor’ or an ‘operational creditor’ does not include a decree-holder. The author contends that such a reasoning is erroneous because if a decree-holder cannot file an application under section 7 or section 9, the objective of including such decree-holders under the definition of the creditor will be rendered nugatory. It is also important to note that, although both the decisions (Urgo Capital and Digamber)were rendered in 2019, the decision in Urgo Capital was delivered by a three-member bench, whereas the decision in Digamber was delivered by a two-member bench of the NCLAT. Being rendered by a large judge bench, the decision in Urgo Capital would prevail over the decision in Digamber.

However, the decision in Sushil Ansal was also rendered by a three-member bench of the NCLAT. There is a direct conflict between the decisions in Urgo Capital and Sushil Ansal. While Urgo Capital allowed a decree-holder to file an application under section 7 of the IBC, Sushil Ansal categorically barred all decree-holders from classifying as financial creditors. Therefore, by deviating from its own judgments, the NCLAT, in Sushil Ansal, has not only rendered an erroneous decision, but also created a question of law which now requires to be settled either by a five-member bench of the NCLAT or the Supreme Court.

The NCLAT has left decree-holding homebuyers to be without a remedy under the IBC

As per Explanation (ii) to section 5(8) of the IBC, the amount raised from the homebuyers under a real estate project falls under the category of a ‘financial debt’. Therefore, the homebuyers are deemed to be financial creditors entitled to file an application under section 7 of the IBC. However, the situation becomes complicated for a homebuyer which has obtained a decree in his/her favor from a Real Estate Regulatory Authority (“RER Authority”). This is because once the RER Authority issues an RC/decree, the Builder-Buyer Agreement (“BBA”) between the homebuyer and the real estate project developer stands terminated. Once the BBA is terminated, the decree-holding homebuyer no longer falls under the deeming fiction that allowed homebuyers to be financial creditors. This is a fact which was admitted by the NCLAT in Sushil Ansal as well . Now, if a decree-holding homebuyer does not fall within the definition of a ‘financial creditor’ and assuming (but not conceding) that decree-holders cannot be classified as financial creditors, one begs to question, what is the remedy available to such a decree-holding homebuyer under the IBC. Accepting such a position would lead to a situation where a homebuyer, which has already gone through one round of litigation before a RER Authority, is barred from getting access to effective justice.

Conclusion

Experience has shown that even after getting a favorable order from a RER Authority, the homebuyers have not been able to materially execute such orders. Having been failed by the enforcement mechanism under Real Estate (Regulation and Development) Act, 2016, the homebuyers started approaching the NCLT in the capacity of a decree-holder. However, the decision in Sushil Ansal has placed an embargo on this practice. The author concludes that if a holder of an arbitral award can seek initiation of CIRP as held in K. Kishan, then a decree-holding homebuyer must also be allowed to derive benefits under section 7 of the IBC. Furthermore, given the conflicting decisions in Urgo Capital and Sushil Ansal, an authoritative ruling from a larger bench of the NCLAT or the Supreme Court is warranted to end the existential crisis being faced by the decree-holding homebuyers. Alternatively, a legislative clarification on the subject would also prove helpful.

Mayank Udhwani

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