[Gaurav Mitra is an Independent Practitioner (LLM, University of Cambridge; BCL, University of Oxford), and Lavanya Pathak is an Associate at Chambers of Gaurav Mitra (LLM, University of Cambridge)]
Courts have always strived to balance the interests of all parties involved in the proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”). Particularly in reference to builder-buyer disputes, it seems that the law has evolved considerably to accommodate the concerns of both the builders and allottees. However, in the context of a joint development agreement (“JDA”), which is an arrangement between developers and landowners, it remains to be seen how the IBC can protect the landowners.
In an agreement of this kind, the landowner usually entrusts the developer with the construction of the real estate project in exchange for a specific share in the developed commercial or residential units. In this arrangement, in case the project goes south, several legal questions arise in the context of insolvency, including whether the landowner can initiate corporate insolvency resolution process (“CIRP”) against the developer in his capacity as a financial or operational creditor. Another question that might arise is whether, upon the initiation of CIRP against a developer, the estate of the Corporate Debtor (“CD”) would include the JDA property owned by the landowner. This post addresses a few of these instances that may arise and highlights the direction the law seems to be taking in such disputes.
Initiation of CIRP by the Landowner as a Financial Creditor
Generally, in a JDA, the landowner is liable to receive a certain share of profit or is assured some units in the commercial or residential project upon completion of the project. In this regard, they may also receive allotment letters. Thus, the question is whether they shall be treated as financial creditors in their capacity as a profit-sharing party or as an allottee. Unfortunately, the National Company Law Appellate Tribunal (“NCLAT”) has answered both the questions in the negative.
In the case of a profit-sharing agreement, the NCLAT, in Mukesh N. Desai v. Piyush Patel, clarified that a landowner who has entered into an agreement of reciprocal rights and obligations for developing the land would not fall within the definition of financial creditor as defined under section 5(8) of the IBC. The Court went on to hold that:
“We are of the earnest view that both parties being ‘Joint Development Partners’ who entered into a consortium of sorts for developing the subject land and for any breach of terms of the contract, Section 7 Application filed under the Code would not be maintainable as the amount cannot be construed as ‘Financial Debt’ as there is no sum(s) i.e., owed, assigned or transferred to in compliance of the provisions of Section 5(8) of the Code.”
Furthermore, even when the landowner held allotment letters for certain units in the project, the NCLAT maintained its stance and held that the application filed by the landowner shall not be maintainable under section 7 of the IBC since a “pre-condition for application of Explanation (i) of section 5(8)(f) is raising of an amount from allottee”. Thus, the Court, in Namdeo Ramchandra Patil v. Vishal Ghisulal Jain (Company Appeal (AT) (Insolvency) No. 821 of 2021, judgment dated 19 September 2022), while noting the definition of allottee and promotor under the Real Estate (Regulation and Development) Act, 2016, held that:
“When we look in the real nature of the transaction entered between the Corporate Debtor and the Appellants – Landowners, the landowners were entitled to share the constructed area in the ratio of 45:55 and allotment of flats and commercial units in lieu of their entitlement under the Development Agreement does not make the transaction of allotment a Financial Debt within the meaning of Section 5(8)(f).”
The rationale of such an interpretation was further emphasized by the NCLAT in Vipul Limited v. Solitare Buildmark Pvt. Ltd, where it noted that both parties being ‘Joint Development Partners’, initiation of CIRP by one partner of the JDA against the other only jeopardized the interests of the allottees.
Initiation of CIRP by the Landowner as an Operational Creditor
Initiation in the capacity of an Operational Creditor under section 9 of the Code also remains unrecognized by the courts. The NCLAT has dealt with this question in the context of a general JDA in the case of SreeSankeshwara Foundation and Investments v. Dugar Housing limited. In this case, the tribunal went into the meaning of the terms ‘operational debt’ and ‘operational debtor’ and concluded that since there was no claim in respect of the provision of goods or services, the petitioners shall not be regarded as “operational creditors”.
Even otherwise, it is also important to point out that the landowners are likely to prefer recognition as a financial creditor because they want representation on the Committee of Creditors (“CoC”).
Right of Impleadment as a Party
Considering the stakes of a landowner in the project, both in terms of the project land and in respect of their future shares, it is only natural that the landowner would wish to be impleaded as a party. However, the courts have not been keen on allowing such an intervention.
Underlying such a response is the principle that at the stage of initiation of CIRP, what merely needs to be ascertained is whether the applicant fulfills the requirements under section 7 and section 9 of the IBC. As such, the impleadment of any party is unwarranted at this stage. The NCLAT made this amply clear in Vekas Kumar Garg v. DMI Finance Pvt. Ltd., as well as in Deb Kumar Majumder v. State Bank of India.
In L&T Infrastructure Finance Company Private Limited v. Gwalior Bypass Project Limited, the tribunal unequivocally held that since the appellant was a financial creditor of the CD and was neither a member nor a shareholder of the CD, it had no right to intervene or oppose the admission of the application by ICICI Bank against the CD. In fact, in Prayag Polytech Pvt. Ltd. v. Hind Tradex Ltd., the NCLAT stayed intervention by directors and shareholders of the financial creditor as well.
Thus, the position maintained is that impleadment is rarely allowed at the stage of admission of the application under section 7 or 9 of the IBC.
Fate of the JDA Property During CIRP
It is the intention of the IBC that upon initiation of insolvency proceedings, the property of the CD is frozen to preserve its estate for the creditors. However, the landowner will be inclined to terminate the rights created in favor of the developer on such an event in order to keep his asset out of the CIRP process. The Supreme Court dealt with these conflicting interests in the case of Rajendra K. Bhutta v. State of Maharashtra. The legal question was whether landowners could recover the JDA property after the application of the moratorium. After thoroughly analyzing the nature of rights created in favor of the developer, the Court concluded that the property would be considered “occupied” by the developer, and as such, it would fall within the broad scope of section 14.
Furthermore, in New Okhla Industrial Development Authority (NOIDA) v. Amit Agarwal, the NCLAT noted that a leasehold property would be considered an intangible asset of the CD and would, as such, form a part of its estate under section 18(f)(iv). In this context, the ratio in Bhupinder Singh v. Unitech Ltd can also be borrowed, where the Supreme Court directed NOIDA to restore a lease land to the Successful Resolution Applicant as it constituted “a valuable security for ensuring that they are monetized with a view to fulfill the commitments to the homebuyers”.
Thus, considering the overall scheme of the law, it will not be amiss to say that all doors have seemingly been closed for the landowners once the CIRP is initiated against the CD. Even at the stage of submission of claims, it is uncertain whether they will be regarded as operational or financial creditors. It may also foreclose the possibility of landowners initiating a reverse CIRP, whereby the interested members of erstwhile management of the corporate debtors are allowed to infuse funds for the completion of the project. While it remains to be seen what the position of the Supreme Court will be on these issues, the insolvency law, for the time being, does not seem to favor the rights of a landowner under the JDA. Such a view is in the best interest of third-party allottees who must not be affected by inter-se disputes between the landowner and developer. However, the court must also bear in mind that such an interpretation might disincentivize future JDA projects.
– Gaurav Mitra and Lavanya Pathak