FORUM: National Company Law Appellate Tribunal, Delhi
CASE NO.: Company Appeal (AT) (Insolvency) No. 452 of 2020.
DATE OF DECISION: 14.08.2020
I. MATERIAL FACTS-
The Respondents No. 1 and 2 jointly booked a unit, and entered into a “Built up Agreement” with the Corporate Debtor. Respondent No. 2 also booked a separate unit and entered into a “Flat Buyer Agreement” with the Corporate Debtor. The respondents paid an advance amount and the Corporate Debtor undertook that the possession would be transferred 2 years post the date of allotment. The Corporate Debtor has neither completed the construction, nor refunded the advance amount and thus the Respondents No. 1 and 2, approached the Uttar Pradesh RERA. The RERA granted a Recovery Certificate to the Respondents, however, despite that the Corporate Debtor committed default and failed to repay the amount due to the Respondent No. 1 and 2. Therefore, the Respondents filed a Corporate Insolvency application against the Corporate Debtor, before the National Company Law Tribunal (NCLT), under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) in the capacity of “Decree holder” and prayed for initiation of Corporate Insolvency Resolution Process against the Corporate Debtor.
II. PROCEDURAL HISTORY-
- The Hon’ble NCLT passed an order for admission of Section 7 Application in favor of Respondent No. 1 and 2, and declared a moratorium and appointed Respondent No. 3 as an Interim Resolution Professional (IRP) for the Corporate Debtor.
- The IRP received claims against the Corporate Debtor from 283 allottees. However, before the constitution of the Committee of Creditors, the two allottees and the Corporate Debtor reached a settlement.
- Hence, the present appeal filed by Appellant challenging the order of admission passed by NCLT, and seeking approval of the settlement.
III. ISSUES-
(i) Whether this is a fit case for invoking Rule 11 of the NCLT Rules to allow the parties to settle the dispute?
(ii) Whether application filed by Respondent nos. 1 & 2 under Section 7 of the IBC was not maintainable?
IV. APPELLANT CONTENTIONS-
1. The impugned order being in conflict with the Amendment to ‘I&B Code’ prescribing the threshold limit renders the application of Respondent Nos.1 & 2 under Section 7 non-maintainable.
2. That the impugned order wrongly treats the Respondent Nos. 1 & 2 as being decree-holders but even in such capacity they cannot be permitted to execute the decree under the ‘I&B Code’ mechanism.
3. That the dispute stands settled between the Corporate Debtor and Respondent Nos. 1 & 2 in terms of an amicable settlement and they have filed a joint application for withdrawal and termination of Corporate Insolvency Resolution Process of the Corporate Debtor while the Committee of Creditors has not been constituted till date in terms of order dated 20th March, 2020.
V. RESPONDENT CONTENTIONS-
1. That the Respondent Nos. 1 & 2 do not wish to contest the issue raised by the Appellant qua maintainability of application under Section 7 filed by them and, therefore, agree and subscribe to the arguments of appellants.
2. That the dispute has been settled prior to constitution of Committee of Creditors and there is no legal impediment in allowing such settlement, thus permitting withdrawal and termination of Corporate Insolvency Resolution Process.
3. That with respect to claims of other Homebuyers/Creditors, it is submitted that they can pursue their claims independently on their own merits through any remedy as may be available under law.
VI. COURT OBSERVATIONS-
1. It is pertinent to note that the judgment cited Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India and Ors.,[1] to establish that it is not a disputed position in law that the Corporate Debtor is permitted to seek exit from the Corporate Insolvency Resolution Process at the pre-admission as well as the post-admissions stage. The latter is only possible before the constitution of the Committee of Creditors.
2. The judgment further noted that a party on the basis of a settlement reached by the parties, is allowed to approach the Adjudicating Authority under Rule 11 for the withdrawal of an application under Section 7 IBC.
3. However, exercise of the NCLAT’s inherent powers under Rule 11 would depend on the consideration of all relevant factors and the view of the various stakeholders or concerned parties must be kept in mind.
4. Being considerate of this, the NCLAT did not allow the withdrawal of the application on the basis of a settlement, because it would be grossly detrimental to approve a settlement which just two claimants, when the IRP received 283 claims against the Corporate Debtor.
5. The Respondent Nos. 1 and 2, admittedly approached the NCLT in the capacity of a decree-holder, against the default of the financial debt committed by the Corporate Debtor subsequent to the Recovery Certificate issued by UP RERA.
6. Since they did not approach the NCLT in the purported capacity of an ‘allottee’, but came in the capacity of a ‘decree-holder’, the Court analyzed the definitions of ‘Creditor’, ‘Financial creditor’ and ‘Financial Debt’ under the IBC, to establish that a decree-holder does not come within the purview of the term ‘Financial creditor’. This is because the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money. Therefore, a ‘decree-holder’ cannot seek initiation of the Corporate Insolvency Resolution Process under Section 7, as a Financial creditor.
VII. DECISION-
1. That allowing prayer for withdrawal of the Section 7 Application, pursuant to the settlement between the parties would cause injustice to the interest of other stakeholders and thus, rejected.
2. That the decree-holder would not fall within ambit of financial creditor and thus order of the NCLT for admission of application under Section 7 was not maintainable and thus set aside.
3. It is open for claimants to independently seek legal remedy as may be available under law. While computing the period of limitation, the period reckoned from date of filing of each claim before the Interim Resolution Professional till date of disposal of this appeal shall stand excluded.
4. The ‘Corporate Debtor’ (company) is released from all the rigor of law and is allowed to function independently through its Board of Directors from immediate effect.
VIII. ANALYSIS & CRITICS-
1. The above-mentioned judgment was based largely upon two facets, firstly, degree of discretion to exercise while allowing withdrawal of application for reason of settlement at pre and post admission stage, and secondly, with respect of status of decree holder under IBC.
2. It is submitted that Hon’ble NCLAT has rightfully balanced the first facet, i.e. degree of discretion to exercise at post admission stage with circumstances such as interest of other stakeholders.
3. However, it is the opinion of the authors that the Hon’ble NCLAT has gone into grave error while holding ‘decree-holder’ as per se outside the ambit of financial creditors because-
(i) The term ‘creditor’ defined under Section 3 (10) includes decree-holder.
(ii) To reach the stage of Financial creditor, the decree holder has to satisfy either test:
a. That the debt was disbursed against the time value of money or
b. That the debt falls within any clause of definition of financial creditor as mentioned under Section 5(8) of the Code
(iii) That there is no straight-jacket formula so as to ascertain whether the claim of decree-holders would fall within the ambit of financial creditors or operational creditors and this would depend upon the nature of the claim in the case and facts and circumstances of a particular case. Hence, it is humbly submitted that since there can be no straight jacket formula either to per se reject or per se accept a decree-holder as financial creditor, the reasoning of NCLAT in the present case should have governed by rule of reasoning and not by rule per se.
(iv) That the single per se yardstick followed by Hon’ble NCLAT under present case is against the intention of law maker as well as against the settled legal position.
(v) Even otherwise, the Hon’ble NCLAT miserably failed to distinguish the earlier precedents passed by NCLAT itself on the subject matter from present case.
In Urgo Capital Limited v. Bangalore Dehydration and Drying[2], Hon’ble three judge bench of NCLAT held that-
The definition of the word ‘creditor’ under IB code includes decree-holders, therefore if a petition is filed for execution of decree it cannot be dismissed on the fact that decree-holder should file a decree for execution in civil Court.
That the judgment under present case is in direct conflict with the reasoning of Hon’ble NCLAT three-judge bench judgment. It is important to note that the Hon’ble NCLAT under present case has failed to distinguish the present case from the settled position.
Similarly, in Digamber Bhondwen v. JM Financial Asset Reconstruction Company,[3] the NCLAT stated that though, the term ‘Creditor’ includes a decree-holder, for the purposes of Sections 7 and 9 of the IBC, decree-holders are not included within the purview of the terms ‘financial creditor’ or ‘operational creditor’ and cannot, therefore, initiate corporate insolvency proceedings.
The Supreme Court was dealing with the same issue in the case of K. Kishan v. Vijay Nirman Company,[4] wherein it held that;
"19. We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation."
If a decree from a civil court will not be considered as an evidence of default then why at the very first place, legislature would have provided for the same under Part V of Form 1.
Part V of Form 1 of IBBI (Application to Adjudicating Authority) Rules provides for decree, order of any court or tribunal or award as an evidence of default by the corporate debtor.
Though an arbitral award is not equivalent to a decree but in the case of Sundaram Finance Ltd. v. Abdul Samad,[5] Supreme Court while interpreting Section 36 of the Arbitration & Conciliation Act, 1996 held that:
For the purposes of execution of a decree the award is to be enforced in the same manner as if it was a decree under the said Code.
IX. CONCLUSION
Thus, it is humbly submitted that, when CIRP can be initiated on the basis of an award which is an adjudicated amount, then the question is, why it cannot be allowed in cases of decree of any forum as well. Therefore, NCLAT could not have rejected the initiation of CIRP based on a decree by stating that the amount in a decree is not a Financial Debt but an adjudicated amount. To exclude a Financial Debt, when it is adjudicated, from the rigors of the IBC is fundamentally flawed and goes contrary to the Scheme of IBC which recognizes that an adjudicated amount can also become a financial debt.
This case analysis is authored by: 1.Mr. Shubham Budhiraja, an Associate Company Secretary and a final-year student pursuing LL.B. from Law Center-II, Delhi University; and 2.Ms. Akshita Goyal, a third-year student pursuing B.A. LL.B. from Symbiosis Law School, Pune, during her online internship with S&D Legal Associates.
[1] Swiss Ribbons Pvt. Ltd. and Ors. v. Union of India and Ors., AIR 2019 SC 739. [2] MANU/NL/0023/2020. [3] 165 (IBC) 130/2020. [4] (2018) 17 SCC 662. [5] MANU/SC/0122/2018.
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