IBC UPDATE | DECREEHOLDER - NOT A FINANCIAL CREDITOR?

A three-member bench of the National Company Law Appellate Tribunal (NCLAT) in a recent case of Sushil Ansal v Ashok Tripathi and Ors held that a homebuyer who had obtained a decree in his favour from a competent court or authority ceases to be the Financial Creditor within the scope of the Insolvency and Bankruptcy Code, 2016 (IBC). In this update, we will analyse this unique judgment delivered by the NCLAT.

FACTS

• Mr Ashok Tripathi (Homebuyer) entered into an agreement (Agreement) dated 12 September 2014 with Ansal Properties and Infrastructure Limited (APIL).
  
  
• APIL failed to provide possession to the Homebuyer within the time stipulated in the Agreement, the Homebuyer approached the Uttar Pradesh-Real Estate Regulatory Authority (RERA). RERA adjudicated upon the dispute, deciding in favour of the Homebuyer and issued a Recovery Certificate dated 10 August 2019 (RC), directing APIL to refund the monies. APIL failed to refund the entire amount within the time stipulated under the RC, however, part payment of the money was made.
  
  
• The Homebuyer thus moved the New Delhi bench of the National Company Law Tribunal (NCLT) under Section 7 of the IBC as a Financial Creditor, in the capacity of decree-holder against the default of the financial debt committed by Mr Sushil Ansal of APIL (Corporate Debtor) on account of the non-payment of the principal amount along with penalty as decreed by the RERA. NCLT admitted the petition and directed the appointment of IRP. The said order (Impugned Order) was challenged in the present case.
  

ISSUES

• Whether this is a fit case for invoking Rule 11 of the NCLAT Rules, 2016 to allow the parties to settle the dispute?
  
  
• Whether an application filed by Respondent Nos. 1 & 2 under Section 7 of the IBC was not maintainable?

HELD

• While holding for the first issue that allowing to settle the matter with only 2 creditors would jeopardise the interest of majority stakeholders, being about 300 allottees, the NCLAT ruled out the possibility of any settlement.
  
  
• The more important aspect of the decision however lies in the second issue. While deciding the maintainability of the Petition under Section 7 as a Financial Creditor, the NCLAT held as follows (Paragraph 23 (ii)):
  
  “Decree-holder, though included in the definition of ‘Creditor’, does not fall within the definition of ‘Financial Creditor’ and cannot seek initiation of Corporate Insolvency Resolution Process as ‘Financial Creditor”.
  
  
• The principal reason cited for holding that the Decree Holding Homebuyer ceases to be the financial creditor was that the Agreement between the parties is terminated as soon as a decree or an RC is issued by a court/ authority having competent jurisdiction. Thus, despite being a creditor, a petition under Section 7 of the IBC was held to be not maintainable.

MHCO Comment:

We believe the judgment of NCLAT seems to raise issues in 2 ways (i) It goes squarely against its own precedents in a number of matters and (ii) It deprives the homebuyers of the remedy under IBC which was available to them under the previous decisions of NCLAT.

One of the most landmark precedents which the present NCLAT failed to consider is the case of Urgo Capital Limited vs. Bangalore Dehydration and Drying Equipment Co wherein it was 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. The said decision was also delivered by a 3-member bench of the NCLAT. Therefore, the question of law now remains to be decided by the Supreme Court now.

If the principle laid down by the NCLAT in the present case remains unchallenged, it would render a homebuyer in limbo with regards to its remedy under IBC. The homebuyers were deemed to be financial creditors and capable of filing a petition under Section 7 of the IBC for providing an efficient remedy to the homebuyers. NCLAT has held that by obtaining a decree or RC from the RERA, the homebuyers would cease to avail the remedy under the IBC. They can take refuge in the process of execution of the decree as provided under the Code of Civil Procedure, 1908. However, the said process is long-drawn and tedious. The remedy under the IBC on the other hand could prove to be more efficient. This decision of the NCLAT closes this door for the decree-holding homebuyers.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

REGULATORY PROCEEDINGS PROHIBITED DURING MORATORIUM PERIOD UNDER IBC

In an interesting Order, the Securities Appellate Tribunal (SAT), in the case of Dewan Housing, directed the Securities and Exchange Board of India (SEBI) to halt proceedings against Dewan Housing Finance Corporation Limited (DHFL) and quashed the order of the SEBI imposing penalty on DHFL.

BACKGROUND

• Corporate Insolvency Resolution Process (CIRP) was instituted against DHFL and thus, moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) was imposed on DHFL.
  
  
• During the moratorium, the Adjudicating Officer of SEBI issued a notice to DHFL to show cause as to why penalty should not be imposed on it for non-compliance of various SEBI regulations dealing with the creation of `Debenture Redemption Reserve` and submission of audited financial results.
  
  
• DHFL contended that due to the moratorium under IBC in place, no proceedings could be initiated against it. However, the Adjudicating Officer of SEBI vide an Order (SEBI Order) imposed a penalty of Rs 20 lacs on DHFL for non-compliance of various SEBI regulations.
  
  
• In light of the above circumstances, DHFL challenged the SEBI Order before SAT.
  

The Securities Appellate Tribunal held:

• SEBI argued on mainly on two grounds:- (a) the moratorium declared under IBC would be applicable only to the enforcement / recovery of the determined liability and not to proceedings for assessing or determining the liability; (b) that moratorium is only applicable to creditors and not to regulators like the SEBI.
  
  
• SAT rejected SEBI’s argument and held that the word ‘proceedings’ under Section 14 of the IBC would cover the proceedings initiated by SEBI against DHFL.
  
  
• SAT placed reliance on the judgments of the Supreme Court in Alchemist ARC case and Innoventive Industries case, and held that in cases where moratorium has been declared under the IBC, Adjudicating Officer of SEBI does not have jurisdiction to proceed under the SEBI laws / regulations against a corporate debtor (DHFL in the present case).
  
  
• It also rejected the contention of the SEBI that moratorium is only applicable to creditors and not to regulators like the SEBI. Placing reliance on previous judgments of the National Company Law Tribunal (NCLT), inter alia, in case of Ms Anju Agarwal vs Bombay Stock Exchange & Others, wherein it was held that in case of contradictions, Section 14 of the IBC would prevail over Section 28A of the SEBI Act (provision dealing with the imposition of penalties), SAT held that SEBI cannot recover any penalty from DHFL.
  
  
• Thus, SAT quashed the order of SEBI imposing penalty on DHFL. It also quashed the show cause notice and the proceedings for recovery of the penalty, as no proceedings could be instituted due to the moratorium.

MHCO Comment :

The order of the SAT is an interesting development. The order delves into and interprets Section 14 of the IBC, which might be beyond the jurisdiction of the SAT, as the NCLT would be an appropriate forum to decide the same. Further, this order effectively bars regulators like the SEBI, the Reserve Bank of India, Insurance Regulatory and Development Authority, from penalising entities for violation of its regulations. It would be interesting to see whether SEBI files an appeal against this order of the SAT.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

MAHARASHTRA APARTMENT OWNERSHIP ACT AMENDMENT| CO-OPERATIVE COURT TO NOW HAVE JURISDICTION 

The Government of Maharashtra recently amended the Maharashtra Apartment Ownership (Amendment) Act, 2020 . This update seeks to broadly set out the important changes and additions brought about to the Maharashtra Apartment Ownership Act, 1970 (Act).

• Section 12A – As per this newly added Section 12A to the Act, the Apartment owners now can change or amend the contents of the Declaration or Deed of Apartments by passing a resolution by majority in a special meeting of the Association of Apartment Owners. Earlier, the Apartment owners in order to make any revisions or amendments required registraion of ‘Deed of Apartment – Form II’ before the Sub-Registrar of Assurances as per the Maharashtra Apartment Ownership Rules, 1972. This provision seems to be have been done away with in this amdendement.
  
  
• Section 16A – This new Section 16A now allows any aggrieved apartment owner or association of apartment owners can file a complaint with the Registrar for any violation or contravention of the provisions of the Act or the rules against any apartment owner or the sole owner or all the owners of the property. Every such complaint filed before the Registrar shall as far as possible be disposed of within a period of 30 days from the date of its filing. If the Registrar fails to dispose of the complaint within 30 days, he must record the reasons for the delay.
  
  
• Section 16B – Any apartment owner, Association of Apartment owners or any sole owner aggrieved by any direction or order of the Registrar may prefer an appeal to the Co-operative Court. Every appeal under this newly added section shall be preferred within a period of 60 days from the date on which the copy of the direction or order made by the Registrar is received. The Co-operative Court shall after giving reasonable opportunities to the parties pass such orders as it may deem fit and shall send a copy of every order passed in the appeal to the Registrar and the parties. Every appeal shall be dealt by the Co-operative Court within 90 days from the date of receipt of the appeal.
  

MHCO Comment :

Earlier the resident of the apartment owners had to file a suit before the civil court for any dispute with the apartment owners or the condominium and the same was time consuming. Even if a member did not pay the monthly maintenance fee, the other remaining members had to seek redressal from the civil court. This amendment now puts the apartment owners in same forum as the cooperative housing societies i.e. before the Deputy Registrar and Cooperative Court which being a specialised forum to adjudicate these issues. This amendment further requires the Deputy Registrar and Cooperative Court to resolve the issues in a timely manner.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.