Decree Holder Cannot Initiate CIRP as Financial Creditors: NCLAT

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In the case of Sushil Ansal vs Ashok Tripathi & Ors, the National Company Law Appellate Tribunal (NCLAT), New Delhi diluted the interest of decree holders under IBC. The appellate tribunal stated that the decree-holder could not be a financial creditor solely to initiate Corporate Insolvency Resolution Process (CIRP). The appeal was filed against the order dated 17th March 2020. The appellant herein was a former director and shareholder of M/s Ansal Properties and Infrastructure Limited. 

Facts of the Case

The issue aroused out of the booking of dwelling units under a real estate project namely “Sushant Golf City” developed at “High Tech Township”, Lucknow. Both the respondents jointly booked a unit admeasuring 3746 sq feet which was worth Rs 1,62,43,133 on 5th August 2014 and also paid an advance of Rs 8,37,300. Mr Saurabh Tripathi separately booked a unit admeasuring 1229 sq feet on 16th July 2014 and paid Rs 1,63,994 as booking advance. A joint Builder Buy Agreement dated 12th September 2014 for the first unit and flat buyer agreement dated 28th September 2014 for the second unit was executed inter se the respective parties. Corporate Debtor had to finish the project and submit them to the units within two years. The project under RERA started on 22nd September 2015 and should have been completed by 22nd September 2017. The corporate Debtor did not fulfil this clause, and even after five years, the appellant neither completed the construction nor returned the money. 

Arguments

Appellant: 

  1. The ordinance was promulgated and enforced during the pendency of the applications before the adjudicating authority. 
  2. No classifications of allottees were permissible. Allottees under real estate projects had no further classification or demarcation and continued to be allottees without any distinction. 
  3. The respondents were speculative buyers and initiated CIRP only to harass the appellant and also to cripple the functioning by extorting money. 
  4. The appellant should be allowed to complete the project as it has to complete the project and give it to the allottees.

Respondent: 

  1. Rule 11 of NCLAT Rules, 2016 should be invoked to set aside the order of admission and also to terminate the CIRP against the appellant.
  2. The respondents did not wish to contest the issue raised by appellant qua maintainability of application u/s 7 and hence subscribed to the arguments of the appellant.

Court’s Interpretation

  • The appellant can seek an exit from CIRP at the pre-admission stage. They can also seek an exit at the post-admission stage but before the constitution of the committee of creditors.
  • Exercises of inherent powers of the appellate tribunal are discretionary and could only be invoked to meet the end of justice or to prevent the abuse of court.
  • It was stated by the appellate tribunal that “in a case where interests of the majority of stakeholders are in serious jeopardy, it would be inappropriate to allow settlement with only two creditors which may amount to perpetuating injustice. Exercise of inherent powers in such cases would be a travesty of justice.” 
  • Respondents were not considered as allottees after the issuance of the Recovery Certificate dated 10th August 2019. “On their showing, they were the decree-holders seeking execution of money due under the Recovery Certificate which is impermissible within the ambit of Section 7 of the ‘I&B Code’.
  • Decree-holder does not fall under the ambit of financial creditor due to which it makes it impossible for them to initiate CIRP as financial creditors. 

Court’s Judgment

The Appellate Tribunal stated that the impugned order dated 17th March 2020 cannot be sustained and consequently set aside the order of NCLT. The tribunal also freed the appellant from all the rigour of law and was allowed to function independently. The appeal was allowed. 


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