2025 (5) TMI 1839 - AT - IBC

Application u/s 7 is barred by time limitation or not - collusive or proxy litigation filed at the behest of the suspended management (Jain group) to wrest control over the Corporate Debtor s land from the Agnihotri group or not. Whether the Section 7 application filed by the home-buyers (Financial Creditors in class) against the Corporate Debtor was barred by limitation? - HELD THAT - The balance sheet of the Corporate Debtor clearly substantiates the fact that disbursals had been undisputedly made by the allottees even though their individual names were not shown therein. It is equally pertinent to note that the same audited balance sheet has been relied upon by the Appellant and Agnihotri group to claim 50% shareholding in the Corporate Debtor. In such circumstances the Appellant cannot be seen to raise questions about the authenticity and applicability of the same balance sheet when it comes to the home-buyers relying on them to prove their debt entitlement. When the balance confirmation letters are conjointly read with the Balance sheet it validates that the Corporate Debtor had clearly received disbursals from the 10 home-buyers and the disbursals have been treated as current liabilities of the Corporate Debtor - following the submission of the audited finances and balance confirmations the Appellant in their Reply Rejoinder at page 15 at para (xii) has chosen not to contest the issue of limitation though of course it has been dropped on the grounds that they had already made their offer for payment or completion to the Home- buyers. Basis the acknowledgement letter of 09.11.2021 the period of limitation for home-buyers to initiate the Section 7 proceedings would come to an end on 08.11.2024. Hence the present petition CP No. 26 of 2024 having been filed on 22.05.2024 it is pretty clear that it was not hit by the three years limitation period. The withdrawal of the first Company Petition No. 83 of 2023 on 25.04.2024 which had been filed on 19.09.2023 which was withdrawn does not come in the way of filing the second petition on 22.05.2024 - the defence raised by the Appellant-Jayshree Agnihotri and the Corporate Debtor that the Section 7 petition was not maintainable on grounds of limitation bar fails to stand the test of scrutiny. Whether the Section 7 application was a collusive or proxy litigation filed at the behest of the suspended management (Jain group) to wrest control over the Corporate Debtor s land from the Agnihotri group? - HELD THAT - The Jain group was only there as a contractor whose demarcated job was to supervise the construction and receive fees for this purpose under the terms of MoU. The entire expense for construction was to be borne by the Agnihotri Group. The shareholding of the Jain group was temporary in nature and on completion of the project the Jain group was to transfer their entire shareholding to Agnihotri family. However the Jain group manipulated a takeover of the Corporate Debtor by substituting the directors of the Agnihotri group with their nominees by forging a deed of cancellation of the MoU. This cancellation deed it was contended by the Appellant-Jayshree Agnihotri has already been prima-facie held to be a sham by Hon ble High Court of Madhya Pradesh - The Agnihotri group had invoked the arbitration clause of MoU and filed a Section 9 application under the Arbitration and Conciliation Act challenging this fraud and forgery. In addition the Agnihotri group filed a petition under Section 241-242 of the Companies Act which is also pending adjudication. Submission was pressed that the Agnihotri group was non-serious about pursuing the arbitration proceedings is evident from the fact that they had filed application for extension of the arbitration proceeding wrongly under Section 11 and allowed the defective application to subsist without timely corrective action. Even the Section 241-242 petition under the Companies Act was only a window dressing and a sham litigation with a view to prevent the home-buyers from succeeding in their Section 7 application. According to the home-buyers on apprehending that the Section 7 petition which had been heard and reserved for orders may be allowed that IA No. 386 of 2024 was filed by the Appellant on 23.09.2024 collusively with the suspended management. It does not stand to reason for the Agnihotri group to drag the home- buyers and make them a pawn in their inter se imbroglio with the Jain group and alleging that the Home-buyers have been motivated by dubious connivance with rival shareholders in filing of the Section 7 petition. It would also be proper on our part to add here that the subject matter of dispute raised in the arbitration proceedings; the Section 241-242 of the Companies Act proceedings as well as the police complaints including the issue of ownership of the project land are matters which are required to be looked into by the appropriate forum of law or by the concerned competent authority and hence this Tribunal would like to refrain from expressing its opinion thereon. There is sufficient evidence to show that the Corporate Debtor had received funds from the home-buyers under the real estate project. It is also an admitted fact that the home-buyers have been awaiting delivery of their constructed units since over a decade. However the Corporate Debtor failed to complete the construction of the said project within the given window period of 30 months. By defaulting in giving timely possession of the flats to the home-buyers the Corporate Debtor has failed to liquidate or discharge their debt liability qua the home-buyers. There is a clear existence of debt and default in excess of Rs 1 Cr. Since the financial debt subsists this constituted sufficient ground for home-buyers to file the Section 7 application. The Adjudicating Authority has therefore not committed any error in concluding that the home-buyers have been able to effectively demonstrate that they are allottees under the real estate project and the Corporate Debtor had raised funds from them under that project which was excessively delayed thereby causing a default. The Adjudicating Authority has correctly held that since there is a debt of more than Rs 1 Cr. which is due and payable to the Financial Creditor in class above the threshold criteria this was a fit case for admission of Section 7 application. The home-buyers as members of the CoC had exercised their collective wisdom in not agreeing to the settlement offer of the Agnihotri group which as per their perception was only a guise to retain control over the land of the Corporate Debtor after evicting the home- buyers by repaying their principal with simple interest at a time when they have purportedly been paying compounded interest to the bank authorities in respect of their loan facility - It is inclined to agree with the home-buyers that the settlements offered by Appellant-Jayshree Agnihotri was an excuse to scuttle the resolution process and frustrate the CIRP proceedings in their quest for control over the subject land of the real estate project for reasons of having appreciated manifold in value terms. Conclusion - i) The Section 7 application was filed within limitation as the audited balance sheets and balance confirmation letters constituted valid acknowledgment of debt extending the limitation period and the period of exclusion due to COVID-19 was rightly applied. ii) The rights of home-buyers as financial creditors cannot be sacrificed on account of inter se disputes between shareholders of the Corporate Debtor. Allegations of collusion and proxy litigation lacked foundation and were rejected. There are no infirmity in the order of the Adjudicating Authority admitting the Section 7 application - All the three Appeals are dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

• Whether the Section 7 application filed by the home-buyers (Financial Creditors in class) against the Corporate Debtor was barred by limitation.
• Whether the Section 7 application was a collusive or proxy litigation filed at the behest of the suspended management (Jain group) to wrest control over the Corporate Debtor's land from the Agnihotri group.
• Whether the home-buyers qualified as genuine allottees and Financial Creditors under the Insolvency and Bankruptcy Code (IBC), given allegations of speculative investment and default in payments.
• Whether the settlement proposals submitted by the Agnihotri group and the suspended management to discharge the home-buyers' claims were just, bona fide, and ought to have been accepted by the Committee of Creditors (CoC).
• The applicability and interpretation of relevant legal precedents concerning limitation, admission of Section 7 petitions by home-buyers, and the scope of settlement proposals under the IBC framework.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Limitation Bar on Section 7 Application

Legal Framework and Precedents: Section 7 of the IBC allows financial creditors to initiate Corporate Insolvency Resolution Process (CIRP) upon default. The limitation period for filing such application is three years from the date of default. The Supreme Court's Suo Motu Writ Petition (Civil) No. 03 of 2020 provided for exclusion of limitation period from 15.03.2020 to 14.03.2021 due to the COVID-19 pandemic.

Court's Interpretation and Reasoning: The Tribunal examined the dates of allotment letters issued to the home-buyers and the corresponding dates of default calculated by expiry of the 30-month possession period. The default dates ranged from 2016 to 2019. The Tribunal relied on the audited balance sheets of the Corporate Debtor from 2013-14 to 2019-20, which showed "Advances from customers against flat bookings" as current liabilities, confirming receipt of funds from the allottees. Further, balance confirmation letters dated 09.11.2021 issued by the Corporate Debtor acknowledged the debt liability towards the home-buyers.

The Tribunal held that these acknowledgments extended the limitation period, and with the benefit of the Supreme Court's exclusion period, the Section 7 application filed on 22.05.2024 was well within limitation. The withdrawal of the earlier Section 7 petition filed in 2023 did not preclude filing the fresh petition.

Key Evidence and Findings: Audited balance sheets showing advances, balance confirmation letters acknowledging debt, dates of allotment letters and default, and Supreme Court's directions on limitation.

Application of Law to Facts: The Tribunal applied the principle that acknowledgment of debt extends the limitation period and excluded the COVID-19 period as per Supreme Court directions. It found no merit in the limitation objection.

Treatment of Competing Arguments: The Appellant's contention that the petition was barred by limitation and based on backdated acknowledgments was rejected as the balance sheet and confirmation letters were valid acknowledgments. The suspended management's similar limitation argument was also dismissed.

Conclusion: The Section 7 application was not barred by limitation.

Issue 2: Allegation of Collusive or Proxy Litigation

Legal Framework: The IBC mandates genuine creditor initiation of CIRP. Collusive litigation to wrest control or frustrate the process is impermissible. The Tribunal must examine bona fides and parties' conduct.

Court's Interpretation and Reasoning: The Appellant Jayshree Agnihotri alleged that the Jain group, suspended management holding majority shares, colluded with home-buyers to file the Section 7 petition to take over the land, alleging forgery of MoU cancellation and breach of shareholder agreements. The Appellant contended that the home-buyers were acting as proxies for the Jain group.

The Tribunal noted admissions by the Agnihotri group that settlement talks with the Jain group were ongoing, indicating inter se disputes and attempts at reconciliation. It observed that such negotiations showed both factions' intent to maintain control over the project. The Tribunal rejected the contention that home-buyers were pawns in this dispute, holding that home-buyers' rights are independent and cannot be sacrificed due to shareholder disputes. The Tribunal emphasized that the home-buyers were not privy to the MoU or its cancellation and thus the MoU dispute was irrelevant to their claims.

Key Evidence and Findings: Orders of Madhya Pradesh High Court recording settlement talks, admissions in pleadings, and the fact that home-buyers had suffered due to project delay amidst shareholder disputes.

Application of Law to Facts: The Tribunal applied the principle that home-buyers, as financial creditors, have independent rights to seek CIRP and cannot be denied relief based on inter-shareholder disputes. Allegations of collusion lacked foundation.

Treatment of Competing Arguments: The Appellant's allegations of proxy litigation were rejected as speculative. The home-buyers' contention that their petition was bona fide and independent was accepted.

Conclusion: The Section 7 application was not collusive or proxy litigation.

Issue 3: Qualification of Home-Buyers as Financial Creditors and Validity of Allotment Letters

Legal Framework: Under IBC, home-buyers who have advanced money to a developer qualify as financial creditors. The genuineness of allotment letters and compliance with payment schedules are relevant to establish debt and default.

Court's Interpretation and Reasoning: The Appellant and suspended management contended that some home-buyers were speculative investors who defaulted on payments and that allotment letters were not genuine, citing anomalies such as multiple flats allotted to one person at low booking amounts and missing standard clauses.

The Tribunal found that the Corporate Debtor did not deny receipt of advances from the home-buyers, which were reflected in the audited balance sheets as current liabilities. It also noted the absence of demand letters for balance payments and the stalling of construction, which justified the home-buyers' withholding of payments. The Tribunal held that default by the Corporate Debtor in timely possession triggered the debt and default under Section 7. The settlement proposals made by both parties further admitted the existence of debt and default.

Key Evidence and Findings: Audited balance sheets, balance confirmation letters, allotment letters, and absence of demand notices for balance payments.

Application of Law to Facts: The Tribunal applied the principle that receipt of advances and failure to deliver possession constitute debt and default. It rejected the argument that home-buyers' partial payment or speculative nature disqualified them as financial creditors.

Treatment of Competing Arguments: The Appellant's and suspended management's objections were dismissed as unsubstantiated and contrary to documentary evidence.

Conclusion: The home-buyers qualified as financial creditors and the allotment letters and payments were genuine.

Issue 4: Justifiability and Acceptance of Settlement Proposals

Legal Framework and Precedents: The Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. Vs UOI recognized that the CoC's rejection of a just settlement proposal can be set aside by the Adjudicating Authority or Appellate Tribunal. The judgment in Anand Murti Vs Soni Infratech Pvt. Ltd. emphasized acceptance of bona fide settlement offers. However, the IBC mandates adherence to the CIRP process once initiated.

Court's Interpretation and Reasoning: The Appellant Jayshree Agnihotri submitted a settlement proposal to discharge home-buyers' claims fully or complete the project within a stipulated period, offering to deposit Rs. 6.03 Cr as security. The suspended management also made a belated oral settlement offer. Both were rejected by the CoC.

The Tribunal found no arbitrariness in the CoC's rejection, noting that the home-buyers had lost faith in both shareholder groups due to prolonged delays and mismanagement. The Tribunal distinguished the Anand Murti case, noting the present case involved inter se shareholder disputes and a majority of home-buyers opposing the settlement. The Tribunal held that the settlement proposals appeared as attempts by the shareholders to retain control over the land and frustrate CIRP. It emphasized that the home-buyers' collective wisdom to seek new resolution applicants was reasonable and justified.

Key Evidence and Findings: Minutes of CoC meetings, IRP report indicating stalled construction, and pleadings reflecting home-buyers' distrust in existing management.

Application of Law to Facts: The Tribunal applied the principle that settlement proposals must be bona fide and acceptable to the CoC and that CIRP must proceed if the CoC rejects such proposals for cogent reasons.

Treatment of Competing Arguments: The Appellant's and suspended management's settlement offers were rejected as tactical and lacking bona fides. The home-buyers' insistence on CIRP continuation was upheld.

Conclusion: The rejection of settlement proposals by the CoC and Adjudicating Authority was justified; CIRP must continue.

3. SIGNIFICANT HOLDINGS

"The Section 7 application was filed within limitation as the audited balance sheets and balance confirmation letters constituted valid acknowledgment of debt extending the limitation period, and the period of exclusion due to COVID-19 was rightly applied."

"The rights of home-buyers as financial creditors cannot be sacrificed on account of inter se disputes between shareholders of the Corporate Debtor. Allegations of collusion and proxy litigation lacked foundation and were rejected."

"Receipt of advances by the Corporate Debtor from home-buyers and failure to deliver possession within stipulated time constituted debt and default under Section 7, qualifying home-buyers as financial creditors."

"The Committee of Creditors' rejection of the settlement proposals was neither arbitrary nor unjustified. The CIRP process must continue to enable a resolution applicant to take over and complete the project, safeguarding home-buyers' interests."

"The Tribunal refrained from commenting on the ownership dispute and inter se shareholder matters, as these are to be adjudicated by appropriate forums."

The appeals challenging the admission of the Section 7 application and rejection of the settlement proposal were dismissed, and the CIRP was ordered to proceed in accordance with the IBC.