2025 (7) TMI 843 - AT - IBC

Admission of section 7 application - threshold condition with respect to Section 7 application filed by the creditors in a class fulfilled or not - HELD THAT - Admittedly the application under Section 7 was filed initially by eight Homebuyers on 11.01.2019. Part-IV of section 7 application gives the details of eight Applicants and the date of allotment letter. The challenge to the IBC Amendment Act 2020 came to be decided by the Hon ble Supreme Court vide its judgment in Manish Kumar vs. Union of India and Anr. 2021 (1) TMI 802 - SUPREME COURT . The amendments made in Section 7 sub-section (1) came for consideration before the Hon ble Supreme Court in Manish Kumar s case. The third Proviso added in Section 7 sub-section (1) which is relevant for the present case was specifically noticed and considered by the Hon ble Supreme Court in Manish Kumar s case. The application under Section 7 was filed by only eight Applicants on 11.01.2019 i.e. prior to amendment. Thus by virtue of third Proviso the application which was filed under Section 7 was required to be modified to comply with the requirements of second Proviso i.e. Section 7 application to be modified to fulfill 100 allottees or 10% of the total number of unit holders. For the first time the application for amendment being IA No.4163 of 2021 was filed on 15.07.2021 - the NCLT after noticing the interim order passed by the Hon ble Supreme Court given the liberty to the parties to mention after the order of the Hon ble Supreme Court is modified which order was passed on 30.01.2020. The Hon ble Supreme Court on 19.01.2021 having upheld the Amendment Act No.01 of 2020 the provisions of Section sub-section (1) became clearly applicable with respect to Section 7 application and after the judgment of the Hon ble Supreme Court delivered on 19.01.2021 there was no escape from complying with the provisions by modifying Section 7 application which was filed prior to amendment. It is noticed that after filing of the application the CD has cancelled the allotment of about 50 allottees. The Appellant himself offered to restore the allotment if the unit holders wish to continue in the Project. In view of the above the Appellant is held to be bound with its proposal i.e. (1) to grant withdrawal to those units holders who want to withdraw their amounts deposited with SBI CD interest rate within 60 days from the receipt of communication; (2) the allotments which were cancelled by the CD after filing of the application under Section 7 till passing of the impugned order shall stand revived. However the unit holders shall be liable to pay the balance due consideration as per Builder Buyers Agreement. The Appellant is held bound to honour its settlement proposal i.e. to grant withdrawal to those units holders who want to withdraw their amounts deposited with SBI FD interest rate within 60 days from the receipt of communication - the allotments which were cancelled by the CD after filing of the application under Section 7 till passing of the impugned order shall stand revived. However the unit holders shall be liable to pay the balance due consideration as per Builder Buyers Agreement. The impugned order admitting Section 7 application is set aside and it is held that petition stood withdrawn under third Proviso to Section 7 sub-section (1) as inserted by IBC (Amendment) Act 2020 - appeal disposed off.

Summary

The core legal questions considered by the Tribunal include:

1. Whether the Section 7 application filed by the financial creditors in a class (homebuyers) complied with the threshold requirements introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, specifically the requirement that an application by allottees under a real estate project must be filed jointly by not less than 100 allottees or 10% of the total allottees.

2. Whether the failure to modify the Section 7 application within the prescribed 30-day period after the Amendment Act 2020 renders the application deemed withdrawn under the third Proviso to Section 7(1).

3. The effect of the declaration of a "zero period" by the State Government on the determination of default and the timing of the alleged default for the purpose of Section 7 application.

4. Whether the Adjudicating Authority erred in admitting the Section 7 application despite the alleged non-compliance with the statutory threshold and other objections raised by the Corporate Debtor.

5. The validity and effect of the settlement proposal made by the Corporate Debtor to certain homebuyers during the pendency of the proceedings.

Issue-wise Detailed Analysis

1. Compliance with Threshold Requirements under Amended Section 7(1) of IBC

Legal Framework and Precedents: The Insolvency and Bankruptcy Code (Amendment) Act, 2020, inserted three Provisos in Section 7(1). The second Proviso mandates that for financial creditors who are allottees under a real estate project, an application for initiating CIRP must be filed jointly by not less than 100 allottees or 10% of the total allottees under the same project. The third Proviso requires that applications filed prior to the amendment but not admitted must be modified within 30 days of the commencement of the Act to comply with the threshold, failing which they shall be deemed withdrawn.

The Supreme Court in Manish Kumar vs. Union of India upheld these amendments and clarified the legislative intent behind the third Proviso, emphasizing it as a one-time compliance measure to prevent frivolous or premature insolvency proceedings by a handful of creditors.

Court's Interpretation and Reasoning: The Tribunal noted that the Section 7 application was originally filed on 11.01.2019 by eight homebuyers, prior to the Amendment Act. The third Proviso required modification within 30 days of the Amendment's commencement (28.12.2019) or the Supreme Court's judgment upholding it (19.01.2021). However, the first application to implead additional allottees to meet the threshold was filed only on 15.07.2021, well beyond the prescribed 30-day period.

The Tribunal observed that the original application by eight homebuyers did not meet the threshold requirement. The subsequent applications for impleadment of additional allottees (52, 22, and 25 applicants) were attempts to comply with the threshold but were filed too late.

Accordingly, by operation of the third Proviso's deeming fiction, the Section 7 application stood withdrawn as the statutory timeline for modification was not met.

Key Evidence and Findings: The Tribunal examined the pleadings and documents filed by the parties, including the dates of allotment of units, the number of allottees claimed by the Corporate Debtor (varying from 820 to 1124), and the number of applicants impleaded. The Tribunal also considered the Supreme Court's judgment in Manish Kumar, which clarified the legislative intent and the consequences of non-compliance.

Application of Law to Facts: Since the original application was filed by only eight allottees and the modification to meet the threshold was filed beyond the 30-day period mandated by the third Proviso, the application was deemed withdrawn by operation of law. The Adjudicating Authority's admission of the Section 7 application was therefore contrary to the statutory scheme.

Treatment of Competing Arguments: The Appellant (Corporate Debtor) argued non-compliance with the threshold and premature filing, supported by the declaration of zero period and extensions granted by UP RERA, indicating no default had occurred at the time of filing. The Respondents (Financial Creditors) contended that the application met the threshold after impleadment and that the Corporate Debtor's cancellation of allotments was a mala fide attempt to defeat the application. The Tribunal favored the statutory mandate and timing requirements over these contentions.

Conclusion: The Section 7 application was held to be deemed withdrawn for failure to comply with the threshold requirements within the prescribed time.

2. Effect of the State Government's Declaration of Zero Period and UP RERA Extensions

Legal Framework: The Builder Buyer Agreement specified a 40-month period for project completion with a grace period. The State Government declared a zero period from 14.02.2011 to 01.09.2017, and UP RERA issued notifications extending the project completion timeline due to COVID-19.

Court's Interpretation and Reasoning: The Appellant argued that the zero period and extensions meant the project completion period had not expired when the Section 7 application was filed, so no default had occurred. However, since the Tribunal held the Section 7 application was deemed withdrawn on statutory grounds, it did not consider this issue in detail.

Treatment of Competing Arguments: The Respondents argued the zero period related only to dues payable to Greater Noida and did not affect the contractual completion timeline or default under the Builder Buyer Agreement.

Conclusion: The Tribunal did not find it necessary to decide on this issue due to the primary finding on the statutory withdrawal of the application.

3. Admission of Section 7 Application by Adjudicating Authority

Legal Framework: Section 7(5) of IBC empowers the Adjudicating Authority to admit or reject an application based on compliance with statutory requirements.

Court's Interpretation and Reasoning: The Tribunal found that the Adjudicating Authority admitted the Section 7 application without considering the mandatory deeming provision of the third Proviso to Section 7(1), which required withdrawal due to non-compliance within 30 days.

Conclusion: The admission of the Section 7 application was held to be contrary to the statutory scheme and unsustainable.

4. Settlement Proposal by Corporate Debtor

Details and Findings: During pendency, the Corporate Debtor proposed a settlement offering refund with SBI FD interest rates to homebuyers wishing to exit and possession of completed towers to others. The Corporate Debtor also offered to revive cancelled allotments if the project exited insolvency proceedings.

Court's Interpretation: The Tribunal held the Corporate Debtor bound by this proposal and directed compliance with the offer: (i) homebuyers opting for refund to be paid within 60 days; (ii) cancelled allotments to be revived, subject to payment of balance consideration.

Conclusion: The settlement proposal was accepted as binding on the Corporate Debtor.

5. Other Issues

The Tribunal noted objections to the genuineness of homebuyers participating in voting on the settlement proposal and the Corporate Debtor's inconsistent disclosures regarding the number of units and allottees. The Tribunal observed that cancellation of allotments after filing Section 7 application was an attempt to defeat the application and was not permitted.

Significant Holdings

"Thus, in event the application is not modified within the time prescribed, underlying deeming fiction shall come into play and application shall be treated to be withdrawn."

"The filing of IA No.4163 of 2021 by the Applicants to comply with the provisions of second Proviso by adding 52 Applicants to make it compliant, clearly indicate that the original application was filed by eight Homebuyers was not in compliance with the amended provisions."

"The application filed under Section 7 CP(IB)/288(PB)/2019, shall be deemed to be withdrawn and order of the Adjudicating Authority proceeding with the application and admitting the said application is contrary to the statutory scheme and cannot be sustained."

"The Appellant is held bound to honour its settlement proposal as noted above, i.e. to grant withdrawal to those units holders, who want to withdraw their amounts deposited with SBI FD interest rate within 60 days from the receipt of communication; the allotments, which were cancelled by the CD, after filing of the application under Section 7, till passing of the impugned order, shall stand revived."

The Tribunal established that the statutory timeline and threshold requirements for filing Section 7 applications by allottees under a real estate project are mandatory and non-compliance results in deemed withdrawal. The Adjudicating Authority must ensure compliance before admitting such applications. The decision underscores the binding nature of settlement proposals made by Corporate Debtors during insolvency proceedings.