Homebuyer Decree Holder as Financial Creditor: The Never-Ending Debate

[By Nikhil Singh]

The author is a student at the National University of Juridical Sciences, Kolkata.

Introduction

The Insolvency and Bankruptcy Code, 2016 (“Code”) was brought with an intent to secure the creditors’ interests by providing exhaustive provisions for corporate restructuring and debt recovery. Creditors are classified into two heads i.e. financial and operational creditors and the process to initiate a corporate insolvency resolution process (“CIRP”) has been provided in the Code. The phrase “creditor” has also been defined in the code itself under Section 2(10). The definition expressly includes “decree holder” within the scope of the term. As regards the homebuyers, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 put them in a priority position by including the amount advanced by them to the builders within the definition of “financial debt” under Section 5(8)(f) of the Code. The Supreme Court has also held that the remedies under Real Estate (Regulation and Development) Act, 2016 (“RERA”) and the Code co-exist with concurrent remedies under the two statutes. However, a recent ruling by the National Company Law Appellate Tribunal (“NCLAT”) has raised a debate as to whether a decree holding homebuyer would be covered within the definition.

Analysis

In Sushil Ansal v Ashok Tripathi (“Sushil Ansal Case”), the respondent i.e. the homebuyer had purchased a flat from the appellants and paid a certain amount in relation to it. Upon the appellant’s failure to deliver possession, the respondent got a recovery certificate i.e. decree in his favour from the Real Estate Regulatory Authority. After this, he initiated CIRP under Section 7 claiming himself as a decree-holder, and not a homebuyer. Now based on the facts of the case, it was clear that there was no dispute as to the existence of the debt and even the appellants did not challenge this. The only contention raised by the appellant was that once the respondent became a decree-holder, the underlying builder buyer contract stood terminated and thus no CIRP could be initiated based on it.

Now a question arises as to whether a decree-holder ceases to be a financial creditor who can imitate a CIRP under Section 7. On this point, there are contradicting positions taken by the courts. In the case of Urgo Capital Ltd. v Bangalore Dehydration and Drying Equipment Co.(“Urgo Case”) the court had ruled in the positive holding that a decree-holder continues to be a financial creditor and can consequently initiate a CIRP under Section 7. The court had further clarified that just because the claimant does not go for court execution of the decree, it does not disqualify him from initiating CIRP based on the decree. Further jurisprudence on Section 7 is that the claimant only needs to show the existence of creditor-debtor relations by proving the existence of a debt. More specifically, the court had allowed section 7 application stating that as long as the amount under the decree has not been paid, the debt exists and that the decree itself will be evidence of the existence of a debt.

Now, a parallel to money decree can be drawn from arbitral awards passed by tribunals. The position taken by the court in K Kishan v Vijay Nirman Co. was that an award- the creditor is considered as a financial creditor who can initiate a CIRP based on the award. The only condition is that the timeline to challenge the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) has elapsed. This analogy is further strengthened by Section 36 of the Arbitration Act, which states that an award is to be enforced as if “it is a decree of a court”. Now, one might rightly argue that if an arbitral award is kept on the same pedestal as a court decree, the Code and NCLAT cannot treat them differently to establish the creditor-debtor relations. The NCLAT had done the same mistake in the heavily criticized judgment in Digamber Bhondwen v. JM Financial Asset Reconstruction Company (“Digamber”). There, the Tribunal had taken an erroneous position in holding that a decree-holder, although falling under the definition of a creditor under section 3(10) of the Code, will not be entitled to file an application under section 7 or section 9 of the Code as the definition of a ‘financial creditor’ or an ‘operational creditor’ does not include a decree-holder. Such a position is flawed because it would invalidate the definition of the term “creditor” itself. If decree-holder has been expressly included in the scope of creditor, and judicial precedents have appreciated such inclusion, the position in Digamber would not only be in conflict with the legislative intent but also its own position in previous judgements. Now although a larger bench in the Urgo Case has contradicted this and taken the correct position, the judgement has not been overruled and has made way for the larger bench decision in the Sushil Ansal Case. Thus, currently, these two judgements stand in contradiction with each other and as both are of the same bench strength, none of them have overruled the other. This has created a gap on this issue which can only be settled by a larger bench of the NCLAT or the Supreme Court of India.

Another, problem that the exclusionary position creates is that the decree holding homebuyers are now left remediless under the Code. Explanation II of Section 5(8) categorically includes the amount raised through a builder buyer contract as a “financial debt” enabling homebuyers to initiate CIRP as financial creditors under Section 7. Now it is true that the basis of the creditor-debtor relation is the builder buyer contract and that once a decree is passed based on such a contract, the contract stands terminated. However, this basis is only relevant to prove the existence of the debt and once a decree is passed based on such a contract, the decree itself becomes evidence of the debt if there is no appeal against it. The NCLAT seems to have failed in analysing this point in the Sushil Ansal Case which has given rise to this problem. If such a position is crystalised, then the homebuyers will have two separate options. The first is to get a decree in their favour and get it enforced through an enforcement petition and the second is to directly approach the National Company Law Tribunal under the Code as a financial creditor. Both these remedies seem exclusive of each other in light of the recent judgement in the Sushil Ansal Case.

Conclusion

In light of such contradicting judgements, no clear position of law can be derived. This makes a strong case for intervention by the larger benches of the NCLAT or the Supreme Court to clarify the legal status of a decree-holder home buyer under the Code. This is more important given the poor enforcement mechanism under RERA. The inclusion of homebuyers in the Insolvency Code had come as a huge relief for them but such inconsistency in the judgements pushes them in an existential crisis state. The correct approach would be to go by the legislative intent to include all types of decree holders as a creditor and entitle them to initiate CIRP under Section 7. If this legislative intent is unclear, the legislator itself can come up with a clarification on the point. The argument of a separate enforcement mechanism for homebuyer decree holders should also not disentitle them under the Code as a similar enforcement mechanism is also available for arbitral award creditors under the Arbitration Act. If this does not disentitle arbitral award holder (also a decree by virtue of Section 36 of the Arbitration Act) from filling a Section 7 application, homebuyer decree holders should also have that option open for them.

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