National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Venugopal M. (Judicial Member) and V.P. Singh (Technical Member) and Shreesha Merla (Technical Member), while addressing the present Company Appeal observed that:
No penalty can be saddled either under Section 65(1) or (2) of the Code without recording an opinion that a prima facie case is established to suggest that a person ‘fraudulently’ or with malicious intent for the purpose other than the resolution of Insolvency or Liquidation or with an intent to defraud any person has filed the Application.
The instant appeal emanates from the Order passed by National Company Law Tribunal Delhi whereby application under Section 7 of the Insolvency and Bankruptcy Code 2016 was admitted.
Factual Matrix
Corporate Debtor is a builder of High-End Project wherein a flat was booked for a total sale consideration of Rs 3,80,10,000.
Respondents were the second purchasers of the above-stated flat booked vide Agreement Buyer Agreement. As per Agreement, the completion period was 36 months plus six months as a grace period, i.e. February 2015.
Appellant contended that after adjusting the payments made by the Original buyer, the respondent paid a total sum of Rs 2,75,55,186 as against the total cost of the flat as Rs 3,80,10,000. The last payment was made by the respondents on 26-08-2013, and after that, despite several reminders, no payment was made.
Respondents opted for a Construction linked plan but failed to pay the instalments on time.
Appellants submitted that the respondents are defaulters. Therefore, Corporate Debtor was constrained to cancel their allotment.
Respondents initiated the proceedings under Section 7 of the Insolvency and Bankruptcy Code against the appellant.
Appellant pleaded that the proceedings initiated by respondents 1 and 2 are against the provisions of the Code and have been done so, to pressurise the Corporate Debtor.
Further, respondent 1/Homebuyer submitted that as per the Agreement, possession was to be handed over within 36 months from the date of commencement of the construction or execution of the Agreement, whichever is later.
Despite the assurances, the Appellant failed to deliver the possession of the said unit to the Respondents. Therefore, the Respondents/Financial Creditor had filed the Application under Section 7 of the Code.
NCLT observed that the Corporate Debtor did not hand over the possession of the flat to the Financial Creditor as the construction work could not be completed within the stipulated time and there was no proof of extension of time by the Authority concerned. A debt of more than Rs 1 lakh was due and payable, which the Corporate Debtor failed to pay.
In view of the above circumstances, application wad admitted by NCLT and the same has been challenged in the instant appeal.
Issues for Consideration:
- Whether the Corporate Debtor has committed default in not completing the Construction of the flat in time and handing over possession of the same in terms of Agreement?
- Whether Financial Creditor/Home Buyer committed default in making payment of the instalments as per ‘ABA’ under construction link Plan?
- Whether the Application under Section 7 of the Code is filed fraudulently with malicious intent for the purposes other than for the Resolution of Insolvency or liquidation, as defined under Section 65 of the I&B Code, 2016?
- Whether the application is barred by limitation?
Analysis and Decision
On considering the above-stated issues, Bench observed that the Corporate had committed default in completing the construction work of the flat n time and failed to deliver the possession on the stipulated date as per the Agreement.
In a reply to a notice, Corporate Debtor himself admitted that unlike other builders who have abandoned the project and stopped the work, it is completing the Project which is at the final stage where flooring and finishing work is underway.
It was observed from the Agreement that under the Construction linked payment plan, it is mandatory to issue demand notice for instalments in the commencement of respective stages of Construction by speed post or courier.
In the instant case, there was no evidence to show that the demand notice at the respective stages of Construction was ever sent to the Allottee. Whereas, Clause 2.18 of the Agreement makes it mandatory to send the Notice to the Allottee under Construction linked plan. No compliance of conditions of Clause 2.17 and 2.18 were made in the instant case.
Hence, in the present case, it is difficult to ascertain as to when Instalment became due, at the start of the respective stage of the Construction.
Bench observed that:
Mandatory condition of issuing Notice through speed post or courier to the Allottee, at every stage of Construction as per Agreement has not been followed.
Hence, it cannot be concluded that the allotted committed any default in paying the instalment when due and the fact that the flat was to be delivered latest by 2nd week of February 2016, but construction work was still going on in the year 2018 also cannot be denied.
Justification for Invoking Section 65 of the Code
In accordance with the Supreme Court decision in Pioneer’ Urban Land Infrastructure v. Union of India, (2019) 8 S SCC 416, Corporate Debtor has the responsibility to furnish the details of default. It was held that:
“Under Section 65 of the Code, the real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of Insolvency. The Allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/Apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it. The Allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/Apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it.”
Bench stressed upon the point that Section 65 of the Code is not meant to negate the process under Section 7 or 9 of the Code. Penal action under Section 65 can be taken only when the provision of the Code has been invoked fraudulently, with malicious intent.
In the Supreme Court decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held that:
“…in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties.”
Hence, from the above discussion, it is clear that
the Code provides stringent action under Section 65 against the person who initiates proceedings under the Code fraudulently or with malicious intent, for the purpose other than the resolution of Insolvency or liquidation under the Code.
Requirement for levying penalty under Section 65 IBC is that a ‘prima facie’ opinion is required to be arrived at that a person has filed the petition for initiation of proceedings fraudulently or with malicious intent.
While parting with the decision, Tribunal held that the Real Estate Developer failed to prove that Allottee is a speculative Investor and is not genuinely interested in purchasing the flat and initiated proceeding under the Code to pressurise the Corporate Debtor.
Thus, Tribunal found no justification to invoke Section 65 of the I&B Code against the Allottee.
Decision
NCLT’s order requires no interference. [Amit Katyal v. Meera Ahuja, 2020 SCC OnLine NCLAT 748, decided on 09-11-2020]