Synergy and Impact: Exploring the Intercacy between RERA and IBC

Introduction

In the intricacy of real estate regulation in India, a recent ruling by the National Company Law Appellate Tribunal (herein referred as NCLAT) in Delhi has cast insight into an important legal issue. The ruling of the NCLAT highlights the continuing obligation of allottees even after a favorable order the Real Estate Regulatory Authority (RERA). Under Section 7(1) of the Insolvency and Bankruptcy Code (IBC)[1], allottees are held to certain thresholds, irrespective of RERA’s decision. This decision of the NCLAT showcases the intricate interplay between RERA and IBC regulations.

In the case of Shri Rahul Gyanchandani & Ors. v Parsvnath Landmark Developers Pvt. Ltd.

Facts

1. The Respondent undertook the development of a project named ‘La Tropicana Khyber Pass Delhi’.

2. The Appellant, during the period spanning from 2007 to 2012, made payments to the Respondent for the acquisition of four units within the aforementioned project. These units were duly allocated to the Appellants by the Respondent.

3. On February 11, 2019, the Appellant initiated legal action by filing a petition, designated as CP No.IB 443(PB)/2019, as Rahul Gyanchandani & Ors. vs. Parsvnath Landmark Developers Pvt. Ltd. & Ors., under Section 7 of the Insolvency and Bankruptcy Code, 2016 (referred to as the “Code”). This petition was lodged with the intention of invoking insolvency proceedings against the Respondent. Subsequently, the Adjudicating Authority issued directives to adhere to the modified provisions under Section 7, as per the second amendment ordinance. However, the Appellant opted to withdraw the aforementioned petition on January 3, 2020.

4. Owing to the failure of the developer to fulfill its obligations concerning the completion of the project within the agreed-upon timeframe, the Appellant filed five discrete complaints under Section 31 read with Section 18 of the Real Estate (Regulation and Development) Act, 2016 (referred to as the “RERA Act, 2016”). These complaints, numbered 77, 78, 79, 80, and 81 of 2020, sought redressal for the Appellant’s grievances, specifically a refund of the amounts remitted by them, alongside accrued interest, in accordance with the terms stipulated in the Flat Buyer Agreement executed on August 21, 2007.

5. The adjudicatory body designated as Delhi RERA, rendered judgments on all five complaints on October 21, 2022, adjudicating in favor of the Appellants. These judgments directed the Respondent to effectuate the refund of the amounts in question, inclusive of interest.

6. Despite the stipulated legal obligation to effectuate the aforementioned refunds within 45 days of the respective orders, the Respondent defaulted in making such payments.

7. Subsequently, on August 3, 2023, the Appellants filed another petition, designated as IB No.454(PB)/2023 under Section 7, petitioning for the commencement of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. This action was prompted by the Corporate Debtor’s default in discharging the outstanding refund obligations owed to all four Appellants, compounded by accrued interest. The quantum of the refund sought for each Appellant amounted to Rs. 24,14,50,504/-, coupled with interest at a rate of 10% per annum.[2]

Contentions

1. Whether the Appellants, constituting only four out of 488 allottees, meet the threshold requirements specified in Section 7(1) of the IBC for maintaining a petition.

2. Whether the Appellants qualify as Financial Creditors under Section 5(8)(f) of the IBC, considering their status as allottees and the remedies sought under the RERA Act

Judgement Analysis

he Adjudicating Authority, relying on the precedent set forth in the case of Vishal Chelani & Ors. vs. Debashis Nanda[3] (Civil Appeal No.3806 of 2023), dismissed the Section 7 Application. It emphasized that while the judgment in the case of Kotak Mahindra Bank Ltd. vs. A. Balakrishnan & Anr.[4] presented distinct factual circumstances, the principles enunciated by the Hon’ble Supreme Court in Vishal Chelani & Ors. vs. Debashis Nanda were pertinent to the issue at hand regarding the maintainability of the petition. The Authority underscored its obligation to adhere to the ruling established by the Hon’ble Supreme Court in Vishal Chelani & Ors. vs. Debashis Nanda and consequently rejected the petition on the grounds of non-maintainability.

The Appellants contended that they should be categorized as decree holders rather than real estate allottees, thereby exempting them from the threshold requirements specified under Section 7(1), 2nd Proviso of the Insolvency and Bankruptcy Code, 2016 (IBC). They argued that the RERA Act, 2016, mandates that individuals granted refunds of entire amounts paid to the promoter for allotment of a real estate unit cease to be allottees, as the refund order is conditioned upon withdrawal from the project. However, the Adjudicating Authority rejected this contention, affirming that the Appellants continued to qualify as allottees within the ambit of the IBC and RERA Act, 2016, despite the orders issued by RERA.

The Adjudicating Authority referenced the judgment in Vishal Chelani’s case, highlighting the Supreme Court’s stance that the status of a ‘Financial Creditor’ remains unchanged for individuals who have obtained orders from RERA. It dismissed the Appellants’ argument of being classified as decree holders, asserting that they are, in fact, allottees who must comply with the provisions of Section 7(1), 2nd Proviso of the IBC. The Authority concluded that the rejection of the Appellants’ Section 7 Application was justified due to their failure to adhere to the prescribed eligibility criteria.

Furthermore, the Adjudicating Authority rejected the Section 7 Application on the basis of numerical disparity, noting that the Appellants constituted only four individuals out of a total of 488 allottees. This numerical incongruity was deemed significant in its decision to dismiss the Application.

In light of the foregoing analysis, the Adjudicating Authority concluded that the Section 7 Application lacked merit and dismissed the appeal.

[1] INSOLVENCY AND BANKRUPTCY CODE, 2016, § 7 (1), Acts of Parliament, 1949 (India)

[2] Shri Rahul Gyanchandani & Ors. v Parsvnath Landmark Developers Pvt. Ltd., https://nclat.nic.in/

[3] Vishal Chelani & Ors. vs. Debashis Nanda, MANU/SC/1138/2023

[4] Kotak Mahindra Bank Ltd. vs. A. Balakrishnan & Anr., MANU/SC/0736/2022