Insolvency petitions by home buyers can’t be dismissed by merely citing malicious intent

Should an insolvency plea against the builder by home buyers be dismissed only on the pretext that the petition is filed for recovery of Debt and not for the resolution of Insolvency? In a recent order, the National Company Law Appellate Tribunal (NCLAT) has rejected a plea by a real estate company, which wanted the insolvency proceeding against it stopped because it alleged that insolvency application was filed fraudulently with malicious intent for the purposes other than for the resolution of insolvency or liquidation.

Dismissing the petition of the real estate company – Krrish Group – the appellate tribunal has said that any insolvency application satisfying the requirements of Section 7 or 9 of the Insolvency and Bankruptcy Code (IBC) could not be dismissed arbitrarily under the guise of Section 65 of the Code.

It noted in its order: “We often notice that despite fulfilling all the requirements for Section 7 and 9 of the Code, the petitions are rejected only on the pretext that the petition is filed for recovery of debt and not for the resolution of Insolvency. It is necessary to keep in mind that Section 65 of the Code is not meant to negate the process under Section 7 or 9 of the Code.”

It further said that penal action under Section 65 can be taken only when the provision of the Code has been invoked fraudulently, with malicious intent.

In the present case, the allottees of flats in Gurgaon-based residential housing project – Krrish Provence.  The buyers started insolvency proceedings against the builder after the latter failed to handover the flats on time despite making 72.5% of the payment.

The buyers had contented at the NCLT that as per the agreement, possession of the flat was to be handed over to the home buyers by the first week of February 2016. However, the flats were not ready for possession till 28 November 2018. Despite the assurances, the builder failed to deliver the possession of the flats and therefore, the home buyers had to file insolvency application under Section 7 of the IBC Code on 6 December 2018. The NCLT admitted the application on 28 November 2019.

The argument put forward by the builder against the NCLT’s decision was that the home buyers had opted for construction linked plan but failed to pay the instalments on time, even though time was the essence of Agreement. It also contended that home buyers are defaulters, and hence it was forced to cancel the allotment of the flats through a letter dated 26 June 2015.

It further alleges that the main intention of the home buyer is not seeking a resolution through the insolvency process but coercing the builder for recovery of amount already paid.

It must be mentioned here that the builder had proposed to return a part of the amount after deducting more than 45% of the amount as earnest money.

The NCLAT, however, observed that as per the agreement it is mandatory to issue demand notice for instalments on commencement of respective stages of Construction by speed post or courier, but in in this case, there is no evidence to show that the demand notice at respective stages of construction was ever sent to the allottee. “Therefore, 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,” said that appellate tribunal, thus, dismissing the builder’s plea that the home buyers had defaulted on payments.