Insolvency and Bankruptcy Code, 2016 – ss.5(8)(f), 7, 7(5)(a) – Corporate Insolvency Resolution Process (CIRP) – Admission of the Corporate Debtor into CIRP – Locus standi to intervene in proceedings u/s.7 – Appellant-Corporate debtor availed financial assistance of Rs.70 crores from ECLOriginal Lender for the development of the residential-cumcommercial project – Appellant failed to pay loan installments, and thereafter the accounts were declared NPA – Original Lender transferred all its rights, title, and interest in the said loan to EARCL-Financial Creditor – Appellant failed in making the payment despite entering into One Time Settlement Agreement – Financial Creditor initiated CIRP u/s.7, in order to recover the loan amount – NCLT dismissed the petition holding that the facts did not warrant initiation of the CIRP as IBC was being invoked as a recovery mechanism rather than as a tool for insolvency resolution; and that the project was viable and substantially complete and CIRP process would adversely affect the interests of the homebuyers – NCLAT set aside the order of NCLT and directed admission of the application u/s.7 – ECHCS (Society)-association of homebuyers moved intervention application before the NCLAT, which was dismissed for want of locus – Correctness:
Held: Once the Adjudicating Authority is satisfied that a financial debt exists and a default has occurred, it must admit the application unless it is incomplete – Inquiry u/s.7(5)(a) is confined strictly to the determination of debt and default, leaving no scope for equitable or discretionary considerations – Corporate Debtor admittedly possesses no adjudicated or realisable claim exceeding the amount in default – Its reliance on business viability, unsold inventory, project status, or anticipated receivables does not constitute “good reasons” in law to defer or deny admission of CIRP – Existence of a financial debt owed to EARCL is undisputed – Persistent defaults stand admitted and are conclusively established on record, including breach of the restructuring agreement and failure to pay instalments within the stipulated cure period – Restructuring arrangement failed due to non-payment by the Corporate Debtor, thereby triggering an express event of default under its terms – NCLAT correctly held that considerations such as ongoing operations, partial project completion, or anticipated receivables are extraneous to the statutory mandate u/s.7 – It cannot be said that EARCL misused the Code as a recovery tool – Allegations of mala fide invocation neither pleaded or established – Circumstances, taken cumulatively, substantiated EARCL’s request for initiation of CIRP – Thus, impugned judgment admitting the Corporate Debtor into the CIRP does not suffer from any legal infirmity – As regards the rejection of the intervention application filed by the society, the appellant Society neither a financial nor an operational creditor – It is a maintenance society not constituted for insolvency representation – No documentary proof of registration, collective authorisation, or general body resolution produced – Membership is automatic and mandatory, negating consensual representation – Intervention application filed only at the appellate stage and not before the NCLT – Society not a party to the financial transaction forming the substratum of the s.7 application, hence, no statutory right of appeal inheres in the appellant – Right to initiate or participate in insolvency proceedings is statutory, not equitable – Society or Resident Welfare Association, not being a creditor in its own right and not recognised as an authorised representative of allottees under the IBC, has no locus standi to intervene in proceedings arising out of a s.7 petition – NCLAT justified in rejecting the Society’s intervention application – No prejudice caused to homebuyers, whose interests are adequately safeguarded under the Code – Upon commencement of CIRP, any aggrieved stakeholder may avail remedies strictly in accordance with the Code. [Paras 12.3, 12.8-12.12, 12.18, 12.21, 12.22, 13.7, 13.8, 13.17, 13.22, 15] Insolvency and Bankruptcy Code, 2016 – Cases of insolvency against the project developers – Safeguarding the interests of homebuyers – Issuance of directions to the Committee of Creditors:
Held: While the commercial wisdom of the Committee of CreditorsCoC is paramount and is not ordinarily amenable to judicial review, the width of powers vested in the CoC carries with it a corresponding duty of responsibility – Any extraordinary or nonroutine decision taken by the CoC must, thus, be supported by cogent reasons duly recorded in writing – With a view to advancing transparency, ensuring accountability, and safeguarding the interests of homebuyers, issuance of directions – Information Memorandum to mandatorily disclose comprehensive and complete details of all allottees – Where the CoC, upon due consideration, finds it not viable to approve handover of possession in terms of the CIRP Regulations, it shall mandatorily record cogent and specific reasons in writing for such decision – Any recommendation for liquidation by the Committee of Creditors to be accompanied by a reasoned justification recorded in writing evidencing proper application of mind and due consideration of all viable alternatives, in consonance with the objective of the Code – These directions to operate prospectively and to be complied with forthwith. [Para 15.1]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Nidhi Jain. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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