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Can property buyers initiate insolvency petitions in the court?.

September 3, 2017

Can property buyers initiate insolvency petitions in the court?

Can property buyers initiate insolvency petitions in the court? “The legal position as to whether home buyers can file application under the code against any developer is still a gray area,”

Pathak agrees: “(Whether) homebuyers—by simply making payments to the builder—can avail the remedy of insolvency code is yet to be decided as home buyers are non-defined and non-categorized under any form of creditors in the code.”Can property buyers initiate insolvency petitions in the court?

However, in a few appeals made to the National Company Law Appellate Tribunal (NCLAT), the order was in favor of home buyers. The insolvency code was enacted last year and there are a few cases that lawyers refer to for this conclusion. The landmark judgment by NCLAT came in the case of Nikhil Mehta & Sons Vs. AMR Infrastructure Limited and all the lawyers that Mint interacted with made their statements based on this judgment. “However, the facts of the case are unique and may not apply to most of the homebuyers,” said Shetty. He explained that in this case, one of the flat units was purchased by the applicant under the “Committed Return Plan”.

Under the plan, the appellant was to pay a considerable portion of the total consideration on the execution of the memorandum of understanding (MoU) and the developer had committed to pay a particular amount to the buyer each month as “Assured Returns”. The developer had defaulted in paying the assured returns and therefore the buyers approached the NCLT. The petition was rejected by the NCLT, as homebuyers were not categorized as creditors under the code.Can home buyers initiate insolvency petitions in the court?

Thereafter, the appellant approached NCLAT and “it was held that as the developer treated the appellants as investors and borrowed the amount for its commercial purpose, the amount invested by the flat purchasers would come within the meaning of financial debt as defined in the code and therefore the appellant flat purchaser ought to be treated as a financial creditor,” explained Shetty.Can property buyers initiate insolvency petitions in the court?

Subsequently, NCLAT had to deal with three appeals against the same developer—AMR Infrastructure Ltd—by three other homebuyers— Rubina Chadha, Sajive Kanwar, and Mukesh Kumar.

All of them first approached the NCLT, where their appeal was rejected based on different reasons. In case of Rubina Chadha, NCLT, Delhi, held that the appellant could not satisfy the tribunal that they come within the meaning of financial creditors or operational creditors. In Sajive Kanwar’ claim, NCLT, Delhi, had held that flat buyers cannot be treated as financial creditors since such debts are not disbursed against the consideration for the time value of money. In Mukesh Kumar’s appeal, where he claimed to be an operational creditor, the NCLT, Delhi held that a flat purchaser cannot be treated as an operational creditor as the debt has not arisen out of provisions of goods, services or employment.Can property buyers initiate insolvency petitions in the court?

After their cases were declined by the NCLT, all the three approached NCLAT, which passed an order based on an order passed in the Nikhil Mehta Case. “NCLAT did not decide whether or not the homebuyers would be the operational creditors or financial creditors,” said Shetty. But NCLAT held that as in the Nikhil Mehta case, the appellants therein were held to be the financial creditors of AMR Infrastructure by NCLAT, the tribunal was bound to admit the application filed by Nikhil Mehta & Anr. against AMR Infrastructure Ltd. The appellants in the subsequent three appeals could file their respective claims before the Interim Resolution Professional appointed in the Nikhil Mehta case.Can property buyers initiate insolvency petitions in the court?

Therefore, the question of whether a home buyer can file an application under the code as an operational creditor or a financial creditor continues to remain unanswered, Shetty added.Can property buyers initiate insolvency petitions in the court?

It all depends on the builder-buyer agreement. If there are any clauses related to assured return or debt obligation of home buyers, a homebuyer will be considered as the financial creditor and can thus file a petition for liquidation.

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