CIRP Under Section 7 Can Commence Even If Claims Of Certain Allottees Are Time Barred Or Below Threshold Of Rs. 1 Crore: NCLAT Delhi

“The provision of Section 7(1) Second Proviso inserted by Act No. 1 of 2020 having been explained by the Hon’ble Supreme Court, the law is well settled that all applicants who have joined the Section 7 Application have not fulfilled the threshold individually nor claim of all the applicants individually has to be within time in event there is default of more than Rs. 1 Crore and default of Rs. 1 Crore on basis of which the application is filed is well within time. The mere fact that claim of some other barred by time is insignificant. Application under Section 7 of the Code triggered when default of Rs. 1 Crore qua some of the applicant or some other financial creditors is fulfilled, Insolvency Resolution Process under Section 7 can commence.”

Background Facts

On 21.08.2008, Anand Infoedge Pvt. Ltd. (“AIPL”) was allotted land measuring 100,980 sq. mts. situated at Sector 143 Noida (“Project Land”) by the New Okhla Industrial Development Authority (NOIDA) vide Lease Deed. After taking possession of the land, AIPL entered into Collaboration Agreement with Mist Avenue Pvt. Ltd. (“MAPL”) for development of a real estate project named Festival City (“Project”) on the Project Land.

The Respondents (Allottees) entered into Builder Buyer Agreement with MAPL and were allotted units in the Project. In 2017, the first Collaboration Agreement was terminated and a second Collaboration Agreement was executed between AIPL and Mist Direct Sales Private Limited (“MDSPL”) for the development of Project.

Despite of the two collaborations, the Project could not be completed within stipulated timelines. In 2021, Mr. Nitin Batra and 142 (approx.) other allottees (Financial Creditors/Allottees) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking ‘joint’ initiation of Corporate Insolvency Resolution Process (“CIRP”) against AIPL, MAPL and MDSPL.

On 21.10.2022 the NCLT held the Section 7 petition to be maintainable and directed the application to be listed for hearing on 10.11.2022. AIPL, MACL and MDSPL (collectively, “Corporate Debtors/Appellants”) filed an appeal against order dated 21.10.2022 before the NCLAT.

On 28.12.2019, the Section 7(1) of IBC was amended and two provisos were inserted. The second Proviso to Section 7(1) provides that an Application for initiating CIRP against the Corporate Debtor shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate, whichever is less.

The Corporate Debtors argued that the NCLT does not possess jurisdiction to consolidate the CIRP of three different companies at the stage of admission of Section 7 petition. The requirement under second proviso to Section 7(1), that petition must be filed by minimum 100 allottees, is also not fulfilled. The Section 7 petition was initially filed by 143 allottees, however, claims of 18 applicants were barred by limitation, claims of 11 allottees were barred by under Section 10A, claims of eight allottees were settled and claims of three allottees were premature. Hence, the number of applicants was effectively below 100.

NCLT Verdict

The Bench while placing reliance on the Supreme Court judgment in Manish Kumar vs. Union of India & Anr., 2021 SCC OnLine SC 30, concluded as under:

“(i) In event the default of Rs. 1 Crore is made out against the Corporate Debtor it is not necessary that the default of Rs. 1 Crore should be qua of the applicants individually or separately if default of Rs. 1 Crore is made out qua any of the applicants or any other financial creditor who is not even part of the Application, application under Section 7 is maintainable.

(ii) what is required to be proved under Section 7 is that the default of Rs. 1 Crore which is due on the Corporate Debtor is not barred by limitation if default of Rs. 1 Crore due of corporate debtor is within limitation the fact that claim of certain other allottees who were joint in the application is barred by limitation is insignificant.”

It was thus opined that claim of 18 allottees, which were barred by time, need not be excluded from the count of 100 allottees/applicants as required under Section 7. Moreover, each individual allottee need not meet the minimum threshold of Rs. 1 Crore default or limitation requirements in a Section 7 petition jointly filed by allottees. The CIRP under Section 7 of IBC can commence even if only few financial creditors fulfill the minimum threshold of Rs. 1 Crore default.

“The provision of Section 7(1) Second Proviso inserted by Act No. 1 of 2020 having been explained by the Hon’ble Supreme Court, the law is well settled that all applicants who have joined the Section 7 Application have not fulfilled the threshold individually nor claim of all the applicants individually has to be within time in event there is default of more than Rs. 1 Crore and default of Rs. 1 Crore on basis of which the application is filed is well within time. The mere fact that claim of some other barred by time is insignificant. Application under Section 7 of the Code triggered when default of Rs. 1 Crore qua some of the applicant or some other financial creditors is fulfilled, Insolvency Resolution Process under Section 7 can commence.”

The Bench has further held that a petition under Section 7 of IBC, filed by allottees for joint CIRP of separate corporate entities involved in a common real estate project is maintainable.

The NCLT order has been upheld and the appeal has been dismissed.

Case title: Mist Avenue Pvt. Ltd. v Nitin Batra & Ors. and connected matters.

Case No.: Company Appeal (AT) (Insolvency) No. 127 of 2023

Counsel for Appellants: Mr. Dhruv Goel, Mr. Krishnendu Datta (Sr. Advocate), Mr. NPS Chawla, Mr. Surekh Kant Baxy, Ms. Mahima Shekhawat, Mr. Rahul, Mr. Abhijeet Sinha, Mr. Apoorv Agarwal, Ms. Vaishnavi Prakash.

Counsel for Respondent: Mr. Sahil Sethi, Mr. Samriddh Bindal and Mr. Vikash Kumar, Advocates.

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