‘Ordinary Course Of Business’ For Real Estate Industry Is Providing Construction Service, Doesn’t Include Entering Into Agreement For Investment In A Project: NCLT Delhi
Pallavi Mishra
1 Oct 2023 5:00 AM GMT
The National Company Law Tribunal (“NCLT”), New Delhi Bench, comprising of Shri Ashok Kumar Bhardwaj (Judicial Member) and Shri L.N. Gupta (Technical Member), while adjudicating a petition filed in Pallavi Joshi Bakhru v Universal Buildwell Private Limited, has held that the ‘ordinary course of business’ for a real estate industry would mean providing construction service....
The National Company Law Tribunal (“NCLT”), New Delhi Bench, comprising of Shri Ashok Kumar Bhardwaj (Judicial Member) and Shri L.N. Gupta (Technical Member), while adjudicating a petition filed in Pallavi Joshi Bakhru v Universal Buildwell Private Limited, has held that the ‘ordinary course of business’ for a real estate industry would mean providing construction service. An agreement between two investors to invest into a project cannot be treated as an act done by them in an ‘Ordinary Course of Business’.
Background Facts
Universal Buildwell Pvt. Ltd. (“Corporate Debtor”) is engaged in the business of real estate development with Market Square (“Project”) being one of its commercial projects. The Corporate Debtor was admitted to Corporate Insolvency Resolution Process (“CIRP”) on 03.07.2018.
A Settlement Agreement dated 18.01.2019 was entered between the Corporate Debtor and Samyak Project Private Ltd., whereby the Corporate Debtor transferred its development rights of 66,702 sq. ft. are in Market Square valued at Rs. 9.42 Crores to the other party, in lieu of development rights of 22,706 square feet area valued at Rs. 3.50 Crores.
Section 45 of IBC states that when a Corporate Debtor transfers an asset to another party for a consideration significantly lesser than the consideration provided by the Corporate Debtor, then such transactions are undervalued. The Resolution Professional is empowered to seek reversal of such transactions. However, these transactions are valid if done by the Corporate Debtor in its ‘ordinary course of business’.
The Resolution Professional regarded the Settlement Agreement as an undervalued transaction and filed an application before the NCLT seeking declaration of the Settlement Agreement as void.
The Corporate Debtor argued that that the Settlement Agreement was executed between parties in the ‘Ordinary Course of Business’ and thus cannot be regarded as undervalued transaction under IBC.
NCLT VERDICT
The Bench opined that the term ‘Ordinary Course of Business’ requires interpretation. In general parlance, the expression would mean the regular or customary condition of course. According to Black’s Law dictionary, it means the normal routine in managing a trade or business.
Neither Companies Act, 2013 nor IBC defines Ordinary Course of business, thus the interpretation is left to the subjective understanding of Board of Directors and Audit Committee.
The Bench separately interpreted the expressions ‘ordinary’, ‘course’ and ‘business’ as under:
“The term ‘Ordinary’ means normal, natural and something what happens in routine either everyday or in general or traditionally. The term ‘Course’ means procedure, series, chain, link or string. The term ‘Business’ refers to an organisation or enterprising entity engaged in commercial, industrial, or professional activities. The term ‘Business’ also refers to efforts and activities undertaken by individuals to produce and sell goods and services for profit.”
While applying the meaning of ‘Ordinary Course of Business’ to real estate industry, it was observed that the business of a builder (such as the Corporate Debtor) is to provide construction service. Ordinary course of business would therefore imply supply of goods or services to earn profit in a routine manner. Such supply of goods or services must be a routine activity undertaken by the business organization.
“Thus, the business of the CD is to provide construction service. Therefore, apparently, the ‘Ordinary Course of Business’ is supply of goods or providing service by an organisation or an individual as part of its/his effort to earn profit in a routine manner. Supply of goods or service should be an ordinary/routine affair as part of efforts/activities undertaken by the concerned.”
Accordingly, the Bench held that the Settlement Agreement cannot be treated as an activity undertaken in the ordinary course of business of the Corporate Debtor. The Agreement between two investors to invest into a project is not an act done in ‘Ordinary Course of Business’.
“In the wake, neither the compromise scheme filed by the CD and the Respondent No.1 before Additional District Judge (ibid) nor the Settlement dated 18.01.2018 can be treated as the act or activity performed in ‘Ordinary Course of Business’. The Settlement Agreement in fact is enumeration of terms and conditions qua the Collaboration entered into between two investors who had agreed to invest in ‘Market Square Project’. The Agreement between two investors to invest into a project cannot be treated as an act done by them in an ‘Ordinary Course of Business’.”
The Bench appointed a Commissioner to examine the affairs qua the ‘Market Square’ project. In the meanwhile stay has been imposed on the Project.
Case Title: Pallavi Joshi Bakhru v Universal Buildwell Private Limited.
Case No.: Company Petition No. (IB)- 456(ND)/2018
Counsel For the Applicant: Mr. Harshal Kumar for SRA in CA-891/2019, Sr. Adv. Vivek Kohli, Adv. Sandeep Bhuraria, Adv. Nalin Talwar, Adv. Monish Surenderan, Adv. Juvas Rawal in CA-253/2019
Counsel For the Respondent: Adv. Sanjay Bhatt, Adv. Apoorva Choudhary, Adv. Swapnil Gupta, Adv. Sadiq Noor with Mr. Atul Kansal, RP
