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  • Garvit Shrivastava, Harshita Dhakad

NCLAT’s Ruling on CIRP’s Misuse through Barter Agreement and RERA’s Right To Appeal

[Garvit and Harshita are students at Jindal Global Law School.]


Section 9 of the Insolvency and Bankruptcy Code 2016 (IBC) empowers an operational creditor to file an application to initiate the corporate insolvency resolution process (CIRP) against a corporate debtor. A recent judgment by the NCLAT in the case of RERA v. DB Corp Limited (RERA Case), dealt with the corporate debtor’s liability under the barter agreement, emphasizing the potential misuse of the insolvency process. The NCLAT also delved into the right to appeal as available with the Real Estate Regulatory Authority (RERA) against CIRP initiation, challenging the notion that being a regulatory authority precludes it from being an aggrieved party. The NCLAT’s recognition of RERA’s role and authority underscores the delicate balance needed between insolvency laws and sector-specific regulations. 


This article dissects this pivotal judgment, highlighting the evolving dynamics between IBC and the Real Estate (Regulation and Development) Act 2016 (RERA Act) in real estate insolvency. It underscores the crucial need for harmonious coexistence between these legal frameworks, ensuring that the insolvency process doesn’t hinder compliance with RERA orders, ultimately safeguarding homebuyers’ rights in the ever-evolving real estate legal landscape.


Background of the Case 


AG8 Ventures Limited, a registered real estate developer in Madhya Pradesh, entered into barter agreements with DB Corp Limited for advertising campaigns. The operational creditor (DB Corp Limited) issued a Section 8 demand notice, claiming an operational debt based on alleged defaults in barter agreements. Subsequently, the operational creditor filed a Section 9 application before the Adjudicating Authority, asserting default on the operational debt. Simultaneously, complaints were filed by Aquacity Consumer and Societies Welfare Society under the consumer protection framework, alleging fund diversion by the corporate debtor. The NCDRC ruled in favour of the homebuyers, directing a refund. Civil Appeals were filed before the Supreme Court of India seeking modification. Due to the CIRP proceedings, the RERA orders against the corporate debtor came to a halt, and therefore, an appeal was filed by RERA through its MP Deputy Secretary, challenging the admission of Section 9 application by the operational creditor. 


Moratorium’s Impact on RERA Proceedings


Given the distinct objectives of the RERA Act and IBC, homebuyers have the flexibility to lodge complaints either under RERA Act or IBC, depending on the remedy sought by homebuyers. Under RERA, the primary remedy, as provided in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others (Pioneer Case), is that the allotted infrastructure is constructed and delivered to allottees in time, barring which compensation for the same and/or refund of amounts together with interest is paid. If, however, the allottee wants the corporate debtor’s management to be removed and replaced, so that the corporate debtor can be rehabilitated, they may prefer a Section 7 application under IBC, which I will be discussing in the following paragraph. 


The introduction of IBC led to petitions against real estate developers by allottees with “assured returns” agreements. NCLAT deemed such allottees as financial creditors, treating the amounts raised as a borrowing. The 2018 amendment clarified that funds from allottees for real estate projects are deemed as a borrowing. Home buyers can file under Section 7 of the IBC. The Pioneer Case emphasized delays in projects and the significant contribution of home buyers’ funds. Recognizing them as financial creditors ensures their role in decision-making on the construction company’s future.


Since RERA Act and IBC work in different spheres with different remedies, the clash arises when the CIRP is initiated under IBC while RERA has provided execution decree to the homebuyers against the builder. 


Section 14 of IBC enforces a moratorium throughout the CIRP, halting legal proceedings against the corporate debtor. In Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited, the Supreme Court of India affirmed that any action against the corporate debtor during the moratorium will have no legal effect. The Power Grid Corporation of India Limited v. Jyoti Structures Limited case held that the IBC aims to protect the corporate debtor’s assets during the “standstill” period, focusing on debt recovery actions. The term “proceedings” in Section 14 does not encompass all actions but is limited to debt recovery against the corporate debtor’s assets, including RERA proceedings. Consequently, the court ruled that all RERA proceedings against the corporate debtor must halt during the moratorium. Homebuyers, though having RERA decrees in their favour, cannot enforce them until the CIRP concludes which adversely affects their execution claims as decree holders.


Corporate Debtor’s Liability under Barter Agreement and Misuse of CIRP 


Section 9 of the IBC deals with the initiation of the CIRP by an operational creditor. An operational creditor can trigger the process by sending a demand notice for unpaid operational debt to the corporate debtor. If the debtor fails to make payment within ten days of receiving the notice, the operational creditor can file an application for the initiation of CIRP. In the context of Section 9, operational debt refers to a claim in respect of the provision of goods or services. While the definition seems straightforward, its application to barter agreements can introduce complexities. Barter agreements involve the exchange of goods or services without a direct monetary transaction. Therefore, determining whether a non-monetary obligation arising from a barter agreement qualifies as operational debt is a matter of judicial interpretation.


The Supreme Court of India, in the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited, held that when the transaction between the parties, instead of money terms, includes agreement to supply goods in lieu of payment of money in relation to the project being developed by the corporate debtor and for the purchase of a unit therein, it becomes evident that there is no incidence of an ‘operational debt’. Therefore, the sales in barter agreement cannot be considered as a transaction in relation to the one contemplated under the provisions of Section 9 of IBC. In the RERA Case, the NCLAT reiterated that operational debt under IBC must include a right to payment in monetary terms, and initiating Section 9 proceedings requires non-payment of such operational debt as a prerequisite. The NCLAT scrutinized the barter agreement in question, where the operational creditor claimed entitlement to units in lieu of the barter component. The NCLAT rejected the argument that non-allotment of units constitutes operational debt, emphasizing that the barter agreement does not involve a payment obligation in money.


In Jaypee Kensington Boulevard Apartments Welfare Association and Others v. NBCC (India) Limited and Others, the Supreme Court of India clarified that the term 'payment' in Section 30(2) of the IBC refers exclusively to the payment of money and not any equivalent in the form of barter. The court extends this interpretation to Sections 8 and 9 of the IBC, asserting that operational debt, for the purpose of these sections, involves the payment of money. In the case of Harrish Khurana v. One World Realtech Private, the NCLAT held that it is essential to understand that the intent of the legislature behind CIRP is that it can be triggered only where the prima facie debt is payable and the default has occurred. CIRP cannot be misused by widening the scope of Section 9 to include non-monetary claims under the umbrella of IBC to initiate CIRP and freeze the assets of corporate debtors. The NCLAT in the RERA Case took a step forward discussing the basis of barter agreements to initiate Section 9 proceedings. NCLAT rejected the operational creditor’s claim based on the barter agreement, highlighting that the operational creditor could have sought specific performance of the contract for non-allotment of units instead of claiming operational debt. The NCLAT concluded that there was no operational debt due, and therefore, the initiation of Section 9 proceedings by the operational creditor was against IBC’s scheme. The rejection of the operational creditor's claim ensures that the Section 9 proceedings are not initiated without a genuine operational debt, discouraging attempts to misuse barter agreements to initiate CIRP with the intent of freezing corporate debtor’s assets. By preventing such seizure of assets, the homebuyers can execute the RERA decrees providing them adequate remedies. 


RERA’s Right to Appeal

 

The Gujarat High Court in the case of Gujarat Real Estate Regulatory Authority v. Satyam Infracon (Satyam Case) held that the definition of ‘person’ would include a public authority established by the government as well, and therefore, RERA would be considered an ‘aggrieved person’ to file an appeal. This judgment was appealed in SC and the decision is yet to come. However, NCLAT in the RERA Case provided some clarity on this crucial issue. The counsel for the operational creditor in this case questioned RERA’s standing by contending that, being a regulatory authority, it cannot be aggrieved by the initiation of the CIRP against the corporate debtor and the imposition of a moratorium. The NCLAT rejected this argument, asserting that RERA does indeed have locus to file an appeal. It emphasized that the question of locus is distinct from the success of the grounds in the appeal. RERA’s contention was not solely based on the consequences of the moratorium, but rather it challenged the very initiation of the Section 9 proceeding, alleging collusion between the corporate debtor and the operational creditor. The NCLAT in RERA Case and Gujarat HC in Satyam Case underscore RERA’s statutory role and its authority to regulate and protect the interests of allottees, promoters, and real estate agents. The NCLAT acknowledged that the moratorium impacts RERA’s proceedings against the corporate debtor but rejects the notion that this alone denies RERA the status of an aggrieved party.


The NCLAT provided that RERA’s orders required compliance by the corporate debtor, but the initiation and continuation of the CIRP hindered RERA’s ability to enforce these orders underscoring RERA’s status as an aggrieved party with a legitimate right to file an appeal challenging the initiation of Section 9 proceedings. In SLB Welfare Association v. PSA IMPEX Private Limited and Another, the NCLAT considered the object and basis of filing Section 9 in order to understand if order passed by the RERA should be halted by the initiation of CIRP. The Appellate Tribunal held that when the initiation of CIRP itself is vitiated in law, all subsequent orders passed in the proceedings have to be automatically set aside. 


This judgment in the RERA Case underscored the pivotal role of RERA in safeguarding the rights of homebuyers and upheld its authority to challenge CIRP applications. By allowing RERA to file an appeal against Section 9 proceedings, the NCLAT acknowledged the significant impact of insolvency proceedings on the real estate sector. The decision prevents corporate debtors and operational creditors from potentially misusing CIRP to instigate a standstill period, ultimately impeding the timely completion of real estate projects that allottees have invested in. Through this, the NCLAT effectively considered the rights of homebuyers, recognizing the role of RERA in protecting their interests. 


Conclusion


The legal stance taken by the NCLAT ensures that the remedy of compensation granted by RERA remains a robust and effective tool for homebuyers. By preventing the misuse of CIRP to evade compliance with RERA orders, the judgment safeguards the rights of homebuyers and advocates for a seamless coexistence between insolvency laws and sector-specific regulations in the dynamic landscape of real estate. Recognizing the statutory role of RERA in protecting the interests of homebuyers, the NCLAT reinforces the need for RERA to challenge Section 9 proceedings, even amidst the moratorium, preventing potential misuse of the insolvency process.


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