Supreme Court permits Promoter to complete housing project, setting aside NCLAT order: Anand Murti vs Soni Infratech (2022)

Date of the Judgment: 27 April 2022

Citation: (2022) INSC 413

Judges: L. Nageswara Rao, J., B.R. Gavai, J.

Can a promoter be allowed to complete a stalled housing project instead of undergoing the Corporate Insolvency Resolution Process (CIRP)? The Supreme Court of India recently addressed this question, focusing on the interests of homebuyers. The core issue revolved around whether a settlement plan proposed by the promoter, which aimed to complete the project, should be preferred over the CIRP. The bench, comprising Justices L. Nageswara Rao and B.R. Gavai, delivered the judgment, with Justice B.R. Gavai authoring the opinion.

Case Background

The appellant was the Suspended Director of Soni Infratech Private Limited (the Corporate Debtor). The second respondent had booked a flat in a housing project launched by the Corporate Debtor. On 31st July, 2018, the respondent cancelled the booking and demanded a refund of Rs. 32,27,591 from the Corporate Debtor.

Upon the appellant’s failure to refund the amount, the respondent filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT), New Delhi, for the initiation of CIRP. The NCLT admitted the application on 22nd November, 2019, and appointed an Interim Resolution Professional (IRP) to initiate the CIRP of the Corporate Debtor.

Aggrieved by the NCLT order, the appellant filed an appeal before the National Company Law Appellate Tribunal (NCLAT). The NCLAT issued a notice on 19th December, 2019, and directed the IRP not to constitute the Committee of Creditors (CoC). The appellant submitted before the NCLAT that he was ready to settle the matter with the respondent and that the project was about 70-75% complete. He also stated that he had arranged funds to complete the project.

The NCLAT directed the appellant to file a proposed settlement plan on 31st January, 2020. The appellant submitted the plan on 13th February, 2020. The IRP submitted a status report on 12th February, 2020, stating that most allottees wanted possession of the flats. Despite the settlement with the respondent and the appellant’s willingness to complete the project, the NCLAT modified its interim order on 26th February, 2020, directing the IRP to constitute the CoC and continue the CIRP. The NCLAT reasoned that the settlement was only with one respondent and did not include all allottees.

The appellant approached the Supreme Court, which allowed him to approach the NCLAT for modification of the order to present a settlement plan covering all allottees. The Supreme Court also granted liberty to the appellant to approach the Supreme Court again if the modification application was not allowed.

The NCLAT rejected the modification application on 22nd November, 2021, leading the appellant to file the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The respondent No. 2 filed an application under Section 7 of the IBC before the NCLT, which was admitted on 22nd November, 2019, initiating the CIRP. The appellant, aggrieved by this order, appealed to the NCLAT. The NCLAT initially issued an interim order on 19th December, 2019, directing the IRP not to constitute the CoC. However, on 26th February, 2020, the NCLAT modified its order, directing the IRP to proceed with the CIRP, as the settlement was only with one respondent and not all allottees.

The appellant then approached the Supreme Court, which permitted him to seek modification of the NCLAT order to present a settlement plan covering all allottees. The NCLAT rejected the modification application on 22nd November, 2021, leading to the present appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of the Insolvency and Bankruptcy Code, 2016 (IBC). The relevant provisions are:

• Section 7 of the IBC: This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor. In this case, the respondent No. 2, a homebuyer, initiated CIRP against the Corporate Debtor for failure to refund the booking amount.
• Section 12A of the IBC: This section allows for the withdrawal of an application for CIRP if the Committee of Creditors (CoC) approves it with a certain voting share. The NCLAT suggested that if a settlement is reached, it could be filed under Section 12A of the IBC.

Arguments

Appellant’s Submissions:

• The appellant argued that he had reached a settlement with all stakeholders, including the homebuyers, and was ready to complete the project.
• He submitted that a special meeting of stakeholders on 23rd October, 2021, showed a settlement on almost all counts.
• The appellant contended that the NCLAT erroneously held that there was no settlement with all homebuyers and that there was a trust deficit, despite the minutes of the meeting.
• The promoter, Shri Kashi Nath Shukla, filed an undertaking to complete the project within a stipulated period.
• He argued that a “reverse CIRP” would be in the interest of the homebuyers, allowing the project to be completed.

Homebuyers’ Submissions:

• The homebuyers, represented by Shri D.N. Goburdhun, opposed the appellant’s prayer, stating that the appellant was not interested in completing the project and that the settlement plan was not bona fide.
• They argued that the CIRP would ensure the completion of the project and would be in their best interest.

IRP/Applicant’s Submissions:

• The IRP, represented by Shri Abhigya Kushwah, submitted that most homebuyers were interested in getting possession of the flats.
• He requested the Court to pass appropriate orders considering the interests of the flat purchasers.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the promoter should be permitted to complete the housing project, as per the settlement plan, instead of continuing the Corporate Insolvency Resolution Process (CIRP).

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Legal Provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016: This provision deals with the initiation of CIRP by a financial creditor. The court considered this provision in the context of the initial application filed by the respondent.
• Section 12A of the Insolvency and Bankruptcy Code, 2016: This provision deals with the withdrawal of an application for CIRP. The court considered this provision in the context of the NCLAT’s observation that if a settlement is reached, it could be filed under this section.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Section 7 of the Insolvency and Bankruptcy Code, 2016: The Court acknowledged the initial application under this section but decided to permit the promoter to complete the project.
• Section 12A of the Insolvency and Bankruptcy Code, 2016: The Court considered the NCLAT’s suggestion to use this provision for settlement but ultimately allowed the promoter to complete the project directly.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Interest of Homebuyers: The Court prioritized the interests of the homebuyers, noting that most of them wanted possession of their flats rather than refunds.
• Promoter’s Undertaking: The Court relied heavily on the promoter’s affidavit and undertaking to complete the project within a specified timeframe, without escalating costs, and to honor the agreements made by the previous management.
• Settlement Plan: The Court considered the settlement plan proposed by the promoter, which included financial arrangements and a timeline for completion.
• Meeting of Stakeholders: The Court acknowledged the meeting held on 23rd October, 2021, where most concerns of the homebuyers were addressed.
• Avoidance of CIRP Costs: The Court noted that if the CIRP were to continue, the costs for the homebuyers would likely be higher, as resolution applicants would factor in price escalations.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The Court rejected the argument that the CIRP was necessary to ensure the completion of the project. It reasoned that the promoter’s undertaking provided sufficient assurance for the project’s completion, and that continuing the CIRP would likely result in higher costs for the homebuyers. The Court also considered the fact that only a small fraction of homebuyers were objecting to the settlement plan.

The Court emphasized that the promoter had agreed to not escalate the cost of the flats and to honor the agreements made by the previous management. This was a significant factor in the Court’s decision to allow the promoter to complete the project.

The Supreme Court quoted from the affidavit of Shri Kashi Nath Shukla: “That I say that I will complete the stage wise construction within 6 months to 15 months (+/- 3 Months) in phased manner from the date of Order.”

The Court also noted, “That I have already agreed in my Resolution plan that the Cost of the Flat will not be escalated and agreed to honor the BBA signed by the previous management.”

Further, the Court stated, “That as per the data before the LD IRP only 9 home buyers out of 452 Home Buyers wanted the refund and in my Resolution Plan I have agreed to refund the amount after completion of the project of Phase-1.”

Key Takeaways

• Promoter’s Responsibility: The judgment highlights the responsibility of promoters to complete housing projects and the possibility of allowing them to do so instead of continuing CIRP, provided they give a credible undertaking.
• Homebuyers’ Interests: The Supreme Court prioritized the interests of homebuyers, emphasizing that their desire for possession of flats should be given due consideration.
• Settlement over CIRP: The judgment indicates a preference for settlements that ensure project completion over lengthy and potentially costly CIRP proceedings, especially when a majority of stakeholders agree.
• Undertakings: The Court placed significant weight on the promoter’s undertaking, treating it as a binding commitment.

Directions

The Supreme Court issued the following directions:

1. The appeal was allowed, and the NCLAT order dated 22nd November, 2021, was quashed.
2. The affidavit of Shri Kashi Nath Shukla was taken on record and treated as an undertaking to the Court.
3. The appellant/promoter was permitted to complete the project as per the meeting on 23rd October, 2021, and the undertaking.
4. The modification application before the NCLAT was allowed.
5. The IRP was directed to submit quarterly reports to the NCLAT regarding the project’s progress.
6. The matter was listed before the NCLAT for a status report on 22nd August, 2022.

Development of Law

The ratio decidendi of this case is that in cases where a promoter is willing to complete a stalled housing project and provides a credible undertaking to do so, the Supreme Court may allow the promoter to complete the project instead of continuing the CIRP. This decision emphasizes the importance of protecting the interests of homebuyers and promoting settlements that ensure project completion. This case provides a precedent for allowing promoters to complete projects under the IBC when they demonstrate a genuine commitment to completing the project and protecting the interests of the homebuyers. It also highlights the court’s willingness to prioritize practical solutions over strict adherence to the CIRP process when the circumstances warrant it.

Conclusion

The Supreme Court allowed the appeal, setting aside the NCLAT order and permitting the promoter to complete the housing project. The Court emphasized the promoter’s undertaking to complete the project within a specified timeframe, without escalating costs, and to honor the agreements made by the previous management. The Court prioritized the interests of the homebuyers and favored a settlement that ensured project completion over the continuation of the CIRP. This judgment provides a significant precedent for similar cases under the IBC, highlighting the importance of practical solutions and the protection of homebuyers’ interests.