Supreme Court permits withdrawal of CIRP proceedings in favor of Homebuyers: Amit Katyal vs. Meera Ahuja (03 March 2022)

Date of the Judgment: 03 March 2022

Citation: Not Available

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can the Supreme Court use its powers under Article 142 of the Constitution to allow the withdrawal of Corporate Insolvency Resolution Process (CIRP) proceedings when a majority of homebuyers and the corporate debtor have reached a settlement? This question was addressed by the Supreme Court in a recent case where a real estate project was delayed for over eight years. The Court considered the interests of the homebuyers, who had invested their savings, and the need to ensure that the project was completed. The Supreme Court bench comprising Justices M.R. Shah and B.V. Nagarathna, allowed the withdrawal of CIRP proceedings, emphasizing the need to protect the interests of homebuyers.

Case Background

The case revolves around a housing project in Gurgaon called Krrish Provence Estate, developed by Jasmine Buildmart Pvt. Ltd. (the Corporate Debtor). The project faced significant delays, failing to be completed even after eight years. Consequently, some homebuyers (Respondents 1 to 3), sought a refund of ₹6,93,02,755 due to the delays and failure to hand over possession within the agreed time. They filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking initiation of CIRP against the Corporate Debtor on 06.12.2018. This was before the amendment to Section 7 of the IBC, which now requires either 100 or 10% of the homebuyers/allottees to apply under Section 7 of the IBC.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) admitted the Section 7 application on 28.11.2019, initiating the CIRP and appointing an Interim Resolution Professional (IRP). The promoter/majority shareholder of the Corporate Debtor, filed an appeal against this order before the National Company Law Appellate Tribunal (NCLAT). The NCLAT dismissed the appeal and upheld the admission order. The promoter then appealed to the Supreme Court. During the proceedings, the parties attempted a settlement, which was ultimately successful with a majority of the homebuyers.

Legal Framework

The judgment primarily concerns Section 7 and Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC), along with Rule 11 of the National Company Law Tribunal Rules, 2016.

✓ Section 7 of the IBC deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor. It allows a financial creditor, either individually or jointly with other creditors, to file an application before the Adjudicating Authority (NCLT) for initiating CIRP against a corporate debtor when a default has occurred.

✓ Section 12A of the IBC, inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, allows the Adjudicating Authority to permit the withdrawal of an application admitted under Section 7, 9, or 10, upon an application by the applicant with the approval of 90% voting share of the Committee of Creditors (COC).

✓ Rule 11 of the National Company Law Tribunal Rules, 2016 empowers the NCLT to make such orders or give such directions as may be necessary or expedient to give effect to any order or to prevent abuse of its process or to secure the ends of justice.

Arguments

Appellant’s Submissions:

• The appellant, the promoter/majority shareholder of the Corporate Debtor, argued that a settlement had been reached with the original applicants and a majority of the homebuyers.
• The appellant undertook to complete the project within one year and hand over possession to the homebuyers, as per the settlement agreement.
• The appellant also agreed to refund the original applicants the amount of ₹3,36,02,000 with applicable interest.

Respondents’ (Original Applicants) Submissions:

• The original applicants (homebuyers who initiated the CIRP) agreed to withdraw the CIRP proceedings as they had reached a settlement with the appellant.
• They requested the court to permit the withdrawal of the CIRP proceedings, considering the settlement and the undertaking by the Corporate Debtor to complete the project.

Impleaders and Association’s Submissions:

• The impleaders (other homebuyers) and the Krrish Provence Flat Buyers Association supported the settlement, agreeing to take possession of their respective apartments.
• They submitted that a majority of the homebuyers were in favor of the settlement and the completion of the project.

Analysis of Arguments:

The arguments primarily revolved around the settlement reached between the parties and the willingness of a majority of homebuyers to accept the settlement and withdraw the CIRP proceedings. The appellant’s undertaking to complete the project and the agreement to refund the original applicants’ money were key factors in the settlement. The arguments highlighted the need to balance the interests of all stakeholders, particularly the homebuyers who had invested in the project.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issue addressed was:

• Whether the Supreme Court should exercise its powers under Article 142 of the Constitution of India read with Rule 11 of the NCLT rules, 2016, to permit the withdrawal of CIRP proceedings initiated under Section 7 of the IBC, given the settlement between the parties and the larger interest of the homebuyers.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Legal Provisions Considered:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): Pertains to the initiation of CIRP by a financial creditor.
• Section 12A of the Insolvency and Bankruptcy Code, 2016 (IBC): Allows withdrawal of CIRP application with 90% COC approval.
• Rule 11 of the National Company Law Tribunal Rules, 2016: Empowers NCLT to make orders to prevent abuse of process and secure justice.

Judgment

What weighed in the mind of the Court?

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

• Settlement between parties: The fact that the appellant, original applicants, and a majority of homebuyers had reached a settlement was a significant factor.
• Interest of homebuyers: The Court emphasized the need to protect the interests of the homebuyers, who had invested their hard-earned money in the project.
• Project completion: The undertaking by the appellant to complete the project within one year and hand over possession to the homebuyers was a crucial consideration.
• Avoidance of liquidation: The Court noted that continuing the CIRP proceedings could lead to liquidation, which would be detrimental to the homebuyers.
• Majority support: The fact that a majority of the homebuyers were in favor of the settlement and withdrawal of the CIRP proceedings was also a key factor.
• No progress in CIRP: The Court noted that no significant progress had been made in the CIRP proceedings after the constitution of the COC, making the withdrawal more feasible.

The Court’s reasoning was a blend of factual considerations (settlement, project status, homebuyers’ interests) and legal principles (powers under Article 142, Rule 11, and provisions of the IBC). The emphasis on the facts of the case shows the Court’s inclination to prioritize practical solutions that serve the interests of the affected parties.

Key Takeaways

• The Supreme Court can exercise its powers under Article 142 of the Constitution to allow the withdrawal of CIRP proceedings in exceptional circumstances, especially when a settlement has been reached and it serves the larger interest of the stakeholders.
• The interests of homebuyers are paramount, and the courts should strive to protect them by ensuring the completion of real estate projects.
• The procedure under Section 12A of the IBC and Regulation 30A of the CIRP Regulations is not mandatory and can be relaxed based on the facts of each case, as long as the spirit of the law is followed.
• The Court emphasized that the object of the IBC is not to kill the company, but to ensure that the business of the company runs as a going concern.

Directions

The Supreme Court issued the following directions:

• Respondent Nos. 1 to 3 (original applicants) were permitted to withdraw the application filed under Section 7 of the IBC.
• All orders passed by the NCLT, including the appointment of IRP and constitution of COC, were quashed.
• The impugned judgment and order passed by the NCLAT were also quashed.
• Consumer Case and Criminal Complaint filed by Respondents 1 to 3 were dismissed as withdrawn.
• The appellant and respondent No.4 (Corporate Debtor) were directed to file undertakings to complete the project within one year and obtain the Occupancy Certificate within six months.
• The appellant was directed to pay ₹6,00,000 to the IRP towards expenses.

Development of Law

This judgment clarifies the Supreme Court’s stance on the withdrawal of CIRP proceedings, particularly in cases involving homebuyers and real estate projects. The ratio decidendi of the case is that in cases where a settlement has been reached and it serves the larger interest of the stakeholders, especially homebuyers, the Supreme Court can exercise its powers under Article 142 of the Constitution and Rule 11 of the NCLT rules to allow the withdrawal of CIRP proceedings. This is a departure from the strict procedural requirements under Section 12A of the IBC, highlighting the Court’s willingness to adopt a pragmatic approach to protect homebuyers’ interests. This case reinforces the principle that the IBC is not meant to be used to kill a company but to ensure it continues as a going concern, and the interests of homebuyers are paramount.

Conclusion

The Supreme Court’s decision in Amit Katyal vs. Meera Ahuja is a significant ruling that prioritizes the interests of homebuyers in real estate projects. By allowing the withdrawal of CIRP proceedings based on a settlement between the parties, the Court has demonstrated a pragmatic approach to resolving disputes and ensuring the completion of stalled projects. This judgment sets a precedent for similar cases, emphasizing the need for a balanced approach that protects the interests of all stakeholders while adhering to the spirit of the Insolvency and Bankruptcy Code.