2025 (9) TMI 999 - AT - IBC

Section 7 upheld: Appeal dismissed, admission maintained as corporate debtor defaulted despite lack of occupancy certificate

Mohit Arora (Suspended Director of Revital Reality Pvt. Ltd.) Versus Manish Aneja & Ors.

NCLAT dismissed the appeal and upheld admission of the Section 7 application, holding the corporate debtor defaulted in handing over possession despite ... Admission of section 7 application - default on the part of the Corporate Debtor so as to initiate insolvency resolution process against the Corporate Debtor or not - arguments raised on behalf of the Corporate Debtor that unless Occupation Certificate is received there is no obligation to offer possession was considered and rejected - HELD THAT:- Hon’ble Supreme Court in Manish Kumar vs. Union of India [2021 (1) TMI 802 - SUPREME COURT] where the Hon’ble Supreme Court had occasion to elaborately consider the provision of Section 7 of the I&B Code in reference to the allottees who initiate proceeding under Section 7 against a real estate company. It was held by the Hon’ble Supreme Court that it is not necessary that all Applicants who have initiated proceeding under Section 7 need to prove that default has been committed with respect to each of them by the Corporate Debtor. It is submitted that any allottee, who is Financial Creditor of the Corporate Debtor for default of any other Financial Creditor by virtue of explanation to Section 7(1) can initiate proceeding. Thus, in a case where Corporate Debtor commits default, failing to handover possession of unit to allottee who is a Financial Creditor and has paid his 100% consideration, no capital can be made by making submission by the Corporate Debtor that there are some other allottees who are party to the application who had not paid their 100% consideration. The Occupation Certificate is issued by the Regulatory Authority to a Corporate Debtor after completion of the construction. In a case where Corporate Debtor does not complete construction, it cannot shield itself on the ground that no Occupation Certificate has been issued, therefore, its obligation to handover possession shall not commence. Clause 3.5 contemplate handing over possession within 48 months from the commencement date subject to force majeure and timely payment of all instalments - No case of force majeure except halting of construction for 89 days has been contended, which falls in the expression ‘intervention of statutory authorities’. Clause 3.5 does not stand any fetter in handing over possessing or receipt of Occupation Certificate. In facts of the present case, specially the fact that project is not yet complete as per own case of the Appellant and Appellant in its resolution plan itself has shown that it will take 2-3 years in handing over possession to the homebuyers - The Corporate Debtor cannot be allowed to take benefit of his own inaction and act of not completing the project. Submission of the Appellant that since Occupation Certificate was not issued, it could not give possession to the homebuyers cannot be accepted. Completion of the construction is precondition for obtaining Occupation Certificate, thus, precondition having not been completed by the Corporate Debtor, it cannot hide its default on the pretext that due to non-receipt of the Occupation Certificate possession cannot be handed over, hence, there is not default on the part of the Corporate Debtor. Taking into consideration the overall facts and circumstances, no case has been made out to interfere with the initiation of insolvency resolution process of the Corporate Debtor. The project which is not complete even after about a decade from the date when allotment was made in favour of the allottees, the Corporate Debtor needs resolution as per the I&B Code and the CIRP Regulations, 2016. Discharge the interim order dated 02.07.2024. The period from 02.07.2024 till date shall be excluded from the CIRP process. The Resolution Professional to proceed with the CIRP process and after issuing Form G take steps for early resolution of the Corporate Debtor as early conclusion of the CIRP is required in the facts of the present case - Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a default under Section 7 of the I&B Code is established where a real estate corporate debtor has not handed over possession within the contractual timeframe, despite contractual clauses making possession subject to receipt of an Occupation/Completion Certificate, force majeure, intervention of statutory authorities and timely payment by allottees. 2. Whether alleged payment defaults by some of the allottees who joined the Section 7 application defeat the admission of a Section 7 petition when other applicants have paid substantially or in full. 3. Whether a short period of halted construction (89 days) falling within orders of statutory/quasi-judicial authorities attracts the prohibition under Section 10A and bars adjudication on the Section 7 application. 4. Whether the appellate forum should direct or permit a reverse insolvency mechanism (permit promoters/ex-management to complete the project under supervision) instead of admitting CIRP where there are competing settlement/resolution proposals by promoters and a subset of homebuyers in favour of promoter-led completion. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Existence of default despite clause conditioning possession on Occupation Certificate and other contingencies Legal framework: Admission under Section 7 requires existence of a financial debt/default. Flat Buyer's Agreements set contractual timelines; I&B Code governs insolvency commencement; completion/possession and issue of Occupation/Completion Certificate are regulatory processes under municipal/DTCP/urban planning laws. Precedent treatment: The Court relied on principles articulated in governing case-law that default in non-handover of possession by a real estate corporate debtor constitutes continuing default warranting Section 7 action. The decision differentiated reliance placed by the corporate debtor on an authority decision earlier cited (Ireo Grace) as pertaining to consumer law and deficiency of service, not directly displacing I&B Code analysis. Interpretation and reasoning: Clauses 3.1 and 3.5 were read harmoniously. Both clauses condition the 48-month possession timeline on limited contingencies; when read together the temporal obligation (48 months) is subject primarily to force majeure and timely payments by allottees. The Court rejected the contention that absence of an Occupation Certificate by itself indefinitely suspends the developer's obligation to tender possession, reasoning that an obligation to obtain the Occupation Certificate presupposes completion of construction - the promoter cannot parry its contractual timeline by relying on a precondition it has failed to fulfil through inaction. The Court noted the corporate debtor's own affidavit admitting only two towers complete and projecting completion dates extending beyond the contractual period, demonstrating continuing default. Ratio vs. Obiter: Ratio - Where a developer fails to complete construction such that obtaining an Occupation/Completion Certificate is contingent on the developer's own completion, the contractual condition (receipt of OC) cannot be used to indefinitely postpone possession and negate default for purposes of Section 7. Obiter - Observations on how clause wording would operate in other factual configurations involving substantial demonstrated force majeure or statutory interventions of longer duration. Conclusion: The Court held that default existed; the corporate debtor could not shelter behind non-receipt of Occupation Certificate when completion itself remained incomplete and possession was not offered within the contractual period. Issue 2 - Effect of some applicants' payment defaults on maintainability of Section 7 filed by a group of allottees Legal framework: Section 7 and its Explanation as amended for real estate projects permits applications by a requisite number of allottees; admission thresholds and the in rem nature of insolvency proceedings; established principle that default need not be shown qua each applicant. Precedent treatment: The Court followed and applied the authoritative ratio that a Section 7 application by allottees need not establish default in favour of each applicant - a default affecting the corporate debtor in an aggregate sum suffices and any allottee who is a financial creditor can initiate Section 7 even if some co-applicants have unpaid dues (as explained in Manish Kumar jurisprudence cited). Interpretation and reasoning: The Court rejected the appellant's attempt to defeat the petition by pointing to alleged instalment defaults of some applicants. It observed that a subset of applicants having paid full or substantial consideration and asserting non-handover of possession can sustain a Section 7 petition. The contractual requirement of timely payments is relevant to the individual allottee's entitlement but does not negate the Section 7 filing where defaults by the corporate debtor are established as to other applicants or collectively. Ratio vs. Obiter: Ratio - Payment defaults by some co-applicants do not per se invalidate a Section 7 application brought by the required number of allottees when other applicants demonstrate default or when default in aggregate exists. Obiter - Practical caution regarding potential misuse where applicants who have not paid deliberate to trigger insolvency. Conclusion: The Court held that alleged defaults by certain allottees did not preclude admission of the Section 7 petition; the petitioners met the statutory threshold and demonstrated continuing default by the corporate debtor. Issue 3 - Applicability of Section 10A prohibition due to an intervening 89-day halt in construction Legal framework: Section 10A (prohibition period) prevents initiation of certain insolvency actions during the prescribed moratorium/prohibition period, subject to exceptions and factual determinations whether the period is attracted. Precedent treatment: The Court examined the claim that the 89-day halt, being under orders of statutory bodies and courts, should render the conduct within the prohibited period; however, the Court considered the overall continuing default beyond that limited intervention. Interpretation and reasoning: The Court accepted that an 89-day halt due to orders exists but treated such period as falling within the class of 'intervention of statutory authorities' or limited force majeure; however, even if that period were excluded, the corporate debtor's admitted status (large portions incomplete, significant outstanding construction beyond dates indicated) demonstrated continuing default extending well beyond the halted period and, in any event, the Section 7 petition filed thereafter remained maintainable. The Court also noted that even allowing the 89-day period does not obviate the continuing nature of default. Ratio vs. Obiter: Ratio - Short statutory/intervening halts do not automatically render Section 7 barred if default is continuing and persists beyond the intervening period. Obiter - Specific interplay of Section 10A with varying durations of statutory intervention depending on factual matrix. Conclusion: The Section 10A prohibition did not preclude adjudication of the Section 7 application on the facts; the short halt did not cure or explain away ongoing non-completion/default. Issue 4 - Appropriateness of directing reverse insolvency (promoter-led completion) instead of CIRP Legal framework: I&B Code/CIRP mechanism contemplates insolvency resolution through a resolution professional and CoC; reverse insolvency/permit-to-promoter completion is an exceptional remedy in cases where stakeholders substantially agree and a workable completion plan exists. Precedent treatment: The Court acknowledged authorities where reverse insolvency has been directed but emphasised that such relief is contingent on broad stakeholder consensus and feasibility; where significant opposition exists among petitioning allottees and CoC considerations dissuade piecemeal promoter action, reverse insolvency is inappropriate. Interpretation and reasoning: The Court examined the promoters' reverse-resolution proposal and admitted resolution plan timeline (2-3 years for completion) but found (i) the project registration/HRERA renewal issues and regulatory disputes remained unresolved; (ii) the CoC and many applicants opposed the promoters' plan; and (iii) the promoters' own timelines evidenced prolonged completion. Given these factors and the absence of unanimous or substantial stakeholder support, the Court declined to order reverse insolvency and held that CIRP under the Code is the appropriate mechanism to secure an early, supervised resolution. Ratio vs. Obiter: Ratio - Reverse insolvency is not to be directed where the promoters' plan lacks stakeholder consensus, regulatory clearances are disputed, or completion timelines are protracted; CIRP is the proper recourse in such circumstances. Obiter - Reference to cases where reverse insolvency succeeded where stakeholders were substantially aligned. Conclusion: The Court refused to grant reverse insolvency relief and directed continuation of CIRP; the Resolution Professional was to proceed with issuing Form G and obtain a compliant resolution plan for early conclusion of CIRP. Overall Conclusion and Disposition The Court concluded that the corporate debtor had committed continuing default in not handing over possession within contractual timelines; contractual conditioning on receipt of Occupation Certificate could not be invoked to indefinitely delay possession where completion itself was not achieved by the corporate debtor. Payment defaults by some co-applicants did not defeat maintainability of the Section 7 petition. A limited statutory halt (89 days) did not bar initiation of CIRP in the factual matrix. Reverse insolvency was declined for lack of stakeholder consensus and practical impediments. The appeal was dismissed and the CIRP process directed to proceed expeditiously under the I&B Code and CIRP Regulations, 2016.