2025 (12) TMI 112 - AT - IBC

Section 7 homebuyer insolvency plea cured by filing individual affidavits where association resolution came from core committee

NCLAT held that a section 7 application filed in Form A, based on default towards 98 homebuyers represented through a registered welfare association, ... Maintainability of section 7 application - application filed by registered society registered under Society Registration Act by Assistant Registrar Society - default by the corporate debtor in handing over the possession - HELD THAT:- On reading the application Form A, the intendment is clear that the debt and default is of 98 flat buyers who claimed to be members of the Welfare Association with respect to whose claim proceeding under Section 7 was initiated against the corporate debtor. It is true that the financial creditor could not be said to be Avenue 54 Welfare Association rather the financial creditors were 98 flat buyers who claimed to have form the registered society. When Section 7 applicants offered to file individual affidavit and authorisation to cure the defect, if any, adjudicating authority ought to have been given opportunity to the applicant to cure the defects. It is noticed that from Form A, it cannot be disputed that any person can be authorised by financial creditor to file an application which may also be a registered society, however, there has to be authorisation by financial creditor and in the present case, the resolution which is claimed to be resolution 23.01.2024, authorising the society to Avenue 54 Welfare Association to institute Section 7 application cannot be said to be authorisation by members of the society. Resolution itself claims to be resolution of core committee of the members of the Avenue 54 Welfare Association. There being defect in authorisation, opportunity ought to have been given to applicant to file individual affidavit and authorisation as was submitted before the Court on 17.06.2025. The ends of justice will be served in granting an opportunity to the applicant Avenue 54 Welfare Association to file the individual affidavit of homebuyers stating the identity as also the fact that they individually authorised the applicant in the company petition as also has been noticed in the order dated 17.06.2025. We grant 7 days’ time to the respondent Avenue 54 Welfare Association to file the individual affidavits as noticed in the order dated 17.06.2025. The respondent Avenue 54 Welfare Association is permitted to file “individual affidavits of the homebuyers stating their identity as also the fact that they individually have authorised the applicants in the present company petition” within a period of 7 days from today - appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, instituted in the name of a registered welfare association of homebuyers, is maintainable when the association itself is not the 'financial creditor'. 1.2 Whether the authorisation produced in favour of the persons filing the Section 7 application on behalf of the homebuyers, being only a resolution of the 'core committee' of the association, satisfied the statutory requirement of authorisation by the financial creditors. 1.3 Whether the defect in authorisation for filing the Section 7 application is a curable defect and whether the adjudicating authority ought to have permitted the filing of individual affidavits of homebuyers authorising the association/applicants. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability of Section 7 application filed in the name of a registered welfare association of homebuyers Legal framework 2.1 Section 7(1) of the Insolvency and Bankruptcy Code, 2016, permits a 'financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government' to file an application for initiation of CIRP. 2.2 The Central Government notification dated 27.02.2019, issued under Section 7(1), specifies four categories of persons who may file such application on behalf of a financial creditor: (i) a guardian, (ii) an executor or administrator of an estate of a financial creditor, (iii) a trustee (including a debenture trustee), and (iv) a person duly authorised by the Board of Directors of a company. 2.3 Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 mandates that a financial creditor make the application in Form 1. In Form 1, Part I, item 5 requires disclosure of 'name and address of the person authorised to submit application on its behalf (enclose authorisation)'. Interpretation and reasoning 2.4 The application in Form 1 showed the 'name of the financial creditor' as the welfare association; however, in Part IV it was specifically pleaded that the financial creditor 'comprises of flat purchasers' who have purchased 98 flats, and that the debt is the total value of such flats and the monies paid by these homebuyers. 2.5 The Court noted that, in substance, the financial creditors are the 98 homebuyers, and the dues of these individual flat purchasers form the basis of the Section 7 claim. The welfare association, registered under the Societies Registration Act, is only a vehicle representing them. 2.6 The notification dated 27.02.2019 does not list a registered society or welfare association as one of the notified 'persons' who can file on behalf of a financial creditor under Section 7(1). However, Form 1, Part I, item 5 contemplates that 'any person' can be authorised by the financial creditor to submit the application on its behalf, provided due authorisation is in place. 2.7 The Court therefore distinguished between: (a) the identity of the 'financial creditors' (the 98 flat buyers) and (b) the person who actually submits the application on their behalf (which can be a society/association or individuals, if duly authorised by the financial creditors). Conclusions 2.8 The financial creditors in law are the 98 homebuyers, not the welfare association itself. 2.9 A welfare association or registered society may act as the applicant in a Section 7 filing if it is duly authorised by the actual financial creditors in terms of Form 1, Part I, item 5; the association's competence thus turns on the existence and validity of such authorisation. 2.10 In light of the Court's approach of allowing the defect in authorisation to be cured, it held that, upon establishing valid authorisation from the homebuyers, the Section 7 application at the instance of the welfare association is to be treated as maintainable and proceeded with in accordance with law, making detailed examination of precedents unnecessary. Issue 2 - Sufficiency and validity of the 'core committee' resolution as authorisation for filing the Section 7 application Legal framework 2.11 Form 1, Part I, item 5 requires disclosure of the 'person authorised to submit application' on behalf of the financial creditor and mandates enclosure of the authorisation. Interpretation and reasoning 2.12 The Section 7 application relied on a resolution dated 23.01.2024 (Exhibit A), described as a 'certified true copy of the resolution passed at the virtual meeting of the core committee members of the Avenue 54 Welfare Association'. 2.13 This resolution authorised certain named members to appoint legal representatives and to 'file Section 7 Petitions before the National Company Law Tribunal, Mumbai' against the promoters, along with other authorisations relating to litigation and protection of the association's interests. 2.14 The Court noted that the resolution is expressly by 'core committee members of the Avenue 54 Welfare Association', and not a resolution of all members of the association or of all 98 flat purchasers whose claims form the basis of the Section 7 application. 2.15 On the face of the pleadings, the Section 7 proceeding is based on the dues of all 98 flat buyers; therefore, any authority to institute insolvency proceedings on their behalf must emanate from all such financial creditors, and not merely a subset or internal committee of the association. Conclusions 2.16 The core committee resolution dated 23.01.2024 does not constitute sufficient authorisation by all the financial creditors (i.e., all 98 homebuyers) to the persons filing the Section 7 application. 2.17 There was a defect in the authorisation supporting the Section 7 application, as the authorisation did not demonstrably emanate from or on behalf of all members whose claims were being asserted. Issue 3 - Whether the defect in authorisation is curable and whether the adjudicating authority ought to have allowed filing of individual affidavits by the homebuyers Interpretation and reasoning 2.18 During the hearing of the interlocutory applications seeking dismissal of the Section 7 petition, the applicants (homebuyers/association) offered to file individual affidavits of the homebuyers 'stating their identity, as also the fact that they individually have authorised the applicants in the present Company Petition', as recorded in the order dated 17.06.2025 of the adjudicating authority. 2.19 The corporate debtor opposed the move on the ground that the matter had already been substantially argued and that such affidavits should not be permitted to be tendered at that stage. The adjudicating authority declined to take such affidavits on record, treating them as 'new material'. 2.20 The Court examined the structure of Form 1 and observed that the statutory scheme allows any person to be authorised by the financial creditors to submit the application on their behalf. The essence of the objection was therefore not to the nature of the association per se, but to the fact that there was inadequate proof of authorisation from the actual financial creditors. 2.21 The Court treated this deficiency as procedural and curable: the objection could be addressed by filing individual affidavits from each homebuyer, evidencing their identity and explicit authorisation of the applicant/association for purposes of the Section 7 petition. 2.22 The Court held that, in these circumstances, the adjudicating authority ought to have allowed the Section 7 applicants to cure the defect by filing such affidavits, particularly since the offer to do so was made during the hearing itself. Conclusions 2.23 The defect in authorisation supporting the Section 7 application is not fatal; it is a curable defect. 2.24 The adjudicating authority erred in refusing to take on record the individual affidavits of the homebuyers that were offered to be filed to establish and regularise authorisation. 2.25 To serve the ends of justice, the Court granted the welfare association a period of 7 days to file individual affidavits of the homebuyers stating their identity and confirming that they have individually authorised the applicants in the company petition. 2.26 Upon filing of these affidavits and thereby curing the defect in authorisation, the Section 7 application is to be treated as maintainable and the adjudicating authority is to proceed to hear and decide the Section 7 application in accordance with law. 2.27 The impugned order of the adjudicating authority rejecting the applications seeking dismissal of the Section 7 petition was not interfered with, for the reasons indicated, and the appeals were disposed of with the above directions.