Jayparan ("Jay" in short), has paid a sum of ₹4 crore to RD Developers Private Limited (hereinafter referred as 'Corporate Debtor') who was engaged in real estate business. This sum of ₹4 crore was paid in 2010 as earnes

CS Professional · Insolvency and Bankruptcy - Law and Practice · PYQS · December 2024
Jayparan ("Jay" in short), has paid a sum of ₹4 crore to RD Developers Private Limited (hereinafter referred as 'Corporate Debtor') who was engaged in real estate business. This sum of ₹4 crore was paid in 2010 as earnest money against advance sale consideration for booking of a flat. Since there was no progress in the said project until 2014, Jay sought refund of the earnest money following which the Corporate Debtor assured to return the same with interest @ 12% per annum. Since then, the sum of ₹4 crore was mutually treated as unsecured loan and reflected accordingly in the books of the account of the Corporate Debtor. Interest thereon was paid by the Corporate Debtor and TDS was also deducted thereon for which confirmation of books of accounts was periodically sought from Jay. Thus, it was contended that the Corporate Debtor by his own conduct changed the status of the home-buyer to a Financial Creditor. The Corporate Debtor paid regular interest till FY 2016-17. On the grounds of liquidity and financial crunch, he sought waiver of interest from Jay which request was, however declined. It is the contention of Mr. Jay that the Corporate Debtor thereafter, defaulted in making interest payment since 1st October, 2017 and continued to default from FY 2017-18 until FY 2020-21 except for part repayment in 2018. It is further submitted that on the demise of Mr. Jay during October 2018, the loan amount was transferred to the name of his wife, Kushma Jayparan which stands confirmed from the confirmation of account for FY 2019-20 signed by the Directors of the Corporate Debtor. On account of non-payment of debt, a letter dated 1st February, 2021 was sent by Kushma Jayparan to the Corporate Debtor demanding a sum of ₹6.20 crores which included principal amount of ₹4.09 crores and ₹2.11 crores as interest. Since the amount remained outstanding, on behalf of Jay, his wife filed an application under Section 7 of the IBC on 6th October, 2021 for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor for the default committed. The learned Counsel of the Corporate Debtor contended that there was no agreement between Jay and the Corporate Debtor with respect to the amount advanced by him and further, the amount paid by Jay is as an Advance amount for buying a flat under development of the Corporate Debtor. Hence, Jay is only a home buyer and not a Financial Creditor of unsecured loans. It is also the contention of the Corporate Debtor that the investment was made by the Jay to receive returns on investment from the Corporate Debtor. Hence, the sum advanced was in the nature of speculative investment and cannot be treated as a financial debt. The Adjudicating Authority viewed that as no time period was stipulated in the demand notice, it may be held that no default had occurred and also this date fell in the prohibited period under Section 10A of the IBC, 2016. Thus, the Adjudicating Authority held that in both these circumstances, Section 7 application was non-maintainable. Aggrieved with the findings of the Adjudicating Authority, the wife of Jay preferred an appeal before the National Company Law Appellate Tribunal. State with reasons whether Kushma Jayparan will succeed in her appeal?

Answer & Explanation:

The facts of the question are similar to the of Sushma Paranjpe v. Rohan Developers Pvt. Ltd. decided on 06th December 2023, wherein NCLAT observed that mere insertion of any date in Form 1 at Part IV of the Section 7 application does not make that date of default valid and binding especially when there is no agreement between the two parties as to what shall constitute an event of default. In the absence of agreement specifying the events of default, the alleged date of default cannot be whimsically decided by the creditor and the creditor needs to be put to strict proof to establish the date of default. A plain reading of Section 10A signifies that no application/proceedings under Sections 7, 9 and 10 can be initiated for any default in payment which is committed during Section 10A period. The object and purpose of Section 10A has been explained in the ordinance by which Section 10A was brought into operation. What is essentially barred is initiation of CIRP proceedings when the Corporate Debtor commits any default during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, this statutory provision does not put any bar on the initiation of CIRP proceedings. Thus, the aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing. It was never intended to cover any default which occurred before Section 10A period and continuing thereafter. The NCLT held that it did not find any cogent basis for the Adjudicating Authority to have dismissed the Section 7 application of the Financial Creditor on grounds of non-maintainability in the context of Section 10A of the IBC. NCLT also observed that the Adjudicating Authority has not returned any findings on the basic issue of debt and default which has been the bone of contention. The NCLT was of the considered view that, prima-facie, the corpus of facts and material on record are sufficiently adequate to consider the present Section 7 application on merits. The appeal is allowed. The impugned order is, therefore, set aside. Without expressing any opinion on the merits of the claim of the Appellant, the Section 7 application filed by the Appellant is revived and remanded back to the Adjudicating Authority to be considered again in accordance with law. Based on the above decision of NCLAT, Kushma Jayparan will succeed in her appeal.

Topics: Initiation of CIRP

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic