WHETHER INSOLVENCY CAN BE INITIATED AGAINST THE DEVELOPER COMPANY FOR FAILURE TO REFUND THE MAINTENANCE SECURITY FUNDS?

M/S VIPUL GREENS RESIDENTS WELFARE ASSOCIATION v. VIPUL LIMITED

(IB)-541(ND)/2019 | 12-07-2021

M/S VIPUL GREENS RESIDENTS WELFARE ASSOCIATION v. VIPUL LIMITED

The present petition is filed under Section 7 of the Insolvency & Bankruptcy Code, 2016, (hereinafter referred to as the “Code”), praying for initiation of Corporate Insolvency Resolution Process of the Respondent/Corporate Debtor on the grounds of its inability to liquidate its financial debt.

FACTUAL BACKGROUND

Vipul Greens Residents Welfare Association (“VGRWA”) is a Residents Welfare Association and present issue arises out of an arrangement between the Applicant and the Corporate Debtor by way of which the Corporate Debtor owes an amount of Rs.6,51,36,981/- on account of Maintenance Security Deposits and accrued interest thereon.

ADMITTED FACTS

Honorable Tribunal found that following are the admitted facts: –

1. That the petitioner is the registered welfare association of M/s Vipul Greens Residents Welfare Association and the Corporate Debtor/respondent is a builder who constructed and handed over the possession of the flats to the flat owners till 31.03.2018.
2. The Maintenance and Operation of M/s Vipul Green Complex was earlier being carried out by the Corporate Debtor and it was handed over to the petitioner w.e.f. 01.04.2018
3. It is also admitted fact that the Maintenance Security deposit @ Rs. 50/- per sq. ft. of the super area of the flat has been deposited.

DISPUTES

1. According the Corporate Debtor, the petition is not maintainable, because there is no agreement with the association.
2. All the flat buyers have not individually authorized the Association to file an application under Section 7 of IBC, 2016.
3. The application is not in terms of the amendment made in Section 7 of IBC, 2016 w.ef. 28.12.2019 which says that a Financial Creditor under clause a & b of Section 21(6A) of the code, an application needs to be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent of the total number of such creditors in the same class whichever is less. Whereas the claim of the petitioner is that the petitioner is the registered Association of more than 300 flat buyers and as per the agreement that amount was required to be handed over to the association, as and when it was formed. Therefore, the present application is maintainable. 

TRIBUNAL DECISION

1. In view of the aforesaid insertion of provisions under explanation below Section 7, the Adjudicating Authority is only required to see whether the application under Section 7 has been filed by 100 allottees, who are members of RWA or a 10% of the allottees.
2. The Adjudicating Authority is also required to notice the maintainability on the basis of insertion as made by Ordinance dated 28th December, 2019 as noticed above and then to find out whether any debt is payable in the eye of law or in fact and there is a default.
3. Except the aforesaid facts and the observations as given by the Hon’ble Supreme Court in “Innoventive Industries Ltd. v. ICICI Bank— 2017 SCC OnLine SC 1025” as quoted above, the Adjudicating Authority will not go into the other facts which are required to be determined by Court of Competent Jurisdiction.
4. So far as the insertion of provision under explanation below Section 7 of IBC is concerned, on the basis of the averment made in the application, reply, rejoinder, additional reply as well as written submissions filed by the respective parties, we notice that the respondent in para 10 (c) of their reply has made the averment that “Be that as it may be, it is pertinent to note that the petitioner has only approximately 300 (three hundred) flatbuyers as its members out of total 644 (six hundred forty four) flats of Vipul Greens”
5. On the basis of this averment alone, it is seen that the petitioner is representing the members of 300 flat owners, out of total 644 flats and as per the requirement of Section 7 of IBC, 2016 proviso, an application needs to be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent of the total number of such creditors in the same class whichever is less. Since, the petitioner is representing 300 flat buyers, the petitioner is a registered Association duly elected by the 300 flat buyers and there is a resolution of the Association, which authorizes the petitioner to pursue the matter, in our considered view, the petitioner has fulfilled the minimum requirement for filing an application under the amended Section 7 of IBC, 2016.
6. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor- it need not be a debt owed to the applicant financial creditor but to the other financial creditor of corporate debtor. Under Section 7(2), an application is to be made under subsection (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form i accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, and in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shail ther communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.”
7. In order to initiate the proceeding under Section 7 of IBC, 2016, the Adjudicating Authority has to see a) whether there is a financial debt’ b) the ‘default’ has occurred in repayment of that debt or  not, c) the application is complete and whether any disciplinary proceedings is pending against the proposed RP or not.
8. At this juncture, we would like to refer to the definition of ‘debt’, ‘financial debt’ and ‘financial creditor’ and the same are quoted below:-

Section 3 (11) of IBC : “Debt means  a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.”

Section 5 (8 ) of IBC : “Financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes clause (a) to (I)-

Section 5 (7) of IBC : “Financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to”

1. On plain reading of the definitions referred, we find that the ‘debt’ means a liability or obligation in respect of a claim, which is due from any person and includes a financial debt and operational debt. And the financial debt is a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes the amount paid under either of the clauses from (a) to (i) of Section 5 (8) of the IBC, and the person who paid the money and to whom such debt has been legally assigned or transferred to is known as ‘Financial Creditor’.
2. Whether a ‘security deposit’ comes under the definition of ‘financial debt’ or not? In the course of hearing, this question was raised by the parties.
3. We notice that it is an admitted fact that as per the clause (D) of the agreement at page 176 of the paper book, on the balance of 75% of the deposit, the developer shall pay annually interest at the rate of State Bank of India’s rate for three years’ term deposit and interest shall be paid from the date of providing maintenance services 1.e., 01.05.2007 or from the date deposits are made by owner(s), whichever is later.
4.  In view of this clause of the agreement, when we consider the definition of financial debt’ referred (supra), it is seen that money was borrowed against the payment of interest and that amount was raised from the allottees under a real estate project. Hence, we are of the considered view that the amount raised by the corporate debtor comes under the definition of financial debt’ and the petitioner, who is representing the 300 flat buyers of that project, is the inancial creditor’ in terms of Section 5 (7) of IBC 2016.
5.  From the averments made in the application as well as reply, it is also seen that the amount which has been received by the Corporate Debtor as a Maintenance Security Deposit has not been refunded as yet and as per the agreement, the Corporate Debtor is required to refund the same, the day when the Association is formed. 
6. It is admitted by the Corporate Debtor in its reply that the maintenance is being carried out by the petitioner Association, w.e.f. 01.04.20 18. Therefore, as per the agreement clause, the Corporate Debtor was bound to refund the amount, the day when the Association was formed. Since it is admitted by the Corporate Debtor that the Association has been carrying out the maintenance work w.e.f. 01.04.2018, therefore, the date of default is 01.04.2018.
7. At this juncture, we also consider the part-IV of the application. It is seen in the part-IV of the application that the date of default is shown as 01.04.2018 and the total amount of default including interest is indicated of Rs. 10,80,77,619/-. The present application is filed on 26.02.2019, hence it is within the limitation period.
8. At this juncture, we would like to refer to the arguments advanced by the respondent. Ld. Counsel for the Respondent in the course of his arguments contended that there are some flat owners against whom, there are outstanding dues and on the basis of that, the respondent claimed that they are not liable to refund that amount. We notice that at page 29 of the reply, the respondent has enclosed the list of defaulters but in support of that the respondent has not produced any document to show that they are defaulters in making the payment. Even on the basis of that list, it cannot be presumed that all the 600 Flat buyers are defaulters.
9. At the cost of repetition, we would like to refer to the argument of the Petitioner, who in their written submissions contended that the Corporate Debtor had filed a revised affidavit dated 26.11.2019, wherein they had admitted the unpaid maintenance charges of Rs.96,02,491/- qua 364 members of the Petitioner, but in this Affidavit, the Corporate Debtor has concealed the amount of Rs.3,73,84,308/- collected from these 364 apartment owners towards the Security Deposit and even after adjustment of the entire outstanding maintenance charges , the Corporate Debtor is liable to pay the balance Security Deposit of Rs.2,77,93,782/- plus interest accrued thereon but it has defaulted in payment of this amount to the Petitioner, which is sufficient to initiate CIR Process against the Corporate Debtor.
10. So, considering these submissions, we are unable to accept the contention of the respondent that after adjusting the amounts shown in the Annexure R-II there are no outstanding dues, which are payable by the Corporate Debtor to the Financial Creditor.
11. Hence, for the reasons discussed above, we are of the considered view that there is a financial debt paid by the flat buyers, who are represented through the Registered Association and that amount has not been refunded by the Corporate Debtor as yet, therefore, there is a default in making the payments of debt amount. And in view of the decision of the Hon’ble Supreme Court in the matter of Innoventive Industries Ltd. v. ICICI Bank — 2017 SCC Online SC 1025, the moment, the applicant satisfies the Adjudicating Authority that there is Financial Debt or there is any default of payment, application is complete under Sub Section 2 of Section 7 and there is no disciplinary proceeding pending against the proposed IRP, the Adjudicating Authority has no option but to admit the application under Section 7(5)(a) of the IBC, 2016.
12. In the light of that judgement (Supra) we consider the case in hand and find that the applicant has succeeded in establishing that there is a financial debt and Corporate Debtor is in default in making the payment of that financial debt, the application is complete
13. Under such circumstances, we are inclined to admit this application and accordingly, same is hereby Admitted and the CIRP Process against the Respondent is hereby initiated. Since the applicant has proposed the name of the IRP, therefore, we appoint IRP.