NCLAT rules that a Corporate Debtor, by acquiring encumbered property under the SARFAESI Act, inherits the financial debt as per the IBC.
The National Company Law Appellate Tribunal (NCLAAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) was hearing an appeal and observed that the Appellant (Corporate Debtor), by acquiring encumbered property under the SARFAESI Act, inherited the financial debt owed to home allottees, qualified as a financial creditor under the Insolvency and Bankruptcy Code.
An appeal was filed by the Suspended Director of the Corporate Debtor challenging the National Company Law Tribunal's (NCLT) order dated 26.09.2023, which admitted the Section 7 Application filed by the respondents, who were allottees. The appellant, aggrieved by this order, sought relief through this appeal.
Initially, M/s Subros Ltd. purchased land on 31.10.2003, which faced a land acquisition notification on 27.08.2004. Subros Ltd. contested the acquisition and secured a court release on 22.08.2007, and the government ultimately abandoned the proceedings on 29.01.2010. Subsequently, Subros sold the land to M/s Akme Projects Ltd. on 23.01.2012. However, legal challenges ensued when farmers contested the acquisition actions, resulting in a Supreme Court ban on construction on 24.04.2015. The Supreme Court later declared the acquisition fraudulent on 12.03.2018, invalidating transactions between 27.08.2004 and 29.01.2010.
M/s Akme Projects Ltd. defaulted on a loan from YES Bank, leading to SARFAESI proceedings. Grandstar Realty Pvt. Ltd. (Corporate Debtor) acquired the land in an auction for Rs.40.75 crores. This led to further legal disputes, including writ petitions and the initiation of a Corporate Insolvency Resolution Process (CIRP) against Akme Projects Ltd., with home allottees filing claims. On 25.09.2020, a Section 7 application was filed to initiate CIRP against Grandstar Realty Pvt. Ltd. for a default amounting to INR 78,09,94,385.56.
The Supreme Court clarified on 13.10.2020, and further on 21.07.2022, that M/s Subros Ltd. was not under any restraint related to the land acquisition. The appellant argued that the Corporate Debtor had no financial debt towards the respondents, emphasizing it was merely an auction purchaser and not a successor or assignee of Akme Projects Ltd. The appellant also cited Supreme Court rulings to argue that no default occurred as construction delays were due to legal restraints.
The respondents maintained that by purchasing the encumbered property, Grandstar Realty Pvt. Ltd. inherited all rights and liabilities, including obligations to the homebuyers. They argued that the Corporate Debtor failed to commence construction or secure necessary permits, thus defaulting on its obligations.
The court examined whether Grandstar Realty Pvt. Ltd., as an auction purchaser, could be classified as a financial creditor and if the default was due to legal restraints. The court referred to the Builder Buyers Agreement, which included successors and transferees, binding Grandstar Realty Pvt. Ltd. to the obligations towards the allottees. The court upheld that the financial debt owed by Akme to the allottees was transferred to Grandstar Realty Pvt. Ltd. following the project's takeover under the SARFAESI Act. Additionally, the NCLAT noted that no judicial orders post-2018 prevented the company from advancing the project, and their inaction constituted a clear default.
Ultimately, the NCLAT upheld the NCLT's decision, confirming that the Section 7 application was complete and warranted admission, thus rejecting the appellant's arguments and affirming the applicability of financial debt provisions to Grandstar Realty Pvt. Ltd.
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