In a landmark decision under the Insolvency and Bankruptcy Code, the NCLT Mumbai Bench determined that where a property was purchased by way of payments made to a corporate debtor, the buyers automatically had a statutory charge created in their favor because of Section 55(6)(b) of the Transfer of Property Act. Buyers Who Pay for Property Can Become Secured Creditors Under IBC The Update The NCLT Mumbai found that the buyers who had paid a sum of Rs.
In a landmark decision under the Insolvency and Bankruptcy Code, the NCLT Mumbai Bench determined that where a property was purchased by way of payments made to a corporate debtor, the buyers automatically had a statutory charge created in their favor because of Section 55(6)(b) of the Transfer of Property Act. The Tribunal held that such buyers could be regarded as secured creditors within the meaning of the IBC to the extent of the amount paid by them.
Key Takeaways
- In a landmark decision under the Insolvency and Bankruptcy Code, the NCLT Mumbai Bench determined that where a property was purchased by way of payments made to a corporate debtor, the buyers automatically had a statutory charge created in their favor because of Section 55(6)(b) of the Transfer of Property Act.
- Buyers Who Pay for Property Can Become Secured Creditors Under IBC The Update The NCLT Mumbai found that the buyers who had paid a sum of Rs.
- 17.5 crores towards the purchase of the property of the corporate debtor has a statutory charge under section 55(6)(b) of the Transfer of Property Act, 1882 and were also secured creditors under IBC.
- Bhalchandra Laboratories, the NCLT confirmed the buyer's charge under Section 55 (6) (b) by which the payee can file a claim against the acquirer of the property also.
- The judgment also clarifies how statutory charges created under property law would fall under the IBC definition of security interests even in the absence of registration procedures as is customary for secured transactions.
Buyers Who Pay for Property Can Become Secured Creditors Under IBC
The Update
The NCLT Mumbai found that the buyers who had paid a sum of Rs. 17.5 crores towards the purchase of the property of the corporate debtor has a statutory charge under section 55(6)(b) of the Transfer of Property Act, 1882 and were also secured creditors under IBC.
The Impact
This favorably alters the process of bona fide property purchasers when insolvency occurs by including statutory charges as security interests under the IBC.
The Action
It is essential that liquidators and other insolvency practitioners properly scrutinise all statutory charges created by property transactions while creditors are being validated in liquidation.
Background of the Case
This dispute was between the liquidation estate of Brajesh Construction Private Limited before the NCLT Mumbai Bench. The corporate debtor had a property called AVL Tivona City, in Rajasthan. This property was mortgaged to DHFL, following default on debt repayment by the company.
In the SARFAESI proceedings filed by DHFL, the appellants entered into negotiations to acquire the asset and clear the dues through a one-time settlement. Firstly, the settlement amount was set at Rs. 22 crores, After that inflating to Rs.19 crores. The final figure was settled for Rs. 17.5 crores. Payments were accepted directly by DHFL from the buyers towards the settlement and large sums were paid before the proceedings were initiated against the corporate debtor in insolvency. But, CIRP came into play before the execution of final sale deed and corporate debtor was put into liquidation.
Issue Before the NCLT
The primary matter before the Tribunal was whether the buyers who had paid money for the purchase of the property should be regarded as secured creditors for the purposes of the liquidation. The liquidator acknowledged the principal claim amount but designated the buyers as unsecured creditors. The buyers contended that, under s.55(6)(b) of the Transfer of Property Act, a statutory charge immediately attached to the property in their favour upon payment of part of the purchase money. Because of this, they sought the benefit of protection as secured creditors, falling in the ambit of Section 3(31) of the Insolvency and Bankruptcy Code.
How Section 55(6)(b) Created a Statutory Charge
Under section 55(6)(b) of Transfer of Property Act, a buyer has a charge on seller's property for the purchase money paid in advance for delivery. This is an automatic provision unless the buyer unreasonably refuses to accept delivery of the property. The Tribunal noted that the statutory charge is, by operation of law, independent of a registered mortgage or contractual security. It is argued relying on Supreme Court decisions as the Delhi Development Authority v. In Skipper Constructions and Videocon Properties Ltd. v. Dr. Bhalchandra Laboratories, the NCLT confirmed the buyer's charge under Section 55 (6) (b) by which the payee can file a claim against the acquirer of the property also.
NCLT’s Interpretation Under the IBC
The Tribunal then considered whether that statutory charge fell within the definition of a "security interest" under the Insolvency and Bankruptcy Code. Section 3(31) of the IBC defines a security interest to encompass the fee mortgage charge and encumbrance as well as any other agreement or arrangement that ensures the payment of the debt. The liquidator had argued that the buyers could not be considered as secured creditors as charge had not been registered with ROC, CERSAI or information utilities as mandated by Regulation 21 of the Liquidation Regulations. Yet, the Tribunal also ruled against this disparaging narrow view. It Because of this followed that, as soon as there was a statutory charge, Section 55(6)(b) was a "security interest" within the meaning of the IBC. The NCLT also noted that non-registration would not eliminate the statutory character of the charge created by operation of law.
Why the Buyers Were Treated as Secured Creditors?
The Tribunal has found that the appellants had paid Rs. 17.5 crores about purchase of the subject property as well as towards the settlement of the dues of DHFL. Because the payments were evidenced by documents, like the agreement of sale and the certificates of settlement issued by DHFL, the purchaser obtained a charge by statute over the property up to that limit. So, the Tribunal ordered that the respective purchasers be recognised as secured creditors during winding-up proceedings. Whereas, the NCLT limited the secured creditor recognition only to that amount actually paid, i.e. 17.5 crore. The Tribunal refused to treat the claim of larger sum, as the buyers could show actual payments of only Rs.17.5 Crore.
Why Interest Claim Was Rejected?
Besides principal money, the buyers also claimed paid up interested amounts to the tune of more than about Rs. 35 crores. The Tribunal then considered whether the buyers had the right under any of the contractual clauses they relied on, to interest on the amounts paid. During the hearing, the buyers affirmed that the contract forms had no terms on awarding interest. In consequence of this unenforceability of the contractual sum, the NCLT dismissed the interests claim in full. The Tribunal found that the statutory charge covered the original purchase price but no interest could be claimed absent an express contractual agreement.
Key Legal Takeaways
This is significant as it enhances protection available to honest purchasers in insolvency. The judgment also clarifies how statutory charges created under property law would fall under the IBC definition of security interests even in the absence of registration procedures as is customary for secured transactions. Another implication of this decision is that insolvency tribunals are showing an increasing tendency to acknowledge the extent of the credit rights and equity while adducing creditors in liquidation context. Simultaneously, the judgment underlines the crucial importance of a product of painstaking contract drafting.
Although the investors had achieved secured creditor status for the principal sum paid, they were unable to recover huge interest claims since there was no Interest clause. Because of this, the case demonstrates that documentations still carries considerable weight in real estate and insolvency dealings.
Conclusion
The NCLT Mumbai decision in Akme Sarvodaya Dreamventures LLP v. Megha Agrawal is a landmark development in insolvency law involving property buyers and statutory charges.
If the buyers are deemed secured creditors based on the read together provision in S55(6)(b) of the Transfer of Property Act and S3(31) of the IBC, the Tribunal effectively enhanced legal safeguards for purchasers who have paid significant consideration for the property before the onset of insolvency proceedings.
The message of this case is also that property rights cannot be overlooked in insolvency law because of lack of registration requirements. The decision demonstrates to all users (including buyers and developers, and insolvency professionals and liquidators) the ways in which modern day corporate disputes straddle the boundary between property law and insolvency law.
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NCLT Holds Homebuyer as Secured Creditor Under Section 55(6)(b) of TPA and IBC+
In a landmark decision under the Insolvency and Bankruptcy Code, the NCLT Mumbai Bench determined that where a property was purchased by way of payments made to a corporate debtor, the buyers automatically had a statutory charge created in their favor because of Section 55(6)(b) of the Transfer of Property Act. Buyers Who Pay for Property Can Become Secured Creditors Under IBC The Update The NCLT Mumbai found that the buyers who had paid a sum of Rs.