Dhankalash Distributors Pvt. Ltd. vs Piyush It Solutions Private Limited & Anr.

Declare that Regulation 16A (7) of the (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is ultra vires of the Code;

Direct the Interim Resolution Professional to revise the claims and the voting share assigned to creditors in a class so as to bring the same in proportion to the actual financial debt owed to the creditors in a class;

Pass an ad interim direction to the Interim Resolution Professional not to bring any agenda for voting by the committee of creditors, till the disposal of the instant application;

Pass such other orders and further orders as may be deemed necessary on the facts and in the circumstances of the case.

That the Adjudicating Authority vide its order dated 28.10.2020 allowed Company Petition (IB) No.876 (ND) of 2020 filed on behalf of the Applicant herein being a Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("the Code") for initiating the Corporate Insolvency Resolution Process ("CIRP"). That at the time of admission of the Corporate Debtor to CIRP, amount in excess of INR 1.20 Crore pursuant to default in repayment of an Inter Corporate Loan Agreement by the Corporate Debtor. That Mr. Pawan Kumar Singhal was appointed as the Interim Resolution Professional.

It is submitted by the applicant that the claim of creditors in a class (allottees) arise in the instant case on account of the breach of contract entered between them and the Corporate Debtor, as the Corporate Debtor failed to handover possession of the apartments within the timeframe mentioned in the contracts entered with the said allottees. The applicant further submitted that the claim of the allottees/creditors in the instant case shall thus, be equivalent to the "right of payment" accrued in their favour on account of such breach. That that the effect of breach of contract and "right of payment" of the allottees resulting from such breach, is clearly mentioned in the contracts entered with the allottees. That the Corporate Debtor, in accordance with the usual practice in the industry, devised a contract to record the transaction entered between itself and the allottees. It is submitted that clause 5.5 of the contract, which is applicable in the case of almost all the creditors in a class (allottees), provides the following 'right to payments/delay charges' to the homebuyers, in the event that the contract is breached i.e., when the Corporate Debtor fails to handover possession of the apartment within the timeline mentioned in the contract.

The applicant stated that the "financial debt" owed to the allottees in the instant case is equivalent to the amounts raised from such allottees and the delay charges are payable to them in terms of clause 5.5 of the contract entered between them and the Corporate Debtor. It is submitted that the IRP has however, computed the "voting share" of the creditors in a class (allottees) which is in excess of their "financial debt", which is contrary to Section 5(28) and the overall scheme of the Code. It was further submitted that the IRP has communicated that the voting share of the creditors in a class (homebuyers/allottees) has been assigned in terms of Regulation I6A (7) of the CIRP Regulations.

The applicant submitted that the IBBI (Respondent No. 2) by framing Regulation I6A (7) has taken upon itself to provide that in each and every transaction between a Corporate Debtor and its creditors in a class, the creditor in a class shall be entitled the interest (at the rate of 8% per annum), even when the contracts entered between the parties do not provide for payment of any such interest. It is submitted that as per definition of “financial debt” provided in Section 5(8) of the code, a “financial debt” may or may not include interest and therefore, legislature while enacting the Code was conscious of the fact that there may be certain financial transactions which are done for time value of money, other than payment of interest. It is submitted that as observed by the Hon’ble Supreme Court in the case of “Pioneer Urban Land and Infrastructure Ltd & Ors. versus Union of India” AIR 2019 SC 4055, the transaction entered between a developer and allottees has a "commercial effect of borrowing" as the money is paid in advance for temporary use so that the flat/apartment is given back to the lender. The Hon’ble Supreme Court observed that "Both parties have commercial interest in the same-the real estate developer seeking to make a profit on the sale of the apartment and the flat/apartment purchaser profiting by the sale of the apartment". Therefore, in real estate transactions such as those entered in the instant case between the corporate debtor and the creditors in a class (allottees), the time value of money attached to the financial debt of the allottees is the receipt of finished and completed flat/apartment and not payment of any interest.

The applicant further submitted that the allottees in the instant case are not entitled to the remedy of refund as a consequence of the breach of contract, that the IRP has admitted the claims of the creditors in a class by including an interest of 8% per annum, even in cases where the concerned creditor has filed a claim seeking possession of the apartment in terms of the contract entered between the Corporate Debtor and the creditor. It is submitted that even though the contract entitles the creditors in a class to only delay charges of 2-3% per annum for the period of delay, each creditor in a class has been given vote share by adding an interest of 8% per annum from the date of each payment to the date of initiation of CIRP in view of Regulation 16A (7). The applicant submitted that there cannot be any justifiable basis for creditors in a class to claim interest @ 8% per annum on the entire amount paid by them from the date of each payment, despite making an election/claim for specific performance of the contracts entered with the corporate debtor, i.e., possession of their apartments, despite delay/breach by the Corporate Debtor. Therefore, by providing for a 'straight jacketed' formula for admission of claims of creditor in a class, without allowing resolution professionals to admit claims of creditors in a class in view of the contracts/agreements entered between the parties, the IBBI (Respondent No.2) while framing Regulation 16A (7) has travelled beyond the power and mandate given to it to frame regulations under the Code and thus, the Regulation 16A (7) is ultra vires of the Code.

The applicant cited that in St. Johns Teachers Training Institute vs. Regional Director, National Council for Teacher Education and Ors. 1(2003) 3 SCC 3211 the Supreme Court held that:

Further, the applicant cited that the Hon'ble Supreme Court in Indian Young Lawyers Association and Ors. vs. The State of Kerala and Ors. 1(2019) 11 SCC held that:

The applicant further stated that such mandate on resolution professionals to admit claims of creditors in the class, in excess of the "actual" financial debt owed to them, apart from being contrary to the code is gravely prejudicial to the interest of other financial creditors, such as the Applicant herein. It is submitted that the adverse impact of such award of excess voting share because of Regulation 16A (7) is already being felt in the instant CIRP. It is submitted that if the claims of the creditors in a class are admitted and voting share is assigned in accordance with the “actual” financial debt owed to such creditors, the voting share of the creditors in a class would be less than 66% of the CoC. However, on account of the inclusion of 8% interest on all payments made by the creditors in a class, in terms of Regulation 16A (7), the creditors in a class have claimed a voting share of more than 66% in the CoC in the instant case. Resultantly, a handful of creditors in a class (homebuyers) who are claiming to be representatives of all creditors in a class, are misguiding homebuyers, possibly in connivance with the Corporate Debtor, and creating unnecessary hurdles in order to derail the CIRP.

The Respondent No.1 submitted that the present application is not maintainable as it seeks to challenge the Regulations issued by the IBBI. The IBBI and the Adjudicating authority are the creatures of this code. The Respondent No.1 further submitted that a challenge to the Regulation would need not be made before the appropriate legal forum seeking appropriate remedies.

The applicant further submitted that that it is trite law that an exercise of legislative power (albeit delegated) cannot be appealed before statutory tribunals that function as quasi-judicial forums. Regulation 16A (7) of the Regulations have been made under the authority of delegated legislation. In PTC India Ltd vs. Central Electricity Regulation Commission, (2010) 4 SCC 603, a Constitution bench of the Hon'ble Supreme Court of India has stated, in the context of a challenge to regulations pertaining to the Electricity Act, 2003, "[a] regulation under Section 178 is made under the authority of delegated legislation and consequently its validity can be tested only in judicial review proceedings before the courts and not by way of appeal before the Appellate Tribunal for Electricity under Section 111 of the said Act" (emphasis supplied). Similarly, with respect to regulations pertaining to the Telecom Regulatory Authority of India, the Hon'ble Supreme Court of India has held in BSNL vs. Telecom Regulatory Authority of India, (2014) 3 SCC 222, that "(i) in exercise of the power vested in it under Section 14(b) of the Act, TDSAT does not have the jurisdiction to entertain the challenge to the regulations framed by the Authority under Section 36 of the Act" (emphasis supplied). Similarly, the Regulations framed by the IBBI ought not to be challenged before the Adjudicating Authority, also as it effectively divests constitutional courts of their exclusive powers of judicial review of legislation.

The Respondent No.1 further submitted in its reply that the Financial Creditor, Dhankalash Distributors Pvt. Ltd., has been a part of the CoC since the very first meeting of the CoC held in November 2020. Since then, the IRP has computed the claims of the homebuyers with 8% interest per annum in accordance with Regulation 16A (7) of the Regulations. That the list of financial creditors with 73.19% of voting share with the homebuyers was released by the IRP on 8.03.2021, and no objections were raised to it by Financial Creditor which had 0.53% of the CoC. The dispute with respect to the claim was never raised by Dhankalash Distributors Pvt. Ltd. in any of the meetings of the CoC held since the beginning of the CIRP. Issues pertaining to calculation of claims percentage, if any, have to be raised before IRP and/or before the CoC.

The Respondent No.1 further relied upon the judgement of Hon’ble Supreme Court in Wg. Cdr. Arifur Rahman Khan and Aleya Sultana and Ors. Vs. DLF Southern Homes Put Ltd and Ors, judgment dated 24 August 2020 in Civil Appeal No 6239 of 2019, that homebuyers are entitled to "just and reasonable compensation" under the provisions of law. This just and reasonable compensation/interest is in addition to the monthly penalty that most builder-buyer agreements provide, similar to clause 5.5 of the model agreement relied upon by Dhankalash Distributors Pvt. Ltd. (which states that in case the period of delay in handing over possession exceeds 13 months, a penalty of Rs. 10/- per square foot is to be paid by the builder). Therefore, the Hon'ble Supreme Court of India has clarified beyond any doubt that the provision of interest is to be granted to homebuyers even when the RERA doesn't apply and the contract doesn't stipulate it.

a. That the present application is not maintainable before the Hon'ble Adjudicating Authority as the Hon'ble Adjudicating Authority lacks jurisdiction to entertain the challenge to the Regulations. The challenge to the vires of the regulation can be assailed only before a constitutional court under Article 226 or 32 of the Constitution of India.

b. That the Hon'ble Supreme Court in matter of Bharat Sanchar Nigam Limited vs Telecom Regulatory Authority of India and others (2014)3 SCC 222 faced the question of "Whether in exercise of the power vested in it under Section 14(b) of the Act, TDSAT has the jurisdiction to entertain challenge to the regulations framed by the Authority under Section 36 of the Act." The Apex court after observing the legal position concluded that "In exercise of the power vested in it under Section 14(b) of the Act, TDSAT does not have the jurisdiction to entertain the challenge to the regulations framed by the Authority under Section 36 of the Act". It was further observed that the aggrieved person shall be free to challenge the validity of the regulations framed under Section 36 of the Act by filing appropriate petition before the High Court.

c. The Respondent No. 2 further submitted that the section 240 of the Code empowers the IBBI to make regulations to carry out the provisions of the code. That the section 240, Sub-section (1) provides general regulation making powers to the IBBI, whereas sub-section (2) provides for specific matters on which regulations can be made by the IBBI without prejudice to sub-section (1). Therefore, the IBBI can make regulations on matters as long as they are consistent with the Code even if such matter has not been listed under sub-section (2) of section 240. It is reiterated that the impugned Regulation is aiding and is supplementing to the scheme of Code.

d. The Respondent No. 2 stated that there exists a contractual arrangement between the CD and allotees regarding computation of penalty in case of delay, and the way in which such penalty is to be computed. There exists a claim which is “supported by cogent admissible evidence” and hence there is no dispute as to Regulation 16A (7) being ultra vires. As regards, the issue regarding computation of financial debt which has an inclusion at the rate of 8% unless a different rate has already been agreed by the parties. It may be submitted that the same has been provided as the money paid by the home buyer dots not have any explicit rate of interest in all cases, and it may create difficulty in estimating the amount of claims as on the date of commencement of insolvency for an insolvency professional. Section 18 (b) of the Code casts a duty upon the IRP to receive and collate all the claims submitted by creditors to him, pursuant to the public announcement. Regulation 13 of CIRP Regulations provides that the IRP or RP, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims and thereupon maintain an updated list of creditors providing details of amount claimed by them. Thus, a notional interest at the rate of 8% simple interest has been provided in the CIRP Regulations under Regulation 16A (7) for the aid of insolvency professionals to deters frivolous litigations regarding the amount of claim in this regard that may also waste the precious time of Adjudicating Authority. The Respondent No. 2 further cited that in matter of Col. Sanjeev Dalal (Retd.) vs. International recreation and Amusement Pvt. Ltd. CP(IB) 297(PB)/2018, the AA vide order dated 13th May, 2019 observed that when no rate of interest has been agreed to be payable by the Corporate debtor in the event of default, it would be appropriate that interest at the rate of 8% as specified by the Regulations 16A (7) of the CIRP Regulations must be upheld.