Insolvency Process Against Hacienda Developer of Lotus 300 Project

Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted with the intent to revive and rehabilitate companies with a view to maximize value for all stakeholders. IBC Act consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons. This is done with the objective to promote entrepreneurship, availability of credit and balance the interest of all stakeholders.

This provision of the Code applies to any company incorporated under the Companies Act, 2013 or under any previous company law or a company governed by any Special Act, any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008, partnership firms and individuals in relation to their insolvency, liquidation or bankruptcy as the case maybe.

IBC deals with claim resolution between corporate debtor and creditor. A corporate debtor[1] which means a corporate person who owes a debt to any person and a creditor[2] which means any person to whom a debt is owed and includes a financial creditor, a secured creditor and unsecured creditor and a decree holder. Debt[3] is a liability or an obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. A default arises when there is non-payment of debt in whole or any part of the instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor.

Part II dealing with insolvency resolution and liquidation for corporate debtors in IBC applies when the minimum amount of default is Rs. 1 Crore. The Act recognizes two types of creditors- (1) 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 and (2) operational creditor– means a person to whom an operational debt in respect of provisions of good or services including employment or a debt in respect of the repayment of dues is owed and it includes any person to whom such a debt has been legally assigned or transferred.

What is the procedure to initiate CIRP?

Corporate Insolvency Resolution Process (CIRP) can be initiated in case the corporate debtor commits a default. The process can be initiated by financial creditor, operational creditor or the corporate debtor itself. Such a process is initiated by filing an application before the Adjudicating Authority before a default has occurred. Financial creditor may file this application by itself or jointly with other financial creditors.

The Application by financial creditor(s) has to furnish record of the default recorded with the information utility or such other record or evidence of default. It should propose a name of the resolution professional proposed to act as an interim resolution professional (IRP).  

Are homebuyers Financial Creditors?

The 2018 amendment to the IBC, 2016 included allottees in a real estate project (homebuyers) in the category of financial creditors which allowed them to initiate insolvency proceedings against the Builder. Though due to the fact that there can be thousands of Homebuyers in a project and one Homebuyer initiating the insolvency proceeding can jeopardize the interest of thousands of other Homebuyers, a threshold was proposed. The code was once again amended in 2020 and this new amendment introduced a bar, where at least 100 homebuyers or 10% of total Homebuyers of the same project, whichever is lesser are required to file an insolvency application against the builder.

Rights of Home Buyers?

IBC recognises homebuyers as financial creditors. However, originally they were not treated as financial creditors and their status as operational creditors was also doubted. The suffering of homebuyers came to light in the Supreme Court after the collapse of the housing projects of Jaypee Infratech Ltd. (Chitra Sharma v. Union of India, 2018 18 SCC 575) and Amrapali Group of Companies (Bikram Chatterji v. Union of India, 2019 19 SCC 161). Thereafter, the government constituted Insolvency Law Committee (ILC) to consider amendments to IBC. The Committee in its report recommended that ‘homebuyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of homebuyers by Hon’ble Supreme Court in ongoing cases’. This was accepted by the Supreme Court. Thereafter, the IBC (Second Amendment) Act, 2018 added to the definition of financial debt under Section 5(8) an explanation that amounts raised from allottees of real estate projects (as defined in the Real Estate (Regulation and Development) Act, 2016) would be financial debts.

However, landowners who have been allotted flats in real estate project in consideration of lands given by them for development of such a project are not homebuyers.

In the case of Pioneer Urban Land and Infrastructure Ltd.[4], the Supreme Court held that Insolvency and Bankruptcy Code, 2016 is a beneficial legislation which may be utilized to help the Corporate Debtor back to its feet.

Homebuyers are allowed to participate in IBC process only as a class, i.e. by becoming members of the committee of creditors (COC) and participate in its meetings.

Homebuyers can initiate CIRP process only as a Class i.e., CIRP is initiated only if the petition is joined by atleast 10% of the total number of homebuyers of the same real estate project or 100 homebuyers of the same estate project, whichever is less. This was incorporated by way of IBC (Amendment) Act, 2020.

Individual homebuyers are entitled to file individual claims before the RP and obtain their amount against these claims as per the resolution plan or liquidation process.

Individual homebuyers are entitled to take part in and vote at meetings convened by their representatives.

What happened to the Hacienda Projects Private Limited, the developer of Lotus 300 Project?

In the case of IndusInd Bank Limited v. Hacienda Projects Private Limited[5] before the National Company Law Tribunal (NCLT) New Delhi Bench (Court II), IndusInd Bank Limited filed the petition under Section 7 of IBC, 2016 read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 to initiate corporate insolvency process against Hacienda Projects Private Limited (hereinafter, the ‘Hacienda’).

Hacienda is a company incorporated on 23.02.2010 under provisions of Companies Act, 1956. It was sanctioned a loan of Rs. 70 crores out of which an amount of Rs. 64.5 crore was disbursed to Hacienda by 28.11.2017. Hacienda failed to repay the loan instalments and hence was declared non-performing asset (NPA) on 29.12.2020 as per RBI guidelines. Thereafter, IndusInd through a loan recall cum guarantee invocation notice dated 29.06.2021 recalled the credit facility and invoked the guarantees with respect to the said facility and thereby requested Hacienda to pay outstanding amount. In 30.06.2021 IndusInd also issued a notice to Hacienda under Section 13(2) of the SARFAESI Act. However, Hacienda failed to make the payment.

Details of the case:

1. Amount claimed to be in default and the date on which the default occurred: Rs. 33,00,42,833.09/- as on 28.02.2022.
2. Date of default: 30.04.2021 (default of 1^st instalment by the corporate debtor, after exclusion of amount in terms of Section 10A of the Code) and 29.06.2021 (date of loan recall notice) and the default is still continuing.
3. Arguments by Hacienda:
   1. Hacienda argued that the project has 6 towers out of which construction of 4 towers is 100% complete and for the remaining 2 towers is 99% complete. Further, all the 330 apartments/units in the Project have been sold and possession is offered of which 301 apartment owners have taken possession. External development of central park and other surrounding area is at final stage and construction of the community club is 80% complete.
   2. Hacienda claimed that it has completed the project and it remains a financially viable entity undergoing a temporary hardship. Further, it pointed out that it has repaid an amount of Rs.33 crore out of the Rs. 64.5 crore.
   3. Hacienda relied on Supreme Court’s decision in Vidarbha Industries Power Ltd. v. Axis Bank Ltd., 2022 SCC Online SC 841 wherein it was noted that mere existence of a debt while does give the right to apply for initiating CIRP but the Adjudicating Authority must apply its mind to a spectrum of relevant factors such as financial health and viability of the respondent and feasibility of CIRP.
4. Held:
   1. That despite the claim of selling 301 units out of 330 Hacienda has failed to repay its financial debt. Hence, there is no reason to not initiate CIRP.
   2. Hence, the tribunal decided to admit in terms of Section 7(5) of the IBC and accordingly moratorium was declared in terms of Section 14(1)(a),(b),(c) &(d) of the Code.
   3. Appointed Mr. Ayyagari Viswanadha Sarma as IRP.

4. Insolvency commencement date in respect of corporate debtor: 11-11-2022
5. Estimated date of closure of insolvency resolution process: 10-05-2023
6. Last date of submission of claims- 25-11-2022

Who is the Insolvency Professional?

Insolvency Professional[6] is the person enrolled under section 206 with an insolvency professional agency as its member and registered with the board as an insolvency professional under section 207. Chapter IV of the Act deals with Insolvency Professional. Functions of IRPs[7] is when any insolvency resolution, fresh start, liquidation or bankruptcy process has been initiated. IRP is responsible to conduct the proceedings of CIRP and also to ascertain the operations of the corporate debtor as a going concern. IRP’s appointment is temporary until a Resolution Professional is appointed by the Committee of Creditors (COC).

What are the duties of IRP?

Code lays down the following duties of the IRP:

1. Collate information pertaining to the operations, assets and finances of the corporate debtor to understand its financial position.
2. Gather all the claims made by the creditors against the corporate debtor.
3. Form the COC.
4. Manage finances and govern the operations of the corporate debtor as a going concern until an RP is appointed by the COC.
5. Take custody of all the assets, tangible or intangible, in the name of the corporate debtor until such process is in motion.
6. Any other duties as directed by the Insolvency and Bankruptcy Board of India (IBBI).

What are the duties of a Resolution Professional after appointment by COC?

1. Thereafter Resolution Professional (RP) is appointed by COC. RP is authorised by Section 23 of the Code to conduct the CIRP.
2. He has to moderate all the stages of CIRP and ensure smooth and timely execution of the process. The RP remains responsible for the going concern of the operations until the execution of the resolution plan.
3. His most important duty is to ensure that operations of the corporate debtor is continued as a going concern.
4. RP takes control of the assets and finances of the corporate debtor.
5. He protects and preserves the value of such assets and ensures they remain unfettered until a resolution plan is executed.
6. He also prepared an information memorandum which in turn assists the resolution applicant to compile a resolution plan.

What can the homebuyers in this project expect?

1. After the NCLT passed an order dated 11.11.2022 a public notice/ Form-A was issued by the IRP on 13-11-2022 in leading newspapers of the country inviting all the creditors of Hacienda Projects Private Limited to file their claim as per their category. .
2. As per the Public Notice, the last date to file the claim is 25-11-2022. 
3. The creditors must know in what category they fall and file the appropriate form accordingly- Real estate Allottee.
4. Link of the public notice: https://drive.google.com/file/d/1Frdoi77080NWD5cLTepQvD93hhFq2z8M/view?usp=drivesdk
5. The details of the entire CIRP process is continually updated on the website created by the IRP available at Hacienda Projects – Lotus 300 (lotus300cirp.in)

What are the types of creditors under the Code:

Things to be ensured by the Home Buyers?

1. Homebuyers have to fill form CA. Category of creditor shall be chosen carefully and the form must be filed properly and the same must be submitted with appropriate proof before 25-11-2022.
2. Address and email to be used for correspondence with the interim resolution professional: Deloitte India Insolvency Professionals LLP, 7^th Floor, Building 10, Tower-B, DLF Cyber City, Phase-II, Gurugram, Haryana-122002, email:- inhpplip@deloitte.com
3. Allottees must take note of the fact that the IRP usually creates a whatsapp/telegram group in which information is updated. The link to the same is provided by the IRP in the email sent to the creditors by it.

How to file the Claim Form?

1. Sample on how to fill out a claim form can be assessed by clicking on this link– Form CA.
2. The application of the claim shall be made to the interim insolvency resolution professional, Mr. Mr. Ayyagari Viswanadha Sarma. Following is the list of instructions that must be followed while following the Claim form.
3. Personal Details: The buyer has to fill out his name in the column named as the name of the financial creditor and must provide his personal details like identification number (eg. Aadhar Card no.), email id, etc. It is pertinent a note that if there is more than one allottee the name of all the allottees must be mentioned along with their personal details.
4. Total Amount of Claim: In the total amount of claim the buyer must fill the principal amount and add interest to the principal amount @ MCLR +2 % ( unless specified on the aforementioned website). The total amount of the claim will be the sum of the principal amount and the interest added thereon. A detailed calculation sheet should be enclosed with the claim form and the interest will be calculated on each payment separately. For eg., if someone made a payment of ₹120 in 2013 and ₹200 in 2014, then interest on payment of ₹120 shall be calculated from 2013, and interest on payment of ₹200 shall be calculated from 2014.
5. Additional Documents:  The Creditor/ Claimant must attach all the relevant proves to back his claim. For example, the creditor can attached with the document the allotment letter, booking letter, builder buyer agreement/agreement to sale, loan sanction documents, payment receipts, the complaint made before RERA authority (if applicable), orders of authority (if applicable), etc.
6. Details of how the debt was incurred: The Creditor/ Claimant must explain in brief how the debt was incurred. For e.g. he must mention all the back details on how and when he bought the property and made the payments etc.
7. Bank Details:  The claimant must then mention the bank details in which he wants the money to be transferred. It is also advisable that in the case of joint property details of the joint account of both the buyers should be added.
8. Name of Insolvency Professional: The buyers then must choose an insolvency professional of their choice from the given options of insolvency professionals mentioned in the Public Notice, to represent them in further proceedings.
9. Miscellaneous: At last buyers must sign the declaration and verify that but details mentioned by them are correct and that nothing is concealed by them.

Conclusion:

Filing of claim can be a tricky affair and not filing it properly may lead to non-acceptance of the claim. Thus, the same must be followed properly and with proper care and attention. In case of any doubt, while filing the claim, advice from the appointed interim insolvency resolution professional can be taken. Moreover, one can also seek legal advice from any practicing advocate or practicing CA or CS.