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SECTION 14 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

Supreme Court comes to the rescue of the homebuyers faced with the defaulting builders of stalled projects trying to take refuge under the Moratorium provision provided in section 14 of the Insolvency and Bankruptcy Code, 2016.

 
 

In a recent Judgment pronounced on September 8, 2021, the Hon’ble Supreme Court of India in the case of Anjali Rathi and Ors. vs. Today Homes and Infrastructure Pvt. Ltd. and Ors. (08.09.2021 - SC) : MANU/SC/0649/2021, reiterating the law declared in terms of the ratio of another Judgment in the case of P. Mohanraj v. Shah Bros. Ispat (P) Ltd. (1.3.2021 - SC) MANU/SC/0132/2021 ruled that the moratorium provision under Section 14 of the Insolvency and Bankruptcy Code, 2016 was only in relation to the Corporate Debtor and not in respect of the directors/management of the Corporate Debtor.

What would the above mean and how does the above ruling help the homebuyers?

Of late, there has been a tendency of the defaulting builders to, in order to avoid complying with the Builder buyer agreement conditions or refunding the money of the home buyers in compliance with the judgements passed by consumer courts or to avoid execution proceedings thereof, apply for insolvency and escape the clutches of law after siphoning off the money in an irresponsible manner owing to their own mis-management and/or inefficiency.

That the defaulting builders in order to avoid execution proceedings and to face the consequences of Judgements passed by various Judicial Fora against them resort to taking recourse to insolvency proceedings under the insolvency and bankruptcy code, 2016 and similar move was recently taken by one of the renowned builders in NOIDA who approached the NCLT under section 10 of the Insolvency and Bankruptcy Code, 2016 seeking initiation of Corporate Insolvency Resolution Process against itself.

That there is a provision under section 14 of the Insolvency and Bankruptcy Code, 2016 in terms of which if the insolvency petition filed by a company (including the builder) is admitted by the National Company Law Tribunal or the Adjudicating Authority as they are normally addressed as, a moratorium is declared thus preventing initiation and/or continuation of a variety of legal action including execution of decrees, judgments and orders against the Corporate Debtor.

Section 14(1) of the IBC reads as follows:

14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely—

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”

In the case of P. Mohanraj, the Hon’ble Supreme Court while dealing with the context of proceedings u/s 138 of the Negotiable Instruments Act, had clarified that the moratorium as such under section 14 of the Insolvency and Bankruptcy Code was only in relation to the Corporate Debtor and not in respect of the directors/management of the Corporate Debtor, against whom the proceedings u/s 138 of Negotiable Instruments Act, being criminal in nature, could continue though it would stop in so far as against the Corporate Debtor. As per the ratio of the Judgment in the P. Mohanraj case, the Supreme Court had ruled that the natural persons mentioned in Section 141 shall continue to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.

While ruling on the aforesaid basis, the ratio of the Judgment by the Apex Court the case of Anjali Rathi clarified that the declaration of moratorium under section 14 of the Insolvency and Bankruptcy Code would not prevent initiation of the proceedings against the promoters of the Corporate Debtor as such.

In view of the above, the homebuyers pursuing their legal remedies before the Consumer Court(s) or RERA and faced with the situation of the defaulting builder of a stalled project deceptively trying to escape its liability by taking refuge in terms of a declaration of moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 shall not be prevented from pursuing execution of the judgment/decree/award/order passed in their favour and may pursue their remedies against the promoters of the Corporate Debtor as the builder would have been so defined in the declaration of moratorium.

It may be reiterated as has been clearly outlined, a criminal complaint before the Economic Offences Wing (EOW) or the concerned police, as the case may be, must be lodged to instil a feeling of alarm for the promoter of an impending arrest, criminal prosecution besides consequent sentence and punishment as per law for the offences of breach of trust, cheating and fraud besides others as the case may be.

 

Conclusion

Consumer Protection Act, 2019, Real Estate (Regulation and Development) Act, 2016, and Criminal Prosecution by way of a complaint before the EOW or the local police definitely remain efficacious remedies when already set in motion by the homebuyers, however, if there is an attempt by the defaulting promoter to deceive the homebuyers by acting malafide to wriggle out of the situation and trying to escape its responsibilities by taking refuge under Sections 14 of Insolvency and Bankruptcy Code, 2016, execution is possible besides criminal prosecution remaining another most appropriate legal remedy available to the homebuyers for redressal of their grievances against the promoters in default of their obligations.

One more important and leading factor is that the legal remedies under Consumer Protection Act, RERA and Criminal prosecution are options available for the subscribers of residential or commercial properties alike and they are not distinguished from each other on the basis of the residential or commercial nature of properties they subscribed to and were never delivered.

P.S. – All and any kind of clarifications, in connection with the opinion expressed above, are welcome, however through direct contact with the author.

 

Rakesh Taneja

Advocate, New Delhi

www.tanejalawoffice.com

Email: tanejalawoffice@gmail.com

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