'Floodgates' Would Open: NCLT Bengaluru Rejects Third-Party Homebuyers' Bid To Intervene Before CIRP Admission

The National Company Law Tribunal (NCLT) at Bengaluru has recently held that allowing a group of homebuyers to intervene in a developer's insolvency petition at the pre-admission stage would "amount to opening the floodgates" for objections on extraneous considerations.

It reiterated that its inquiry at that stage is confined to examining the existence of a financial debt and default.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada dismissed an impleadment application filed by a group of homebuyers seeking to intervene in an insolvency petition against Frontier Shelters Pvt Ltd.

Relying on the NCLAT judgment in Surinder Pal Singh & Ors. Vs. Spaze Towers Pvt. Ltd., The tribunal held, "Allowing intervention at this stage would amount to opening the floodgates for every homebuyer to oppose or support the petition on extraneous considerations, which is wholly impermissible under the scheme of the IBC."

The application was filed by a group of homebuyers of the Frontier Heights project. They sought to be impleaded in an insolvency petition filed by M.P. Krishnan against Frontier Shelters Pvt Ltd.

The applicants contended that disputes over ownership of the project land were already pending before a civil court. They also relied on a Karnataka High Court order restraining the sale of 54 flats in the project until disposal of the suit.

They further alleged that Krishnan was not a genuine allottee or homebuyer. According to them, his claimed allotment arose from an external arrangement. They also alleged that he had taken inconsistent factual positions before different forums in collusion with the corporate debtor. According to the applicants, this was intended to bypass subsisting court orders and leave the company without assets.

The applicants argued that admitting the insolvency petition without impleading them would seriously prejudice the interests of bona fide homebuyers.

Relying on the National Company Law Appellate Tribunal's ruling in Deb Kumar Majumdar v. State Bank of India, the tribunal reiterated that only the financial creditor and the corporate debtor have a right to be heard before admission of a petition.

It observed, "The scope of consideration at the pre-admission stage of a petition under Section 7 of the Code is extremely narrow and is limited only to the existence of a financial debt and the occurrence of default by the Corporate Debtor. At this stage, the Adjudicating Authority is not required to adjudicate inter se disputes between the different groups of Homebuyers, allegations of inducement, misrepresentation, breach of assurances, or disputed questions of fact regarding the status of completion of the real-estate project."

The tribunal held that the applicants' objections, including those based on RERA disclosures and pending civil proceedings, raised disputed questions of fact. These related to Krishnan's status as an allottee, the effect of the pending litigation and the alleged collusion with the corporate debtor.

The tribunal held that such issues fell outside the limited scope of inquiry at the pre-admission stage of a petition under Section 7 of the Insolvency and Bankruptcy Code.

It further observed that, if the insolvency petition is admitted, the applicants would be free to submit their claims before the resolution professional for verification and inclusion in the committee of creditors.

The tribunal also clarified that allegations of fraudulent or malicious initiation of insolvency proceedings could be examined separately under Section 65 of the Insolvency and Bankruptcy Code.

Subsequently, the tribunal dismissed the impleadment application.

For Petitioner: Advocate Saji P John

For Respondent: G Satyanarayana CA