Developer's Insolvency Cannot Block Housing Society's Bid For Conveyance Of Land And Building: Bombay High Court

A housing society's application for deemed conveyance of land and building cannot be put on hold merely because insolvency proceedings are pending against a developer, the Bombay High Court has held.

The court ruled that a moratorium under the Insolvency and Bankruptcy Code (IBC) does not prevent authorities from deciding such applications under the Maharashtra Ownership Flats Act (MOFA).

Justice Sandeep V. Marne set aside an order that had rejected a deemed conveyance application filed by Darshan Mandir Co-operative Housing Society on the ground that Corporate Insolvency Resolution Process (CIRP) proceedings were pending against Vas Infrastructure Ltd.

“Considering this peculiar statutory scheme of Section 11 of MOFA, it is difficult to hold that the deliberate act of the developer in not transferring the title in the land in violation of statutory duty under Section 11(1) results into holding of any 'asset' by him within the meaning of Section 14 of IBC, which cannot be transferred on account of imposition of a moratorium. What is effected by the Competent Authority is, not transfer of property of the corporate debtor in real sense, but mere certification that the title in the land and building has now vested in the organization of flat purchasers by reason of failure to perform statutory duty by the developer. In my view therefore, provisions of Section 14 of IBC do not come in the way of Competent Authority execrcising powers under Section 11 of MOFA,” the court held.

The society was registered in December 1991. The building received its occupancy certificate in August 2001. The original developer had agreed to convey the land and building to the society. It was also under a statutory obligation to do so. No conveyance was executed.

The society later applied for deemed conveyance. In the meantime, insolvency proceedings initiated by Canara Bank against Vas Infrastructure had been admitted. Relying on the moratorium operating during CIRP, the competent authority declined to adjudicate the application. It granted liberty to the society to file a fresh application after completion of the insolvency process or after obtaining leave from the National Company Law Tribunal.

The high court found that approach unsustainable.

Tracing the purpose behind the deemed conveyance mechanism, the court observed that the legislature introduced the provision after noticing a widespread failure by developers to transfer title. Developers in cities such as Mumbai and Pune were deliberately delaying conveyance so they could exploit additional development potential arising from FSI and TDR benefits.

“The developers in cities like Mumbai, Pune etc. were deliberately not conveying land in favour of societies so as to exploit further development potential created in the land due to sanction of additional FSI/TDR etc. The Legislature took note of the ground reality that the provisions of Section 11, as it stood prior to amendment, were not sufficient and it was taking unduly long time for decision of suits for conveyance as there was large scale failure on the part of the developers to perform statutory duty imposed under Section 11,” the court observed.

The court noted that deemed conveyance proceedings are not in the nature of recovery actions. Nor do they involve enforcement of a monetary claim against a corporate debtor. Instead, the competent authority performs a statutory function. Its role is to perfect title in favour of flat purchasers when a developer fails to discharge its legal obligation.

According to the court, allowing a developer to invoke the moratorium as a shield against conveyance would undermine the purpose of MOFA. The court observed that such an interpretation would allow developers to indefinitely delay performance of their statutory duty to convey property.

“Otherwise, errant developers would misuse the moratorium imposed on them under Section 14 of IBC to indefinitely delay conveyance under Section 11(1) of MOFA. The courts must be alive to the ground reality that several buildings in cities like Mumbai, Pune etc are in the need of redevelopment,” the court observed.

The court also examined the position of Vas Infrastructure, which claimed rights in the property through a conveyance obtained from the original owner and developer.

The court observed that, prima facie, what had been acquired appeared to be an obligation to convey the land and building in accordance with MOFA rather than an unrestricted proprietary right.

Holding that the pendency of CIRP could not prevent the competent authority from exercising its statutory powers, the court restored the society's application. It directed the authority to decide the application on its own merits and in an expeditious manner.