21 March 2024 Banking/Finance >> Corporate Law   |   Contract Law >> Corporate Law   |   Property/Real Estate Law >> Property & Real Estate  

Bombay High Court has issued a significant order in a redevelopment dispute, prioritizing the rights of a housing society (Petitioner) against a defaulting developer (AA Estates) undergoing a Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

Factual Matrix:

The Petitioner Society entered into a Development Agreement (DA) with AA Estates for the redevelopment of their building. However, AA Estates breached the DA by failing to pay transit rent and complete construction within the stipulated timeframe. Consequently, the Society terminated the DA and entered into a new agreement with Truearth, a different developer.

AA Estates' Objection and IBC Moratorium:

Despite the termination, AA Estates, now under CIRP, objected to the new redevelopment project. They argued that Section 14 of the IBC, which imposes a moratorium on certain actions during CIRP, prevented the Society from proceeding with Truearth.

Court's Reasoning and Rejection of Moratorium Argument:

The court rejected AA Estates' argument, holding that their rights under the DA were contingent upon fulfilling their obligations. Since AA Estates breached the DA by failing to pay rent and complete construction, their rights lacked the requisite vesting to invoke the IBC's moratorium provision.

Balancing Equities and Granting Interim Relief:

The court acknowledged the hardships faced by displaced residents due to AA Estates' defaults, including the lack of promised transit rent. Recognizing the Society's precarious situation, the court found a prima facie case in their favor. Consequently, the court granted interim relief, paving the way for the project's continuation with Truearth. This relief included directing the relevant housing authority (MHADA) to grant necessary permissions for the project.

Significance and Protection of Society's Rights:

This order prioritizes the Society's rights and ensures they can move forward with the long-awaited redevelopment. Importantly, it clarifies that a developer's insolvency proceedings under the IBC cannot be used as a shield to avoid contractual obligations or prevent residents from seeking alternative solutions.

Additional Considerations:

The court's criticism of AA Estates' attempt to exploit the IBC for its own benefit underscores the importance of preventing such tactics. Notably, the order acknowledges a prior judgment where the court addressed similar arguments raised by AA Estates in a different case.

This case serves as a precedent for housing societies facing disputes with defaulting developers undergoing CIRP. It emphasizes the courts' willingness to protect the rights of residents and ensure a fair and balanced approach during redevelopment projects.

  INSOLVENCY AND BANKRUPTCY CODE, 2016