Canara Bank Vs Sh Vivek Kumar IP AVJ Developers Ltd I.A. No. 1301, 1302 of 2023, 7105, 7610 of 2024 in Comp. App. (AT) (Ins) No. 390 of 2023 Judgment Date: 09/01/2025 by Hon’ble NCLAT, New Delhi

Honbl’e NCLAT, New Delhi in its landmark judgement upheld the rights of lenders as Financial Creditors in CoC of Insolvent developers by acting on behalf of homebuyers through their approved project schemes floated and finance by such Financial Institutions. Further it distinguished this judgement from its previous one in case of Axis Bank Limited vs. Value Infracon India Private Limited & Anr (2020), which sends a message across the industry to understand the significance and nuances of Tri-Patriate agreement at the time project approval and financing of home buyers.

Synopsis

AVJ Developers Ltd, the Corporate Debtor (CD) under Insolvency was a renowned builder, who developed almost half a dozen residential housing projects in and around the sub urbs of New Delhi. They launched two new residential housing projects namely AVJ Heights & AVJ Society in Sector Zeta 1 and Surajpur of Greater Noida resp. around early 2019s, multiple banks & NBFCs approved the projects by executing a tri-patriate agreement and offered home loans to the buyers at competitive interest rates.

Escalation in construction cost due to prolonged delay in construction triggered by COVID 19 lockdown, made the project unviable, turning the builder insolvent and leaving the fate of homebuyers & their financier in hands of Hon’ble NCLT, New Delhi bench.

All the Financial Lenders, Operational Creditors and a minor group of home buyers represented through their Authorised Representative (AR) filed their claims as Financial Creditors before Insolvency Professional (IP) appointed, meanwhile a major group of home buyers, who are averse to the cost-time consuming, complex legal process were left with no option other than collecting the updates on the ongoing Insolvency proceeding sitting in their rentals.

Meanwhile home financiers tossed a series of incoherent DRT cases & SARFAESI proceedings against the home buyers to whom once they endorsed the project resulting in repercussions such as building a brute image for bankers, reputational loss for the Financial Institution & putting the integrity of project approvals under stake.

The legal setback for a sensible act

Sensing the situation rightly, Canara Bank one of such home financiers decided to stand with their borrowers and filed a claim as Financial Creditor before the IP of AVJ Developers Ltd on behalf of thirty two home owner whom were financed under their project approval arrangement, but IP rejected the claim quoting Sec 5 (8) (f) of IBC,2016 which empowers only the home buyers to file a claim as a Financial Creditor individually or through a Authorise Representative nominated by Hon’ble NCLT. The legal team of bank decided to know the doors of Hon’ble NCLT which went into vain, as New Delhi bench echoed the voice of IP and held that Bank can’t be treated as Financial Creditor in real estate project and it is only Homebuyers who are to be considered as the Financial Creditor as a class by quoting its judgement in case of Axis Bank Limited vs. Value Infracon India Private Limited & Anr (2020) even after hearing to the arguments of bank that it holds a DRT decree against 18 out of the 32 accounts claimed, against the Corporate Debtor, which strengths its position as a creditor under Section 3(10) of the IBC, which includes decree-holders.

Further, Hon’ble NCLT noted that the claim of financial creditor status based on the DRT decrees were infectious as they were passed disregarding laws prevailing also since bank has failed to register the security interest with the ROC within 30 days under section 77 of the companies act, a lien on the properties cannot be claimed shutting all its door.

It is worth to note a key argument advocated by the RP’s counsel which latter turned its side to uphold the rights of home financiers by Hon’ble NCLAT is that the tripartite agreement states that the primary responsibility to repay the amount lies with the homebuyers thereby negating any responsibility of indemnification on part of the CD.

A triumph for home finanicer’s rights

This time the Tireless efforts of Canara Bank yielded in a Triumph for Home Financier’s rights and of course upheld the integrity of banks and saved a business model i.e., Home Loans through Project Approval which is marketed as win-win situation for home buyers and financiers. The Case Proceedings and the land mark judgment described the nuances of the tri patriate agreement terms and its significance.

Canara Bank has filed an appeal before Hon’ble NCLAT & argued that the bank acted on behalf of other homebuyers who could not navigate the complex insolvency process and quoted a key term of tripartite agreement which explicitly provided that in case of failure by the builder, non-transfer of the dwelling units to the homebuyers or breach of terms of agreement, responsibility was fast ended on the builder to refund the bank the entire amount advanced on behalf of the borrower.

It is further argued that in the context of Section 5 (8) (i) which quoted a financial debt includes the amount of any liability in respect of any guarantee or indemnity for any money borrowed against the payment of interest, since the Corporate Debtor indemnified the amount advanced to the home buyers through the Tri partite agreement for any of its default as defined in the agreement, relationship of the Lending Bank and the Corporate Debtor is established as per the Code.

After hearing the arguments, Hon’ble NCLAT pronounced the land mark judgement impugning the Hon’ble NCLT order and approves the claims of Home Financiers as a Financial Creditor under IBC,2016, it further clarified that the distinguishable aspect of the tripartite agreement of the present appeal vis-à-vis the tripartite agreement in case of Axis Bank Limited vs. Value Infracon India Private Limited & Anr (2020) which Hon’ble NCLT relied upon is clause 16 of the tripartite agreement which fixed the primary responsibility of repayment of loan in case of any of the eventuality laid down in tripartite agreement on the builder/ Corporate Debtor and that established the relationship between the Appellant Bank and the Corporate Debtor under Sec 5 (8) (i) of IBC,2016.

IN NUT SHELL

A Lesson to Learn

It’s worth understanding the nuances and significance of Tri Patriate Agreement Terms and a need for a careful negotiation at the time of Project Approvals there by safe guarding the interest of bank and winning the confidence of home buyers.

Inclusion of financial liability terms in case of default from Builder side by clearly enlisting the probable event of defaults guarantees the banker monies and indemnifies the home buyer as well. It empowers the home financiers to establish themselves as a Financial Creditor’s in case a Developer turning Insolvent there by increasing the chance of recovery rather trailing the innocent home loan borrowers through inherent DRT and SARFAESI action.

The Key business take away is a clear liability clause in Tri patriate agreement bolsters the confidence among the home buyers as banks will stand advocating on behalf of them in cases of an approved project failing, this may turn into a Unique Selling Point (USP) for home financiers.

About the Writer – The Writer is a young practicing banker currently working in PSB, having a ten years’ experience in Banking Industry, worked at various verticals with specialisation in Trade Finance, Credit Appraisal, SARFAESI and Insolvency.

The Writer feels this article may be found useful by fellow Practicing Bankers who are working in specialised housing finance branches dealing prominently on Financing Pre-Approved Housing Projects

Contact the Author @gauthamm2