In an important decision dated 2 November 2023, the National Company Law Appellate Tribunal (NCLAT), New Delhi, in the case of Sabari Realty Private Limited vs Sivana Realty Private Limited & Ors, clarified key issues relating to homebuyers’ rights, voting powers, and fairness in resolution plans under the Insolvency and Bankruptcy Code, 2016.
This judgment is particularly relevant for homebuyers involved in insolvency proceedings of real estate companies, where decisions are taken collectively and may not always align with individual expectations.
Background of the Case
The appellant, Sabari Realty Private Limited, challenged three orders passed by the NCLT. The dispute arose during the corporate insolvency resolution process, where a resolution plan for the real estate project had already been approved by a large majority of creditors, including homebuyers.
The appellant raised concerns regarding its voting rights, the classification of other parties, and the fairness of the resolution plan, especially in relation to how different categories of homebuyers were treated.
Key Issues Raised Before the Tribunal
The case revolved around four main questions:
First, whether the appellant was correctly classified as a “related party” and therefore not allowed to vote on the resolution plan.
Second, whether another entity, KASPL, should have been treated as a related party and restricted from voting.
Third, whether an individual homebuyer can challenge a resolution plan even after it has been approved by the majority of homebuyers.
Fourth, whether it is legally valid to treat certain homebuyers differently from others under the same resolution plan.
What the Tribunal Observed
Status of the Appellant as a Related Party
The Tribunal noted that the appellant had itself described its status as a related party in its own claim documents. It also observed that a prior transaction for transfer of shares was never completed or officially recorded. As a result, the appellant continued to remain a shareholder when the insolvency process began. Based on these facts, the Tribunal held that the appellant was correctly classified as a related party and was rightly denied voting rights.
Whether KASPL Was a Related Party
The Tribunal examined whether KASPL exercised control over the company. It found that KASPL held only 16% shareholding, which is below the threshold generally considered for control. It was also noted that its director had resigned well before the commencement of insolvency proceedings. In the absence of evidence showing control or influence, the Tribunal held that KASPL was not a related party and was allowed to vote.
Can an Individual Homebuyer Challenge the Plan?
The Tribunal clarified an important principle regarding homebuyers. It observed that homebuyers are treated as a single class of creditors and vote collectively through an authorized representative.
Once a majority of this class approves a resolution plan, all members of that class are bound by the decision. An individual homebuyer cannot challenge the plan merely because they are dissatisfied with the outcome. The Tribunal emphasized that individual dissent cannot override the collective decision of the majority.
Different Treatment of “Affected” and “Unaffected” Homebuyers
The resolution plan divided homebuyers into two categories—“Affected” and “Unaffected.” The appellant argued that this was unfair because the “Affected” group received significantly reduced flat area.
The Tribunal, however, found that this classification was based on a logical distinction. The “Affected” homebuyers were those who had been allotted flats without obtaining the required No Objection Certificate (NOC) from the bank (LIC), which had a mortgage over the project. Due to the absence of such approval, their allotments were legally uncertain from the beginning.
On this basis, the Tribunal held that differential treatment was justified and not arbitrary.
Legal Provisions Considered
The Tribunal examined relevant provisions under the Insolvency and Bankruptcy Code, 2016, including:
- Section 5(24), which defines “related party”
- Section 25A, which governs voting by classes of creditors such as homebuyers
- Section 30(2)(e), which ensures that a resolution plan complies with applicable laws
It also referred to Section 59 of the Companies Act, 2013, which deals with rectification of the company’s register of members.
Key Legal Principle Established
The Tribunal reaffirmed the principle of “commercial wisdom” of the Committee of Creditors. This means that decisions taken by the majority of creditors, including homebuyers, are final and should not be interfered with lightly.
Two important points emerge from this judgment:
First, once a majority of homebuyers approve a resolution plan, individual buyers cannot challenge it simply because they are dissatisfied.
Second, different treatment within the same class of creditors is permissible if there is a reasonable and lawful basis for such classification.
Final Outcome of the Case
The NCLAT dismissed all three appeals filed by the appellant. It upheld the validity of the resolution plan, confirmed that the appellant was a related party without voting rights, and refused to direct any changes in the company’s shareholder records.
The resolution plan, which had been approved by 99.96% of the creditors, was allowed to proceed.
What This Means for Homebuyers
This judgment explains how decisions are taken in insolvency cases involving real estate projects. Homebuyers participate as a group, and majority approval plays a decisive role.
It also clarifies that not every difference in treatment is illegal. If there is a valid legal reason behind it, such classification can be upheld.
For homebuyers, the key takeaway is that participation in voting is crucial, and once a majority decision is made, it becomes binding on all members of that class.