The Bombay High Court has ruled that the pendency of Corporate Insolvency Resolution Proceedings (CIRP) against a developer or land holder cannot be used as a ground to deny or indefinitely postpone deemed conveyance proceedings under the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA).
The bench of Justice Sandeep V. Marne has observed that the statutory obligation to convey title in favour of flat purchasers survives insolvency proceedings and is not overridden by the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).
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The bench set aside an order of the Competent Authority which had refused to adjudicate a deemed conveyance application solely because CIRP was pending against a company claiming ownership rights over the property.
The petitioner housing society was formed by flat purchasers in a residential building situated in Borivali, Mumbai. The original developer had constructed the building, sold flats to purchasers through agreements executed under MOFA and was under a statutory obligation to convey the land and building to the society. Despite issuance of the Occupancy Certificate and formation of the society, the conveyance was never executed.
Subsequently, another company claimed to have acquired rights in the property through a conveyance from the original land owner and developer. The society challenged that conveyance and later filed an application for unilateral deemed conveyance under Section 11 of MOFA.
During the pendency of the deemed conveyance proceedings, insolvency proceedings were initiated against the company claiming ownership rights in the property. The National Company Law Tribunal admitted a Section 7 application filed by Canara Bank and imposed a moratorium under Section 14 of the IBC. Relying upon the insolvency proceedings, the Interim Resolution Professional opposed the society’s application. The Competent Authority accepted the objection and refused to adjudicate the application until completion of CIRP or until permission was obtained from the NCLT.
The society challenged that decision before the High Court.
The principal question before the Court was whether initiation of CIRP and the moratorium under Section 14 of the IBC prevent the Competent Authority from exercising powers under Section 11 of MOFA for grant of deemed conveyance.
The Court also examined whether granting deemed conveyance would amount to transferring or alienating the assets of the corporate debtor, thereby attracting the moratorium provisions of the IBC.
The High Court noted that the original promoter had a statutory duty under Section 11 of MOFA to convey the land and building to the society. The Court observed that the obligation was both contractual and statutory in nature and arose immediately after formation of the society and completion of the project.
The Court found that almost the entire development potential of the land had already been consumed by the original developer and only a negligible portion of FSI remained unutilized. In these circumstances, the Court questioned what substantive rights remained capable of being conveyed to a third-party developer years later.
According to the Court, what was effectively acquired by the subsequent purchaser was not an unfettered ownership interest but a property already burdened with the statutory obligation to be conveyed to the housing society.
A key aspect of the judgment is the distinction drawn between enforcement of monetary claims and enforcement of statutory obligations.
The Court held that deemed conveyance proceedings are not recovery proceedings and do not involve enforcement of a financial claim against the corporate debtor. Rather, they are proceedings through which a statutory authority performs a statutory function intended to perfect title in favour of flat purchasers.
Relying on earlier Bombay High Court decisions including Santoshkumar Motilal Bhansali and Anudan Properties Private Limited, the Court observed that statutory duties and regulatory obligations continue despite insolvency proceedings and are not automatically extinguished by a moratorium under the IBC.
The Court emphasized that while the IBC may freeze monetary claims, it does not erase statutory obligations or prevent authorities from discharging duties imposed by welfare legislation.
The respondent argued that Section 14 of the IBC prohibited transfer of the corporate debtor’s assets and therefore deemed conveyance proceedings could not continue.
Rejecting the contention, the High Court held that deemed conveyance does not constitute transfer of an asset belonging to the corporate debtor in the conventional sense. Instead, it is recognition of a legal consequence flowing from the promoter’s failure to perform a statutory duty.
The Court observed that once flats are sold and a cooperative society is formed, the developer is effectively divested of substantial rights in the land and building. The law presumes that title should stand transferred to the organization of flat purchasers and the deemed conveyance mechanism merely facilitates formal recognition of that position.
Consequently, the Court held that Section 14 of the IBC does not create a bar against exercise of powers under Section 11 of MOFA.
The Court highlighted the legislative intent behind introducing the deemed conveyance provisions in 2008. The amendment was enacted because developers frequently delayed conveyance for years in order to exploit future development potential arising from additional FSI and TDR benefits.
Justice Marne warned that if insolvency proceedings were allowed to halt deemed conveyance applications, errant developers could misuse the IBC process to indefinitely postpone transfer of title to housing societies.
The Court further noted that many old buildings in Mumbai and other metropolitan areas require urgent redevelopment. Without conveyance, societies often face significant difficulties in undertaking redevelopment projects. Suspending deemed conveyance proceedings due to CIRP could therefore adversely affect safety and redevelopment rights of flat owners.
The Bombay High Court concluded that the Competent Authority had committed an error by refusing to adjudicate the society’s application solely because CIRP was pending against the company claiming rights in the property.
The Court held that initiation of CIRP does not suspend the statutory obligation under Section 11 of MOFA. Proceedings for deemed conveyance are not recovery proceedings. Section 14 of the IBC does not prohibit the Competent Authority from exercising powers under Section 11 of MOFA. Housing societies are not required to first seek relief from the NCLT under Section 60(5) of the IBC before pursuing deemed conveyance. The Competent Authority must consider the application on its merits.
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