If you are a homebuyer in real estate, it is important to understand the admissibility of the delay penalty/delay compensation under Corporate Insolvency Resolution Process.

Introduction

In the case of a Corporate Insolvency Resolution Process (CIRP) of a real estate entity, there could be a provision/clause in the ‘Builder Buyer Agreement’ or ‘Apartment Buyer Agreement,’ by whatever name called, providing for payment of compensation for the delay in handing over possession beyond the prescribed time frame to the allottees/home buyers.

Whether such claims are to be admitted by the IRP / RP during claims verification is an important issue that needs clarity.

Illustrative Clause For “Delay Penalty / Compensation”

An illustrative clause in the Agreement is given below:-

“If the Company fails to complete the construction on or before the Completion Date or Extended Completion Date as aforesaid and/or on such date as may be extended by mutual consent of the Parties, then the Company shall be liable to pay the Allottee a compensation for the period of delay beyond the final extended Completion Date computed at the rate of Rs. ____________ per month per square feet of the Super Built Up Area of the Apartment, provided the Allottee has not been in default in making payments as per the agreed Schedule of Payments.”

Related Read: Corporate Insolvency Resolution Process Under IBC

Whether compensation payable on account of default/ delay committed by the Corporate Debtor in handing over the possession of the units to the homebuyers/allottees as per the Builder Buyer Agreement would constitute a debt and are to be admitted as a component of the claim?

A) Relevant Provisions:

As per Sec 2(6) of the Code, a claim would include the following:-

  • A right to payment, whether or not such right is reduced to judgment, fixed, undisputed, disputed, legal, equitable, secured, or unsecured
  • A right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to the right of payment, whether or not such right is reduced to judgement, fixed, unmatured, matured, undisputed, disputed, unsecured or secured

Hence, based on the above, a claim would also include payments made as damages/compensation arising from a breach of contract.

Related Read: Winding Up Of A Company Under IBC

B) Relevant Case Law:

Pioneer Urban Land and Infrastructure Limited & Anr Vs. Union of India & Ors (2019):
The Hon’ble Supreme Court observed that:
“What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense” and includes repayment.”

C) Legal Position:

In terms of the provisions contained in the Code and the CIRP Regulations as well as the judgment passed by the Hon’ble Apex Court, the delay penalty/delay compensation shall form a part of the claim to be determined by the IRP / RP, as it amounts to a liability arising out of a breach of contract.

Related Read: Voluntary Liquidation Under IBC 2016

Conclusion

The IRP / RP should carefully verify the claims received from the homebuyers/allottees and check the supporting documents provided including the Builder Buyer Agreement, whether there is any such clause / provision for delay penalty / delay compensation.

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