Banks May Settle with Homebuyers Outside NCLT Liquidation: Kerala High Court Ruling

In a significant development for real estate project financing, the High Court of Kerala has ruled that a consortium of lenders may enter into settlement agreements with homebuyers outside the scope of ongoing liquidation proceedings. This judgment provides essential clarity for institutions and investors caught in the crosshairs of insolvency processes.

Dispute Over Project Assets

The case, encompassing a series of writ appeals, centers on the financial crisis faced by Dewa Projects Private Limited . While the company was under insolvency proceedings, its creditors—a consortium of banks including Union Bank of India—had exercised their rights under the SARFAESI Act to sell properties of the borrower not covered by the project financing or the NCLT liquidation.

Approximately 66 homebuyers, who had previously entered into sale agreements with the project, sought an amicable settlement. The consortium of lenders, acknowledging the plight of the investors, agreed to share a portion of the sale proceeds, covering the principal amounts without interest.

The Legal Question: Intersection of SARFAESI and IBC

The core issue addressed by the bench, led by Chief Justice Soumen Sen and Justice Syam Kumar V.M., was whether the sale proceeds from these mortgaged properties could be disbursed to homebuyers despite parallel insolvency proceedings.

The NCLT, upon receiving a request from the Court to report on the matter, indicated that it held no objection to the disbursement of these funds, provided the assets in question did not form part of the formal liquidation estate being adjudicated by the Tribunal.

Key Observations

The judgment clarifies the discretionary power of creditors to offer relief to individual homebuyers outside of bankruptcy hierarchy when assets remain distinct from the liquidation pool:

> "In our view, the properties from which the sale proceeds have been realized and are sought to be distributed fall outside the liquidation proceedings, and the bank is free to enter into such arrangements with those homebuyers as it may deem fit and proper."

> "The NCLT has filed a report stating that they would have no objection if these amounts are disbursed in favour of 66 homebuyers... from the secured assets not forming part of the sale proceeding."

Implications for Future Litigations

The Court directed the consortium of lenders to release approximately ₹24.75 Crore to a designated account of the liquidator for the benefit of the 66 homebuyers. Crucially, the Court distinguished this relief, cautioning that while the current 66 identified buyers in the settlement agreement are entitled to the payout, the liquidator is strictly prohibited from entertaining, admitting, or processing further claims from non-included buyers.

This ruling acts as a balancing act between the strict timelines of the Insolvency and Bankruptcy Code (IBC) and the equitable needs of retail investors. Parties wishing to contest the validity of the sale or the distribution of assets must now navigate the specific legal avenues preserved by the court, such as pending proceedings before the Debts Recovery Tribunal (DRT).

Ultimately, the judgment ensures that while the law prioritizes judicial liquidation, meaningful relief through mutual settlement remains a viable and legally sanctioned pathway for affected homebuyers.

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Disclaimer: This article is for informational purposes and intended for legal professionals and the general public based on the provided court judgment.