Breach of clause of the agreement, terming it as Default?


Status as on- 18/05/2022


The grievance of the resident’s association i.e., Vilas Condominium Association consisting of home buyers having 327 units alleged the amount of Interest-Bearing Maintenance Security (IBMS) collected from the homebuyers is not refunded to the association of the Home Buyers as per law, despite repeated requests.

It is also alleged that the common area maintenance and common area Electricity charges which the builder is supposed to pay for the period from the date of accrual of maintenance charges till the date of allotment of home buyers are not paid by the builder despite repeated requests.

The builder had collected Interest Bearing Maintenance Security (IBMS) from the association which was in the nature of a corpus security deposit in lieu of the maintenance services.  This deposit was an interest-bearing deposit and thus attracted the time value of money.   As per the agreement, the builder was bound to collect charges and the builder has failed to refund the IBMS charges even though the builder was obliged to do so as soon as the maintenance work was handed over to the association.

The main contentions of the resident’s association are that IBMS charges have not been properly used for the purposes for which they have been charged under the clause of the agreement.  The IBMS charges cannot be utilized for any other purposes other than those that have been mentioned in the said clause of the agreement.

Observation by the NCLT

A two-member Delhi-based bench of NCLT passed an order by allowing a plea filed by the Residents Association for breach clauses of the agreement between the builder and the association, terming it as default.  However, the NCLT pointed out that a bare perusal of the said clause shows that a provision for IBMS has been made to pay maintenance bills and other charges.

In Innovative Industries Ltd. Versus ICICI Bank, Pioneer Urban Land and Infrastructure Ltd. Versus Union of India and reiterated in Manish Kumar Sinha Versus Union of India, in a Section 7 application, the Hon’ble Adjudicating Authority only has to determine as: –

  1. Whether the Financial Creditors in a class have filed the application jointly having a 10% mandate as per the first proviso to Section 7 of the Code?
  2. Whether “the default” has occurred as per the agreement executed between the parties?
  3. Whether the application is complete and there are no disciplinary proceedings against the proposed Insolvency Resolution Professionals (IRP)?

As far as the first condition is concerned, the buyer’s association holds 327 units in the said project, hence, the first condition is satisfied.  Now, as the second condition is concerned, as we have discussed in the above detail, there is a breach of the clause mentioned in the agreement hence thee, the second condition is also satisfied.  As far as the last condition is concerned, the application is complete and there are no disciplinary proceedings against the proposed Insolvency Resolution Professionals proposed by the Financial Creditors.

Conclusion: –

The Adjudicating Authority said that the association has satisfied all the requirements of Section 7 of the Insolvency and Bankruptcy Code, for initiation of Insolvency proceedings against the builder (MGF Development Pvt. Ltd.).

The present case was concluded by the Hon’ble Adjudicating Authority that if the default has been established by way of any means and the same has been recorded, the liability goes on it.


Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us at



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