IN THE SUPREME COURT OF INDIA CIVIL ORIGINAL/APPELLATE JURISDICTION WRIT PETITION (CIVIL) NO. 43 OF 2019 Pioneer Urban Land and Infrastructure …Petitioners Limited & Anr. Versus Union of India & Ors. …Respondents The large number of writ petitions that have been filed before the Court challenging the constitutional validity of amendments made to the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”), pursuant to a report prepared by the Insolvency Law Committee dated 26th March, 2018 (hereinafter referred to as the “Insolvency Committee Report”). The amendments so made deem allottees of real estate projects to be “financial creditors” so that they may trigger the Code, under Section 7 thereof, against the real estate developer. In addition, being financial creditors, they are entitled to be represented in the Committee of Creditors by authorised representatives. Provisions of the Code being challenged are as follows 1. Explanation to Section 5(8)(f) – Real estate project related amendment. 2. Section 21(6A)(b) - 21. Committee of creditors 3. Section 25A- Rights and duties of authorized representatives of financial creditors Case laws that lead to amendment (2019 amendment ) of the Code to include home buyers as financial creditors. The following pronouncements made by NCLAT had recognised the allottees of real estate project as “Financial Creditors” and gave them a seat in Committee of Creditors as Financial Creditors. The National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) on 21st July, 2017 in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd., (Company Appeal (AT) (Insolvency) No. 07 of 2017) held that amounts raised by developers under assured return schemes had the “commercial effect of a borrowing”, which became clear from the developer’s annual returns in which the amount raised was shown as “commitment charges” under the head “financial costs”. As a result, such allottees were held to be “financial creditors” within the meaning of Section 5(7) of the Code. On 11th September, 2017, an order was passed by this Hon’ble Court in Chitra Sharma & Ors. v. Union of India (Writ Petition (Civil) No.744 of 2017) in the case of Jaypee Infratech Ltd. appointing a representative of the home buyers, i.e. the allottees, 14 to participate in meetings of the Committee of Creditors in order that their interests be protected. Given the above orders by NCLAT, the Insolvency Committee Report suggested that amendments be made in the Code seeking to clarify, as a matter of law, that allottees of real estate projects are financial creditors. On 17th August, 2018, the Parliament passed the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (hereinafter referred to as the “Amendment Act”) incorporating the aforesaid amendments as were provided for by the Amendment Ordinance. The above amendment was challenged in the SC on following grounds. One, the amendment is discriminatory in as much as it treats unequals equally, and equals unequally, having no intelligible differentia; and two, that there is no nexus with the objects sought to be achieved by the Code. The amendments made to Section 21 and the insertion of Section 25A of the Code do away with the collegiality and commercial wisdom of the Committee of Creditors, and are manifestly arbitrary on this count. As RERA is there to address all the real estate projects related isues, the amendments in IBS is excessive , disproportionate and violative of Article 14 and 19(1)(g) of the Constitution. It would be wholly arbitrary to include allottees as financial creditors when, in fact, they possess none of the characteristics pointed out in Swiss Ribbons (supra) of banks and financial institutions. Real estate allottees/ homebuyers are unsecured creditors and are therefore more akin to OCs rather than FCs Real estate allottees make payments to the corporate debtors in lieu of services rendered – i.e., construction of apartments. In several cases, payments are also made on a construction linked payment basis. Each individual allottee will be owed a sum that is often much smaller than the amount owed to a single bank/financial institution. There are no repayment schedules in apartment buyer agreements – as the payments have been made by allottees towards grant of possession of their units in a project – and the date of possession is further subject to force majeure and other circumstances. Refund of money by the developer only arises in the event that the allottee validly terminates/ cancels the agreement and not otherwise Agreements between allottees and developers have arbitration clauses. Allottees are interested in securing their single time investment, and not the financial well-being of, or ensuring the continuity of, the corporate debtor as a going-concern. Allottees do not have the expertise or information to be in a position to evaluate the feasibility and viability of resolution plans keeping in mind the business of the corporate debtor as a whole Most of the sources evidencing a financial debt as listed do not apply to real-estate allottees. In the case of real estate allottees, in most cases, the default has not yet occurred since the date of possession is often extended on account of force majeure and other circumstances. Observations of the Court It is important to remember that the Code is not meant to be a debt recovery mechanism. It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it. The home buyers/allottees give advances to the real estate developer and thereby finance the real estate project at hand, are really financial 117 creditors. Given this finding, this plea of the Petitioners must also be rejected. This challenge must also, therefore, fail. It would in fact be manifestly arbitrary to omit allottees from the Committee of Creditors when they are vitally interested in the future of the corporate debtor as they have funded anywhere from 50% to 100% of the project in most cases. It is clear that the expression “disburse” is Section 5(8) would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression “disbursed” refers to money which has been paid against consideration for the “time value of money”. In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee “disburses” money in the form of advance payments made towards construction of the real estate project. The expression “borrow” is wide enough to include an advance given by the home buyers to a real estate developer for “temporary use” i.e. for use in the construction project so long as it is intended by the agreement to give “something equivalent” to money back to the home buyers. Conclusion The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.’ Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5120 OF 2019 in the matter of Duncans Industries Ltd. .. Appellant Versus A. J. Agrochem .. Respondent/ Facts of the case. The appellant is a Corporate Debtor. It is a company which owns and manages 14 tea gardens. Out of 14 tea gardens, the Central Government vide notification dated 28.01.2016, in exercise of its power under Section 16E of the Tea Act, 1953 has taken over the control of 7 tea gardens. The Corporate Debtor(Appellant) owes Rs. 41,55,500/- to Operational Creditor(Who is the respondent in this appeal), against the supply of pesticides etc. The respondent initiated the proceedings against the appellant corporate debtor before the NCLT under Section 9 of the IBC. Appellant opposed the move on the grounds the that the Govt had already taken over the management of tea unit uner Tea Act and hence the insolvency proceedings cannot be initiated without consent of Government. NCLT held that as the prior consent of the central government has not been obtained the proceedings under section 9(operational debt) is not maintainable. In an appeal before the NCLAT by the respondent operational creditor, by the impugned judgment and order, the NCLAT has reversed the order passed by the NCLT, Kolkata and has held that the respondent’s application under Section 9 of the IBC would be maintainable even without the consent of the Central Government in terms of Section 16G of the Tea Act. HENCE THIS APPEAL BEFORE HON: SUPREME COURT. Arguments that came before the Hon: Supreme Court in favour of the Appellant(CD) Tea Act is a special Act for the purpose of providing control by the Union of India of the Tea Industry. Section 16D(1) ofthe Tea Act, 1953 provides for taking over the tea unit and the tea undertaking inter alia if the Central Government is of the opinion that the tea unit is being managed in a manner highly detrimental to the tea industry or to public interest. Section 16E of the Tea Act refers to the power of the Central Government to restart the tea undertaking if it is found necessary in the interest of the general public. It was submitted that an insolvency process is also meant to culminate in liquidation, if there is no revival. It was submitted that since the Tea Act permits for the Central Government to take over the management of a tea estate which is not run properly, the prior permission under Section 16G is applicable to such an estate, the management of which has been taken over by the Government The applicability of section 238 of the IBC has been discussed in the light of the judgements issued by Hon:Supreme Court in the matter of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674 as well as the recent decision of this Court dated 14.08.2019 in the case of K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd. And argued that since there is no inconsistency between the Tea Act and the IBC, there is no occasion to apply Section 238 of the IBC to give overriding effect. Arguments that came before the Hon: Supreme Court in favour of the Respondent(OC) It was submitted that the IBC is a consolidating and amending law relating to reorganization and insolvency resolution and for matters connected therewith or incidental thereto. It was submitted that the Code, which was promulgated in 2016, has not provided for the prerequisite of obtaining consent from the Central Government for initiating corporate insolvency resolution process like the Tea Act, which is an earlier Act enacted in 1953. It was submitted that, thus, such a prerequisite of obtaining consent cannot be imported and/or read into the Code when the self contained Code itself does not provide for it. Swiss Ribbons Pvt. Ltd. v. Union of India [AIR 2019 SC 739 : (2019) 4 SCC 17] was reffered and threby submitted that in the event of any conflict between the two legislations, the provisions of the IBC would prevail by virtue of Section 238 of the IBC. Question before the Hon:Supreme Court The short question which is posed for consideration of this Court is whether before initiation of the proceedings under Section 9 of the IBC, a consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act, 1953 is required and/or whether in absence of any such consent of the Central Government the proceedings initiated by the respondent 15 operational creditor under Section 9 of the IBC would be maintainable or not? Observation and Order of the Hon:Supreme Court It is observed that the management and control of the tea gardens are still with the Corporate Debtor. Hence Section 16G(1)(c) shall not be applicable at all, as the appellant corporate debtor is continued to be in management and control of the tea units/gardens. The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a timebound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. s [Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 : (2018) 1 SCC (Civ) 356] It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. As observed by this Court in Swiss Ribbons Pvt. Ltd. (supra), referred to herein above, the primary focus of the legislation while enacting the IBC is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate debt by liquidation and such corporate insolvency resolution process is to be completed in a time-bound manner. Therefore, the entire “corporate insolvency resolution process” as such cannot be equated with “winding up proceedings”. If the submission on behalf of the appellant that before initiation of proceedings under Section 9 of the IBC, the consent of the Central Government as provided under Section 16G(1)(c) of the Tea Act is to be obtained, in that case, the main object and purpose of the IBC, namely, to complete the “corporate insolvency resolution process” in a time-bound manner, shall be frustrated. The sum and substance of the above discussion would be that the provisions of the IBC would have an overriding effect over the Tea Act, 1953 and that no prior consent of the Central Government before initiation of the proceedings under Section 7 or Section 9 of the IBC would be required and even without such consent of the Central Government, the insolvency proceedings under Section 7 or Section 9 of the IBC initiated by the operational creditor shall be maintainable. The impugned judgment and order dated 20.06.2019 passed by the learned NCLAT holding that insolvency petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 initiated by the respondent operation creditor shall be maintainable, is hereby confirmed.
Jaiprakash Associates Ltd & Anr… Appellant Versus IDBI Bank Ltd. & Anr. … Respondents ( CIVIL APPEAL NO. 6486 of 2019 Order passed by Supreme Court of India) In this particular matter, the Hon:Supreme Court, in order to do complete justice to the home buyers , had exercised it’s extra ordinary power under Article 142 of the Constitution of India, to salvage the situation and provided for a wholesome solution to serve the interest of all concerned and in particular of large number of home buyers(financial Creditors). The provisio to Section 12 (3) of the Insolvency and Bankruptcy Code, 2016(“IBC”) mandates to complete the Corporate Insolvency Resolution Process (“CIRP”) within a period of three hundred and thirty (330) days from the insolvency commencement date, including the extension of the period of CIRP and time taken for legal proceedings. Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. In the decided case, the initial period of 180 days to complete the CIRP got over and the resolution plan was not finalized by the Committee of Creditors. There were many confusions during the process with respect to the voting share of the financial creditors(home buyers), lack of clarity on the status of the home buyers as financial creditors, stagnancy in legal process due to amendment in the legislation etc. As the legislation was new and having many ambiguity with respect to the powers of Committee of Creditors in finalizing the resolution plan, the parties had approached various judicial forums several times, which further delayed the resolution process. In the present case there was unanimity amongst all the parties that liquidation of Corporate debtor must be eschewed and instead an attempt be made to salvage the situation by finding out some viable arrangement which would subserve the interests of all concerned. The Hon:Supreme Court had noted that the liquidation of the company will affect the home buyers and put them further into desperate situation. The Hon: Supreme Court considering the interest of the parties and to do complete justice to them and to establish the real intention of the lawmakers , superseding the restrictive provision of section 12, had ordered that in view of the matter it is proper and expedient to issue directions under Article 142 of the Constitution of India to all concerned to reckon 90 days extended period from the date of the order instead of the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. Through this order the Hon:Supreme Court had surpassed the time limit of 90 days to complete the pending process specified under section 12 and thereby ensured the justice to the stakeholders, particularly home buyers.
It is specifically mentioned in the order that these directions are issued in exceptional situation in the facts of the present case and shall not be treated as a precedent. This judgement will enable the Interim Resolution Professional to count the 90 days from the date of the order to invite revised resolution plans from the final bidders. Additional Notes- What section says. Article 142 in The Constitution Of India 1949 142. Enforcement of decrees and orders of Supreme Court and unless as to discovery, etc ( 1 ) The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe (2) Subject to the provisions of any law made in this behalf by Parliament, the Supreme Court shall, as respects the whole of the territory of India, have all and every power to make any order for the purpose of securing the attendance of any person, the discovery or production of any documents, or the investigation or punishment of any contempt of itself Section 12 of the Insolvency and Bankruptcy Code. 12. Time-limit for completion of insolvency resolution process. – (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of sixty-six per cent. of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once: Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor: Provided also that where the insolvency resolution process of a corporate debtor is pending and has not been completed within the period referred to in the second proviso, such resolution process shall be completed within a period of ninety days from the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.