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.
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.