Homebuyers’ Challenge to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019: A futile endeavour- By Mayank Udhwani

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Homebuyers’ Challenge to the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019: A futile endeavour

Written By-Mayank Udhwani
(5th year student pursuing B.A. LL.B. (Business Law Hons.) at National Law University, Jodhpur)

Introduction

On 28th December 2019, the Ministry of Law and Justice had published the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 [“Ordinance”]. The Ordinance has, inter alia, introduced a threshold for initiation of Corporate Insolvency Resolution Process [“CIRP”] by the homebuyers. Section 3 of the Ordinance has introduced a proviso to Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] owing to which, an application for initiation of CIRP by homebuyers must be filed jointly by 100 or 10% of the allottees (whichever is less) under the same real estate project.[1] Furthermore, the Ordinance has also made the aforementioned provision applicable to the applications which have not yet been admitted by the Adjudicating Authority. This means that the application for initiation of CIRP by homebuyers which have not yet been admitted are now required to be filed jointly by 100 or 10% of the allottees under the same real estate project within 30 days of the promulgation of the Ordinance.[2] These provision have purportedly been introduced to prevent the filing of vexatious or frivolous petitions by a disgruntled homebuyer, thereby misusing the Code.

A Writ Petition has been filed before the Supreme Court against the Ordinance on the ground that Section 3 of the Ordinance is violative of Articles 14 and 21 of the Constitution of India.[3] In the article that follows, the author attempts to argue that the Ordinance is constitutionally valid by rebutting the grounds of challenge raised in the petition challenging the constitutional vires of the Ordinance.[4]

Grounds for Challenge Raised in the Writ Petition

In the Writ Petition, the homebuyers have raised the following challenges to Section 3 of the Ordinance:

  1. That the provision in question creates a class within a class, thereby violating Article 14 of the Constitution;
  2. That the retrospective application of the Ordinance is unconstitutional; and
  3. That the Ordinance violates the right to life.

A heavy reliance is placed upon the decision of the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India [“Pioneer”],[5] to sustain each of the aforementioned arguments. In Pioneer, the Supreme Court had upheld the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018,[6] which had classified homebuyers as Financial Creditors. While the author will address and rebut all these averments in seriatim, it is important to note that IBC is an economic legislation.[7] Accordingly, there must be a presumption in favour of the constitutionality of an enactment.[8]

First Ground for Challenge: Class within the Class

It has been asserted that that the Ordinance, by introducing a minimum threshold for initiation of CIRP by the homebuyers, dissects Financial Creditor further and imposes a condition on that newly created class.[9] This, according to the Writ Petition, amounts to creation of a “class within a class” and is unconstitutional as being violative of Article 14 of the Constitution.

Rebuttal: IBC stipulates two classes of creditors: Financial Creditors and Operational Creditors.[10] Financial creditors can be secured as well as unsecured[11] and, in Pioneer, the homebuyers were held to be unsecured financial creditors.[12] It has been contended in the Writ Petition that the Ordinance creates a class within a class, i.e., it treats the creditors in same class differently. In response to this contention, the author submits that the IBC already contains a provision which treat the creditors in the same class differently. The author is referring to Section 21(6A)(b) which provides for the appointment of an authorized representative to attend the meetings of Committee of Creditors [“CoC”] and vote on behalf of a class of creditors[13] having at least 10 financial creditors.[14] This provision was introduced to overcome the logistical and technical difficulties in ensuring participation by all members of the CoC in large CoCs.[15]

In a situation where the number of homebuyers is more than 10 and the number of unsecured debenture holders [“UDH”] and deposit holders [“DH”] are less than 10, an authorised representative would be appointed only for the homebuyers and not for the UDH and DH. If the argument in the Writ Petition is to be accepted then even Section 21(6A)(b) would have to be declared unconstitutional as it treats the same class of unsecured financial creditors viz., homebuyers,[16] UDH and DH[17]differently. Similarly, Section 21(6) must also be declared unconstitutional as it allows representation of financial creditors forming part of a consortium agreement or a syndicate facility providing for a single trustee by that trustee. Thus, Section 21(6) also creates a ‘class within a class’ by treating secured creditors forming part of a consortium agreement and those secured creditors which are not part of a consortium agreement differently. It is clear from these examples that IBC indeed permits creation of a class within a class. Therefore, this ground for challenge will not be maintainable to assail the validity of the Ordinance.

Second Ground for Challenge: Retrospective Application

It has been asserted in the Writ Petition that the Ordinance has been given retrospective effect as even those proceedings which listed for final arguments before the NCLT will have to comply with the Section 3 of the Ordinance within one month.

Rebuttal: The author submits that this assertion is devoid of any legal merit. The Petitioner is citing a mere hardship in arranging 100 or 10% allottees to file a joint application to assail the constitutional validity of the Ordinance. It is pertinent to note that the Ordinance is only applicable to the applications which have not yet been admitted by the Adjudicating Authority. The Ordinance does not affect those cases where CIRP has been initiated after the admission of an application filed by a homebuyer. The right of homebuyers under the CIRP are not crystallized before the application is admitted. Thus, the introduction of minimum threshold for initiation of CIRP must be seen as a mere hardship as it does not affect substantial rights of the homebuyers.

It is a well settled position of law that hardship of few cannot be the basis of determining the validity of any statute.[18] The author places reliance on the legal maxim dura lex sed lex, which translates to “the law is hard but it is the law” to support his position. This maxim has been upheld by Indian Courts to rule that even if the statutory provision causes hardship to some people, Court has to implement the same.[19]

Third Ground for Challenge: Violation of Right to Life

It has been contested in the Writ Petition that by introducing a minimum threshold for initiation of CIRP by homebuyers, the Ordinance denies the right of homebuyers to approach the NCLT, thereby denying them to access their fundamental rights.

Rebuttal: The author submits that the Ordinance does not deny the right of homebuyers to approach the NCLT. It merely imposes a condition of a filing of a joint application by 100 or 10% of the allottees. The argument made in the Writ Petition may be sustainable had the Ordinance completely barred filing of an application by a homebuyer. Furthermore, it is important to note that homebuyers have two alternate remedies available to them. First, the homebuyers can initiate a proceeding under the Real Estate (Regulation and Development) Act, 2016 [“RERA”]. Second, the homebuyers can also bring the dispute before a consumer dispute for a established under the Consumer Protection Act, 2019. It is also important to take note of Section 88 of RERA which provides that the provisions of RERA are in addition and not in derogation of any other law. Given that two uninhibited remedies are available to the homebuyers in addition to a somewhat restricted access to the NCLT, it cannot be said that the Ordinance violates the right to life of homebuyers.

Conclusion

Based on the foregoing, it can be reasonably concluded that the challenge raised against the Ordinance will not be sustained in the Supreme Court. It is important to remember that IBC does not provide a recovery mechanism. When a homebuyer approaches the NCLT he does not get his money back in the near foreseeable future. On the contrary, the homebuyer must wait for the acceptance of a resolution plan by the CoC. Even then, the homebuyer may only get some percentage of the money owed to him. In light of this, it is suggested by the author that the Ordinance is a blessing in disguise as it directs the homebuyers to resort to proceedings under RERA[20] which provides much better remedies than the ones offered to homebuyers under IBC.

 

Reference

[1] Second proviso to Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 [“Ordinance”] reads as: “Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project whichever is less”. [emphasis supplied]

[2] Third proviso to Section 3 of the Ordinance.

[3] Manish Kumar v. Union of India [WP(C) No. 26 of 2020 (Supreme Court)].

[4] The Writ Petition in Manish Kumar v. Union of India [WP(C) No. 26 of 2020 (Supreme Court)] is available at: https://www.livelaw.in/top-stories/plea-in-sc-challenges-provisions-of-ibc-ordinance-2019-imposing-conditions-on-homebuyers-right-read-petition-151324 (Last accessed on: February 3, 2020).

[5] Pioneer Urban Land and Infrastructure Ltd. v. Union of India, 2019 SCC OnLine SC 1005 [“Pioneer”].

[6] Section 3, Insolvency And Bankruptcy Code (Second Amendment) Act, 2018.

[7] Swiss Ribbons Pvt. Ltd. vs Union of India [WP(C) No. 99 of 2018 (Supreme Court)], paragraph 120.

[8] Ram Krishna Dalmia v. Justice S.R. Tendolkar, (1959) SCR 279, pp. 297-298; State of Bihar v. Shree Baidyanath Ayurved Bhawan (P) Ltd., (2005) 2 SCC 762, p. 783

[9] Supra note 4, paragraph 13.

[10] Section 3, Insolvency And Bankruptcy Code (Second Amendment) Act, 2018.

[11] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [Civil Appeal No. 8766-67 of 2019 (Supreme Court)], paragraph 57.

[12] Pioneer, supra note 5, paragraph 45.

[13] Section 21(6A)(b), Insolvency and Bankruptcy Code, 2016.

[14] Regulation 16A(1), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [“IBBI Regulations”].

[15] Report of the Insolvency Law Committee, March 2018, paragraph 10.4, available at: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf (Last Accessed on: February 3, 2020).

[16] Supra note 12.

[17] Supra note 15, paragraph 10.8.

[18] Namit Sharma v. Union of India, [WP(C) No. 210 of 2012 (Supreme Court)], paragraph 16; Bengal Immunity Company v. State of Bihar, AIR 1955 SC 661.

[19] Vijay Singh v. State of Uttar Pradesh, 2005 (2) AWC 1191, paragraph 77, ; D.D. Joshi v. Union of India, AIR 1983 SC 420.

[20] Section 18 of RERA provides for the return of the complete amount and compensation in case a promoter fails to complete or is unable to give possession of an apartment, plot or building.

 

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