Homebuyers & IBC (Amendment) Act, 2020: Four Years, Two Amendments And Journey still Continues
A milestone law (The Insolvency and Bankruptcy Code, 2016)[i] was enacted in India which was passed by Lok Sabha on 5th May 2016 and Rajya Sabha on 11th May 2016 which received Presidential Assent on 28th May 2016, with prime focus on “Insolvency Resolution” of Corporate Persons, Partnership Firms, and Individuals in order to maximisation of Value of Asset of such persons with specific aims to keep it functional and safe as a continuing business entity while talking care interests of Financial and Operational Creditor. The code wasn’t meant to be another platform for creditor(s) to recover their dues from debtor, but definitely a mechanism to keep interest of all concerned safe including Corporate Debtor itself by giving resolution. Section 2 (a) of Code clearly mentioned that the Code shall apply to all Companies incorporated under Companies Act, 2013 or any previous Company Law, apart from Partnership Firms, LLPs, Individual, Proprietorship Firms etc. Needless to say, all Real Estate Giants or even small Real Estate Players/Builders are either registered as “Companies”, “Firms” “LLPs” etc in their respective field of law governing their incorporation and functioning. Surprisingly, Homebuyers/Allottee(s) were neither covered under the definition of “Financial Creditor” as defined in Section 5 (7) nor as “Operational Creditor” as defined under Section 5 (20) or in any other clause of the Original Code despite of well-known open secret that Real Estate Sectors majorly runs on the money of buyers/allottee(s) rather than Financial Investors/Lenders.
Protection of Homebuyer’s Rights by Judiciary:
An application for triggering Insolvency Process by invoking Section (7) of Insolvency and Bankruptcy Code, 2016 was moved before the National Company Law Tribunal, Principal Bench, Delhi (NCLT in short) in CP No- (ISB)-03 (PB)/2017, titled as Nikhil Mehta & Sons (HUF) & Ors Vs M/s AMR Infrastructure Ltd, wherein the NCLT was required to decide that whether applicants who, vide an written MOU/Agreement, agreed to purchase three units being a residential flat, shop and office, with “Committed Return”/”Assured Return” from the date of execution of MOU/Agreement till actual physical possession of units handed over, in the projects developed, promoted and marketed by respondent, comes within the meaning of “Financial Creditor” as defined under provision of Section (5) sub clause (7) of the I & B Code. The NCLT answered the issue in negative and held that MOU was a pure and simple agreement to sale or purchase of a piece of property and merely because breach of “Assured Amount”, such transaction does not acquire the status of “Financial Debt” and have no consideration for the time value of money. Being aggrieved, an appeal was preferred before the National Company Appellate Tribunal (NCLAT in Short) in Company Appeal (AT) (Insolvency) No- 07 of 2017, titled as Nikhil Mehta & Sons (HUF) & Ors Vs M/s AMR Infrastructure Ltd[ii], decided on 21.07.2017 wherein the NCLAT hold appellants as “Financial Creditor” within the meaning of Section (5) sub clause (7) of the code. It further held that amount disbursed by the appellants was against the “consideration of time value of money” and transaction by corporate debtor by raising the amount by way of sale purchase agreement having a commercial effect of borrowing.
On the other hand, numbers of Writ Petition under Article 32, were filed before Honble Supreme Court Chitra Sharma & Ors Vs. Union of India & Ors VII (2018) SLT 37[iii], wherein grave and serious concern was shown for protection of Home buyers on following amongst various grounds, (1) Homebuyers haven’t been included in IBC and it discriminate their Fundamental Right as “Right to Life” as recognized by SC in M/s Shantistar Builders Vs. Narayan Khimala Totame, 1990 (1) SCC 520. (2) Being not included either as “Financial Creditor” or “Operational Creditor” deeply prejudice them by rendering disentitle to be part of Committee of Creditor (COC in short) while homebuyers are biggest contributor of Finance in real estate project by way of advance money, instalments and in some case full payment, leaving them at mercy of COC without having any say. (3) If moratorium is granted under Section 13 & 14 of IBC in some proceedings they are not party of, different remedies initiated by homebuyers before the Consumer Forums, Real Estate Regulatory Authority (RERA), and Civil Court shall be stayed, which will render them remedy less at all forums (Kindly Refer Alchemist Asset Reconstruction Company Vs. Hotel Gaudavan Private Limited & Ors, 2018(16) SCC 94. Meanwhile, the Insolvency and Bankruptcy (Ordinance) 2018 came into effect on 06th June, 2018 whereby homebuyers were given status of Financial Creditor. The Honble Court keeping in mind the Ordinance and to do complete Justice exercised its power under Article 142 of the Constitution and decided batch of Writ Petitions vide order dated- 09.08.2018 giving various direction to parties concerned including initiations of CIRP afresh form the date of its order, reconstitution of COC afresh, and allowing Homebuyers to be part of COC in the light of Ordinance passed. Another notable judgment wherein the Honble Supreme Court rescued Homebuyers from Developer/Builder was Bikram Chatterji & Ors Vs. UOI & Ors[iv], famously known as “Amarpali Group Case”, and issued various directions including cancelation registration of Amrapali Group of Companies under RERA. It is to be noted that all these cases pertain to era when provisions of IBC weren’t protecting homebuyers and Courts were protecting them under umbrella of Article 32 and 142 of Constitution in respective Writ Petitions.
Legislation on the Issue:
Within 9 days i.e. on 17th August, 2018 from the date of Supreme Court’s orders in Chitra Sharma Case, The Insolvency and Bankruptcy (Amendment) Act, 2018[v] (No- 26 of 2018) was passed and published in Gazette of India. By virtue of Section 3 of Amending Act, 2018 the following explanation in Clause (8), sub clause (f) was added:
“Explanation. —For the purposes of this sub-clause-
- any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
- the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016″
The entire controversy reached to its final conclusion. Now, by virtue of a statutory amendment Homebuyers were now at par with other “Financial Creditor” in Code. Meaning thereby, any homebuyer now could trigger provisions of IBC in case there is delay in possession or refusal to return money by Developer/Builder, making them more accountable and vigilant towards homebuyers. As expected, amendments were made subject to judicial scrutiny in batch of Writ Petition titled as “Pioneer Urban Land and Infrastructure Limited Vs Union of India & Ors, VII (2019) SLT 345[vi], decided on 09.08.2019 wherein the Honble Supreme Court (The Three Judge Bench headed by Justice Rohinton F. Nariman) upheld the amendments brought in Code and declared it not violative of Article 14, 19 (1) (g) and 300-A of the Constitution of India.
Surprisingly, within 1 ½ years i.e. on 13th March 2020 the Government of India passed The Insolvency and Bankruptcy (Amendment) Act, 2020[vii] (No- 1 of 2018) which was published in Gazette of India. By virtue of Section 3 of Amending Act, 2020 the following Provisos were added in Section (7) of Code:
“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:
“Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.”.
Since, the Honble Supreme Court had already upheld the validity of Second Amendment, Act 2018 in “Pioneer Case”, the Amending Act, 2020 by virtue of Section 3, without touching their statutory status as financial creditor, introduced following hurdles for Homebuyers:
- Compelling Homebuyers to bring compulsory “Class Action” in IBC by approaching NCLT, only if, they are minimum 100 in numbers or at-least 10% of Total allottees under the same real estate project, whichever is less, which simply means “No Individual claim shall be entertained”,
- In all “existing petitions”, preferred by individuals or group of homebuyers but less than 100 in numbers, wherein application has not been admitted under the Code, if they do not fulfil new conditions within 30 days, their petitions shall stand withdrawn.
A bare reading of new provisions makes it clear that amendment have been designed to protect errant developers rather than enabling innocent citizen to seek protection of their rights, money invested and enforcing fundamental right to shelter as already recognized under various judgments and brought into code by Second Amendment of 2018 itself. It seems, concept of Welfare State is losing its shine and corporate, rather than individuals, has been able to convince on their concern.
Violation of Article 14 & 21 of Constitution of India?
Article 14 permits discrimination on the basis of “Reasonable Classification” and prohibits Hostile discrimination and Class Legislation. Since, homebuyers/allottee have already been recognised as Financial Creditors through statutory amendment (Second Amendment, 2018) in Code, it would be arbitrary, illegal and more so, unethical by introducing Class within Class (Financial Creditor) by such amendment. In case of violation of Article 14, the State need to show “Intelligible Differentia” on the basis of “Reasonable Classification”, which must meet following criteria as held by Supreme Court in The State of West Benagl Vs Anwar Ali Sarkar, 1952 AIR 1245:
- Distinction must be there between groups sought to be included and group sought to be excluded,
- It must have a rational nexus with objective of the Act.
Effects and Aftermaths of Amendment:
- A financial creditor with claim of Rs. 1 Crore (Enhanced Pecuniary Jurisdiction now) can approach NCLT but a Homebuyers who has booked a Flat of Rs 5 Crore, cannot.
- No individual claim shall be entertained by NCLT.
- Since amendment has been given retrospective effect, it will prejudice greater to ongoing petitions wherein out of sudden petitioners have to bring minimum 100 numbers of person or 10% of total allottee in same real estate project. In case, they fails to meet requirement, their petition shall stand withdrawn.
- Practically, no Homebuyers can approach NCLT as there is no mechanism or DATA available to him/them which empower them to have contact details to contact each other. Such data lies with developer which never sees day’s light.
- Lesser chance of settlement with developer as in some individual cases developer goes out of box to settle to end a dispute, and in class suit it may not suit them.
- More numbers of homebuyers in joint petition could get their petition dismissed in case some of them, themselves, may be at fault in making instalment or they may be “Pre-Existing Dispute” between them. In such scenario, it would be debatable that entire petition should go or not. If not, how to find new petitioners to join to meet minimum numbers criteria.
- Individual or those homebuyers who don’t fulfil minimum numbers requirement, again will be at mercy of Committee of Creditors (COC) as they will not participate in decision making process.
- Other remedies like Consumer Complaint, RERA, Civil Court shall be futile once moratorium is granted in any other petition before NCLT, they are not part of. It will again put them at abeyance.
- The supreme Court will be flooded with Writ Petition, as in past, seeking protection of their Fundamental Right (Right to Life/Right to Shelter/Right to Home) under Article 32 of Constitution.
The challenge to amendment before Honble Supreme Court will certainly seek answer to several questions. Recently, the Honble Supreme Court has issued notice in various Writ Petition challenging validity and constitutionality of said amendment. Further, taking cognizance of homebuyers petition regarding their petitions pending before different NCLTs, the SC has ordered status qua[viii] on the matter [ix]. One of the reasons for bringing new amendment could be an attempt to save real estate sector from threat of insolvency and liquidation by a single homebuyer who intends to recover its money and has nothing to do with resolution of company, which obvious is not a true picture. Even if common sense prevails, no homebuyer spends his hard-earned money and lifetime savings just to ensure the company he is investing/funding/paying should shut down. Yes, IBC has created a deterrence for errant and negligent developer and safe haven for homebuyers who can now seek change in management through resolution process. It must continue to do so. The author do not agree with the recommendation of Expert Panel in their “Report of The Insolvency Law Committee[x]” dated February, 2020” given in clause (ii) of report which suggest to allow initiation of CIRP by atleast 100 persons or 10% of total number of creditor. This step will now force homebuyers to take recourse of writ petition as entertained by SC in Chitra Charma case. Resultantly, buyers will again be confused, uncertain of legal remedies available and fate of their stuck dream home.
[i] The Insolvency and Bankruptcy Code, 2016.
[ii] III (2017) BC 61 (NCLAT)
[iii] Writ Petition (Civil) No- 744 of 2017
[iv] 2019 (9) SCALE 588
[v] The Insolvency and Bankruptcy (Second Amendment) Act, 2018
[vi] Writ Petition (Civil) No- 43 of 2019
[vii] The Insolvency and Bankruptcy (Amendment) Act, 2020
[viii] KR Srivats, Insolvency ordinance: Home buyers get some reprieve as SC orders status quo on pending cases, The Hindu Business line (13th January, 2020), https://www.thehindubusinessline.com/economy/insolvency-ordinance-home-buyers-get-some-reprieve-as-sc-orders-status-quo-on-pending-cases/article30558758.ece
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