Hyper classification amounts to unreasonableness under IBC – By Ravi Charan Pentapati, Partner, Dentons Link Legal

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Hyper classification amounts to unreasonableness under IBC

Ravi Charan Pentapati
Partner, Dentons Link Legal

The Appellants challenged a decision of National Company Law Appellate Tribunal which ruled that as beneficiary of a decree by the Uttar Pradesh Real Estate Regulatory Authority (hereinafter referred to as “UPRERA”), the order of the Resolution Professional (RP) proposing that they be treated differently from other home buyers allottees, does not call for interference.

A. Brief Facts[1]:

  1. Appellants are home buyers, who had opted for allotment in a real estate project of the respondent company. Aggrieved by the delay in the completion of the project, the Appellants approached UPRERA which directed to refund amounts deposited together with interest.
  2. In the meantime, proceedings under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) were initiated. The Committee of Creditors was constituted, and a resolution plan was presented to the Adjudicating Authority.
  3. A distinction was made between home buyers, who had opted or elected for other remedies such as i.e. applying before the RERA and having secured orders in their favor, and those who did not do so.
  4. Home buyers who did not approach authorities under RER Act were given the benefit of 50% better terms than that given to those who approached RERA or who were decree holders.
  5. Aggrieved by the same, Appellants approached Adjudicating Authority which was rejected. Their appeals too were unsuccessful and consequently appeals were filed before Hon’ble Supreme Court.

B. Contentions Raised:

On behalf of Appellants On behalf of Respondent/RP
I. The definition of financial debt [Section 5(8)(f)] which was amended in 2018 after which home buyer allottees in real estate projects also fell within the broad description of financial creditors, a distinction cannot be made between one set of such home buyer allottees and another. I. Appellants cannot be permitted to secure two benefits. Having approached the UPRERA, they fell into a different sub-class of home buyers, who were entitled to specified amounts and, therefore, were unsecured creditors, as compared with allottees who had not invoked RERA remedies. 
II. Reliance was placed on the decision of the NCLT, Mumbai Bench-IV, [Mr. Natwar Agrawal (HUF) vs. Ms. Sakash Developers & Builders Pvt. Ltd.] II.  Such home buyers relinquished their rights under Section 18 of the RERA Act.

 

C. Analysis of Court:

  1. With the introduction of amendment of 2018, an explanation was inserted in the form of Sub-section 8(f) to Section 5 which stipulates that home buyers and allottees of real estate projects were included in the class of “financial creditors” because financial debt is owed to them. On a plain reading of Section 5 (8)(f) no distinction is per se made out between different classes of financial creditors for the purposes of drawing a resolution plan.
  2. On the contention of the RP that once an allottee seeks remedies under RERA and opts for return of money in terms of the order made in her favour, it is not open for her to be treated in the class of home buyer, the Court rejected the same and observed that it is only home buyers that can approach and seek remedies under RERA and no others.
  3. To treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable.
  4. The Apex Court observed that Adjudicating Authority’s order in Natwar Agarwal (HUF) which held that the underlying claim of an aggrieved party is crystallized in the form of a Court order or decree and that does not alter or disturb the status of the concerned party – in the present case of allottees as financial creditors. Furthermore, Section 238 of the IBC contains a non obstante clause which gives overriding effect to its provisions and consequently its provisions acquire primacy and cannot be read as subordinate to the RERA Act.
  5. The distinction made by the RP is artificial; it amounts to “hyper classification” and falls afoul of Article 14 and such an interpretation cannot, therefore, be countenanced.
  6. The impugned order was set-aside, and the Appellants were declared as financial creditors within the meaning of Section 5(8)(f) (Explanation) and entitled to be treated as such along with other home buyers/financial creditors for the purposes of the resolution plan which was awaiting final decision before the Adjudicating Authority.

D. Our Views:

The Doctrine of Reasonable Classification is important in this aspect and the Resolution Professional must ensure that such classification is reasonable and free from arbitrariness. The Resolution Professional has taken a pedantic and hyper technical view of the matter, thereby causing injustice to the Appellants and the Hon’ble Supreme Court has rightly strike a balance between the legitimate rights and interests of the parties and set-aside the decision of the Resolution Professional.

Reference:

[1] Case Reference: Vishal Chelani & Ors. Vs. Debashis Nanda (2023) ibclaw.in 117 SC.

 

 

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