IBC Amendment 2018 & 2019:A boon or a bane to homebuyers?

By- M.Gnana Deepika

INTRODUCTION

Insolvency and Bankruptcy Code was enacted in 2016 to resuscitate both the Creditor and the Corporate Debtor. This Code consolidates and amends the provisions relating to Insolvency petitions’ filing for liquidation of companies, partnership firms, limited liability partnerships, and individuals in single legislation.  It provides for a time-bound resolution of the Creditor’s claims and aims to maximize the value of the debtor’s assets and at the same time balances the interests of Creditors and maintains the continuity of the business entity.   This being a newborn law has undergone various amendments. One of the amendments in the year 2018 that took the spotlight is the inclusion of  real estate allottees, i.e., homebuyers who have entered in agreement with a real estate developer to purchase a property under the ambit of  Financial Creditor.    Later, in December 2019, an amendment was passed to amend the Code. A minimum threshold of 100 or 10% of the allottees, whichever is lower, is required to move an application against the developer before the National Company Law Tribunal.  This article expounds on the amendments’ constitutionality, homebuyers’ status quo during the current pandemic, and the relief that the allottees could seek.

2018 AMENDMENT –ENTRY OF HOMEBUYERS:

The Insolvency and Bankruptcy (Amendment), 2018 brings homebuyers within the umbrella of Financial Creditors.  The Insolvency Law Committee Report based on the Supreme Court’s stance in cases like that of Chita Sharma v. Union of India[1] and Bikram Chatterji v.Union of India[2] stated that the amount raised from Real Estate allottees contributed significantly to the financing of the construction of apartments and hence concluded that the rights of the homebuyer should be protected under the Code.

In the case of Chita Sharma v. Union of India a, writ petition was filed by one of the allottees Chitra Sharma on behalf of 32,000 allottees. It was contended that the insolvency petition against the developer in the NCLT initiated by IDBI bank would deprive the right to justice of the homebuyers as a moratorium would be initiated prohibiting the filing of suits against the debtor. The home buyers have not secured creditors, and hence they would be placed at the end of the queue on the distribution of assets on liquidation though the debt owed to home buyers was around Rs.15,000 crores, which was more than that of banks. In its order, the Supreme Court directed the insolvency resolution professional’s appointment, submitted a resolution plan, and further directed Jaiprakash Associates Ltd (developers) to deposit Rs.2,000 crores.

This being the case, the legislature considered the importance of insertion of an explanation into section 5 (8) (f) of the Code (“(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing😉 so that the home buyers could initiate insolvency proceedings as financial creditors Financial Creditor is any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.  Any amount raised from an allottee under the real estate project shall be deemed an amount having commercial effect of a borrowing. The said amount shall come under the definition of financial debt.  The main intent of such an amendment is to enable home buyers to be a part of the Insolvency Resolution Process in an egalitarian manner and protect the Real estate allottees’ interests.   

Constitutionality of 2018 Amendment:

Builders and the real estate developers filed a writ against the Insolvency and Bankruptcy (Amendment) 2018.   In Pioneer Urban Land and Infrastructure v UOI, [3] it was argued that homebuyers’ classification as financial Creditors was unreasonable and having no intelligible differentia.  However, the Supreme Court upheld the constitutionality of the amendment and dismissed the writ application. The amendment was constitutional as the classification of the homebuyers  does not infringe Article 14, Article 19 (1) (g) read with Article 19 (6) or 300A of the Constitution of India. The Supreme Court also held that Real Estate (Regulation and Development) Act, 2016 should be read harmoniously with the Insolvency and Bankruptcy Code provisions,2016.  

2019 AMENDMENT-DILUTES THE RIGHTS OF HOME BUYERS?

The Government had passed the  Insolvency and Bankruptcy (Amendment) 2019 that amends Section 7 of the Code. A condition precedent is imposed on the home buyers to fulfill the minimum threshold prescribed to initiate an application under the Code.  The application must be filed jointly by allottees of the Real Estate Project by ;

i. Minimum of 100 Allottees    or

ii. Minimum 10% of the total allottees( among whichever is  less)

The amendment is retrospective in nature and provided 30 days time limit for the existing applicant to satisfy the minimum threshold.  There was a huge confusion among the stakeholders post the amendment.    Manis Kumar v UOI[4]  is a writ petition filed by a group of home buyers challenging the constitutionality of section 3 Insolvency and Bankruptcy Code (Amendment ), 2019. The said amendment adds provisos in section 7 of the IBC that sets out new conditions, i.e., a minimum threshold for the home buyers to approach the NCLT, which violates the fundamental rights guaranteed under Articles 14 and 21 of the Constitution. 

The following are the grounds on which the home buyers have challenged the amendment:-

1.  The provision in question creates a class within a class that reaps the benefits available under a piece of legislation and violates Article 14 of the Constitution.

2. The amendment’s retrospective application is unconstitutional as the application pending before the NCLT will also have to comply with the amendment.

3. The amendment denies the home buyers’ right to approach the NCLT and thereby deny their fundamental rights.

The constitutional validity of the 2019 Amendment

On reading the writ petition filed by the home buyers under Article 32, it appears that the amendment deprives the rights of the home buyers provided under Article 14 and 21 of the Constitution.   Article 14 guarantees equality to every citizen of India before the law and prohibits unjust discrimination. It permits discrimination based on reasonable classification and prohibits class legislation and hostile discrimination.  In the case of The State Of West Bengal v Anwar All Sarkarhabib[5] , the supreme court prescribes two prolonged tests for classification under article 14 are (i) it should be founded on an intelligible differentia, which distinguishes those that are grouped from those that have been excluded; and (ii) the differentia must have a rational nexus with the object that the statute seeks to achieve. The invocation of the minimum threshold for allottees is violative of Article 14 without any intelligible differentia, and this distinction does not have nexus with the objective of the Code. Though the introduction of the threshold prevents the futile suits’ multiplicity, there are also chances where the majority’s Act might affect an individual. E.g., In the case of 10 allottees, if one particular allottee’s right is being deprived, he is barred from filing an application until the minimum threshold limit is achieved.  Here, the home buyers have already been given the status of financial creditors. Therefore, it is illegal and arbitrary to introduce a class within a class.  This would deprive the right of an allottee as an individual.

A law within the meaning of Article 21 must be consistent with the norms of fairness that originate in Article 14.  This particular amendment is fair or reasonable and cannot be law under the Constitution.  The right to house recognized by the Constitution as interpreted in Shanthistar Builders v Narayan Khimalal Totame[6]  is also violated due to the amendement. Therefore it is concluded that home buyers have become the victims of the 2019 amendment/

RECOURSE UNDER VARIOUS OTHER LAWS:

There are diverse laws and adjudicating forums that deal with resolving disputes between the home buyers and the real estate developers. However, it is to be noted that section 238 of the Insolvency and Bankruptcy Code, 2016 is a non-obstante clause; thus, the Code has an overriding effect over any other law and hence proceedings before any other authority would come to a standstill.

The various legal remedies available to homebuyers are as follows:

1. Real Estate (Regulation and Development) Act 2016: Section 20(3) and (4) of the Act in case of any default committed by the real estate developers, the allottees have the right to claim the apartment or common areas that they are entitled to or for a refund of the amount that was paid. They also have the right to apply online or physically before the Real Estate Regulatory Authority or Adjudicating officer under section 31 of the Act to protect their rights prescribed under section 20.  Each state has its own set of rules for filing forms and procedures to be followed, according to the Central Act.  The proceedings under RERA are relatively faster than the civil proceedings.

2. Consumer Protection Act 1986: The Act is now replaced as Consumer Protection Act, 2019. An allottee who fulfills the requirement under section 2(d) of the Act, i.e., “consumer,” can file an application for redressal in case of any issue such as deficiency of services by the developer before the consumer disputes redressal commission or National consumer redressal commission (“NCDRC”). In case of default less than 1 crore, an application can be filed before the district forum. On default, above 1 crore NCDRC can be approached. There is no prescribed threshold limit to apply. The litigation time is longer when compared to IBC and RERA proceedings.

RELIEF AVAILABLE DURING THE CURRENT PANDEMIC:

The Finance Minister has introduced the economic relief package where the Government has raised the threshold for default from 1 lakh to 1 crore.  The Government has further directed the suspension of insolvency proceedings for 1 year, effective from March 13, 2020, to March 2021, to protect the interest of the corporate debtors affected due to the pandemic. Hence the home buyers are now barred from filing an application under section 7 on the Code suspension.  It is pertinent to note that sec 40C, which was introduced, excluded the period of lockdown from the calculation of timeline for any activity that could not be contemplated due to lockdown imposed by the Central Government with respect t to the corporate insolvency resolution process, which was in effect from March 29, 2020. It was also clarified that any default that arises due to covid-19 would be excluded from the ambit of default.

CONCLUSION:

The effort to include home buyers under the purview of financial Creditor is appreciated as it provides relief to the allottees; however, the amendment of 2019 that introduced a minimum threshold limit for applying to initiate insolvency proceedings against the defaulting real estate debtor debars an individual homebuyer from seeking relief under IBC. The amendment helps the real estate sector from the unnecessary threat of insolvency proceedings. The individual home buyers are barred from applying the NCLT unless the threshold is achieved. But from a practical view, an individual’s right is deprived as it is difficult for all the persons to come in consonance with the same grounds to apply to the authorities.

On perusal of the case laws and amendment of 2018 and 2019, it is understood that the rights of the allottee as an individual to claim damages or allotment of the property they are entitled is barred as they are obligated to fulfill a specified threshold limit to apply to section 7 of the Code.  From the author’s point of view, the 2019 amendment nullifies the main objective of the Code, which is to protect the interest of the Creditor from the defaulting debtor. During the current pandemic, initiation of insolvency proceedings was suspended; however, the homebuyers’ interest was protected as they could seek relief through various other statutes.  


[1]Writ Petition(s) (Civil) No.744 of 2017, Supreme Court of India

[2]Writ Petition(s) (Civil) No.940 of 2017, Supreme Court of India.

[3]Writ Petition (Civil) NO. 43 OF 2019

[4]Writ Petition (Civil) NO. 43 OF 2019

[5] (1952) SCR 284

[6](1990) 1 SCC 520.

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