Allotees are Financial Creditors : Supreme Court

pioneer-urban-land-and-infrastructure-limited-vs-union-of-india

Status as on- 05/07/2021

Case- Pioneer Urban Land and Infrastructure Limited vs. Union of India 

(Supreme Court Judgment dated August 09, 2019 in Writ Petition Civil No.43/2019)

Brief Facts of the case

  1. Insolvency Amendment 2018 inserted an explanation in section 5(8)(f) of the Insolvency and Bankruptcy Code 2016 (“IBC”), clarifying that real estate allottees (“home buyers”) as defined in section 2(d) of RERA were included as financial creditors.
  2. Under Section 7 of the IBC, this amendment allowed the home buyer to initiate insolvency proceedings against defaulting Promoters. However, the Insolvency Amendment 2018 was challenged in the Supreme Court of India by approximately 200 realtors.
  3. In this case, the allottees filed several petitions against the real estate developers who entered into “assured returns / committed returns” agreements with those developers, under which the developer agreed to pay a certain amount to allottees on a monthly basis from the date of execution of the agreement, in exchange for payment of a substantial portion of the total sales consideration in advance at the time of execution.

Held

The Hon’ble Supreme Court ruled as follows:

  1. The Supreme Court relied on the Insolvency Law Committee Report’s recommendation that the amount paid by the home buyer be used to fund the Project. The Supreme Court observed that the amount raised under the sale agreement between the home buyer and the developer has the commercial effect of borrowing because it is paid in advance for temporary use in order for the flat to be returned to the lender.
  2. The Code Amendment Act does not violate Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Indian Constitution.
  3. The RERA should be read in conjunction with the Code, as amended by the Amendment Act. Only in the event of a conflict will the Code take precedence over the RERA. Remedies given to allottees of flats/apartments are thus concurrent remedies, with such allottees of flats/apartments being able to avail of remedies under the Consumer Protection Act, 1986, RERA, and the Code.
  4. The Court relied on its own decision in Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited, in which it was held that Debt Recovery Tribunal proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and winding up proceedings under the Companies Act, 1956, can proceed concurrently. The court said that “even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code.”
  5. Section 5(8)(f), as it first appeared in the Code, is a residuary provision that always includes allottees of flats/apartments. The explanation, along with the deeming fiction added by the Amendment Act, only serves to clarify this legal position.

Impact of the Case

This Judgment was a boon to home buyers, as a number of insolvency proceedings were initiated against real estate companies as a result of it. However, in several of these cases, projects that were on the verge of completion were dragged into insolvency. To address such challenges, the Insolvency and Bankruptcy (Second Amendment) Bill 2019 is currently being considered by the Insolvency Law Committee Report. The amendment specifically seeks to add a proviso to Section 7 that provides minimum thresholds for initiating insolvency proceedings, i.e., jointly by not less than one hundred such allottees under the same real estate project or jointly by not less than ten such allottees under the same real estate project.

Concerning the claim that the amendment violates Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Indian Constitution, the Supreme Court stated that the Code is a beneficial legislation that can be triggered to put the corporate debtor back on its feet in the interest of unsecured creditors such as allottees, who are vitally interested in the financial health of the corporate debtor.

The Supreme court ruled the following:

“Thus, applying the Shayara Bano v. Union of India (2017) 9 SCC 1 test, it cannot be said that a square peg has been forcibly fixed into a round hole so as to render Section 5(8)(f) manifestly arbitrary i.e., excessive, disproportionate or without adequate determining principle. For the same reason, it cannot be said that Article 19(1)(g) has been infracted and not saved by Article 19(6) as the Amendment Act is made in public interest, and it cannot be said to be an unreasonable restriction on the Petitioner’s fundamental right under Article 19(1)(g). Also, there is no infraction of Article 300-A as no person is deprived of its property without authority of a constitutionally valid law.”

Conclusion

In this case, the Supreme Court upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which included ‘real estate allottees’ within the definition of ‘financial creditors’ under Section 5(8)(f) of the Insolvency and Bankruptcy Code. The decision is a watershed moment for allottees, who will now not only have the authority to enforce the Code, but will also be members of the Committee of Creditors on the same terms as banks and other financial institutions.

While this decision brought a new tool to the homebuyers’ arsenal by providing them with additional recourse against the developers, it did not leave the developer hanging because it also provided a variety of safeguards that the developer could use to keep unscrupulous allottees at bay. As a result of reviewing the preceding judgement, it is possible to conclude that this landmark decision will undoubtedly serve as a major deterrent to fraudulent builders. By upholding the substantive validity of the provision in the Insolvency and Bankruptcy Code, 2016, the Supreme Court has provided a major sigh of relief to aggrieved homebuyers, who now seek relief under the Code without any difficulty.

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

 

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