SC upholds the status of home buyers/allotees as financial creditors u/ IBC

The Hon’ble Supreme Court, on 9thAugust 2019, in the matter of Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Orswhile upholding the constitutional validity of theInsolvency and Bankruptcy Code (Second Amendment) Act, 2018 pronounced that where only interim or no adjudicating officer/Real Estate Regulatory Authority and/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within a period of three months.

It was also observed that IBC & RERA co-exist, however, in any event of clash, the IBC shall prevail over RERA.

Furthermore, it was held that the Section 5(8)(f) of IBC as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments.

The Hon’ble Supreme Court observed that:

The legislative judgment in economic choices must be given a certain degree of deference by the courts. (Para 15)

Real Estate (Regulation and Development) Act, 2016 (RERA) is in addition to and not in derogation of the provisions of any other law for the time being in force (Para 24)

The remedies under RERA to allottees were intended to be additional and not exclusive remedies. (Para 24)

Even by a process of harmonious construction, RERA and the Insolvency and Bankruptcy Code, 2016 must be held to co-exist, and, in the event of a clash, RERA must give way to the Insolvency and Bankruptcy Code. (Para 28)

RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Insolvency and Bankruptcy Code. (Para 28)

As a matter of fact, the Code and RERA operate in completely different spheres. (Para 29)

There are different parallel remedies given to allottees under Real Estate (Regulation and Development) Act and the Insolvency and Bankruptcy Code. Under RERA to see that their flat/apartment is constructed and delivered to them in time, barring which compensation for the same and/or refund of amounts paid together with interest at the very least comes their way. If, however, the allottee wants that the corporate debtor’s management itself be removed and replaced, so that the corporate debtor can be rehabilitated, he may prefer a Section 7 application under the the Insolvency and Bankruptcy Code. That another parallel remedy is available is recognised by RERA itself in the proviso to Section 71(1), by which an allottee may continue with an application already filed before the Consumer Protection fora, he being given the choice to withdraw such complaint and file an application before the adjudicating officer under RERA read with Section 88. (This inference has been drawn on the basis of Para 29)

The Insolvency and Bankruptcy Code is not meant to be a debt recovery mechanism. It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it. Thus, any allottee/home buyer who prefers an application under Section 7 of the Code takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer. Under the Code, he may never get a refund of the entire principal, let alone interest. This is because, the moment a petition is admitted under Section 7, the resolution professional must first advertise for and find a resolution plan by somebody, usually another developer, which has then to pass muster under the Code, i.e. that it must be approved by at least 66% of the Committee of Creditors and must further go through challenges before NCLT and NCLAT before the new management can take over and either complete construction, or pay out or refund amounts. Depending on the kind of resolution plan that is approved, such home buyer/allottee may have to wait for a very long period for the successful completion of the project. He may never get his full money back together with interest in the event that no suitable resolution plan is forthcoming, in which case, winding up of the corporate debtor alone would ensue. On the other hand, if such allottee were to approach the Real Estate Regulatory Authority under RERA, it is more than likely that the project would be completed early by the persons mentioned therein, and/or full amount of refund and interest together with compensation and penalty, if any, would be awarded. Thus, given the bona fides of the allottee who moves an application under Section 7 of the Code, it is only such allottee who has completely lost faith in the management of the real estate developer who would come before the NCLT under the Code hoping that some other developer takes over and completes the project, while always taking the risk that if no one were to come forward, corporate death must ensue and the allottee must then stand in line to receive whatever is given to him in winding up. (Para 39)

It is impossible to say that classifying real estate developers is not founded upon an intelligible differentia which distinguishes them from other operational creditors, nor is it possible to say that such classification is palpably arbitrary having no rational relation to the objects of the Code. (Para 40)

The object of dividing debts into two categories under the Insolvency and Bankruptcy Code namely, financial and operational debts, is broadly to sub-divide debts into those in which money is lent and those where debts are incurred on account of goods being sold or services being rendered.(Para 41)

Real estate developers fall squarely within the object of the Insolvency and Bankruptcy Code as originally enacted insofaras they are financial debtors and not operational debtors. (Para 41)

Home buyers/allottees can be assimilated with other individual financial creditors like debenture holders and fixed deposit holders, who have advanced certain amounts to the corporate debtor. (Para 41)

Home buyers/allottees give advances to the real estate developer and thereby finance the real estate project at hand, are really financial creditors. (Para 43)

If a Section 7 (Insolvency and Bankruptcy Code) application is admitted in favour of an allottee, and if the management of the corporate debtor is in fact a strong and stable one, nothing debars the same erstwhile management from offering a resolution plan, subject to Section 29A of the Code, which may well be accepted by the Committee of Creditors in which home buyers now have a voice. (Para 48)

To assume that the moment the insolvency resolution process starts, corporate death must ensue is wholly incorrect. If the real estate project is otherwise viable, resolution plans from others may well be accepted and the best of these would then work in order to maximise the value of the assets of the corporate debtor. (Para 48)

Just as information utilities provide the kind of information as to default that banks and financial institutions are provided under Sections 214 to 216 of the Code read with Regulations 25 and 27 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, allottees of real estate projects can come armed with the same kind of information, this time provided by the promoter or real estate developer itself, on the basis of which, prima facie at least, a “default” relating to amounts due and payable to the allottee is made out in an application under Section 7 of the Code. (Para 50)

Thus, in order to be a “debt”, there ought to be a liability or obligation in respect of a “claim” which is due from any person. “Claim” then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. (Para 60)

A debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense”, and includes repayment. (Para 60)

The expression “disburse” would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression “disbursed” refers to money which has been paid against consideration for the “time value of money”. In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee “disburses” money in the form of advance payments made towards construction of the real estate project. (Para 61)

The expression “borrow” is wide enough to include an advance given by the home buyers to a real estate developer for “temporary use” i.e. for use in the construction project so long as it is intended by the agreement to give “something equivalent” to money back to the home buyers. The “something equivalent” in these matters is obviously the flat/apartment. Also of importance is the expression “commercial effect”. “Commercial” would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is “raised” under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the “commercial effect” of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have “commercial” interests in the same – the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. (Para 67)

There can be no difficulty in stating that the amounts raised from allottees under real estate projects would, in fact, be subsumed within Section 5(8)(f) of the Insolvency and Bankruptcy Code. (Para 67)

The legislature is not precluded by way of amendment from inserting words into what may even be an exhaustive definition. What is an exhaustive definition is exhaustive for purposes of interpretation of a statute by the Courts, which cannot bind the legislature when it adds something to the statute by way of amendment. (Para 73)

Although a deeming provision is to deem what is not there in reality, thereby requiring the subject matter to be treated as if it were real, yet several authorities and judgments show that a deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain. (Para 83)

Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. (Conclusion i)

Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Insolvency and Bankruptcy Code.(Conclusion ii)

Section 5(8)(f) as it originally appeared in the Insolvency and Bankruptcy Code always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.(Conclusion iii)

Where only interim or no adjudicating officer/Real Estate Regulatory Authority and/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within a period of three months (Para 87)

Copy of judgement: Judgement_09-Aug-2019

-Adv. Tushar Kaushik

Leave a Reply

Your email address will not be published. Required fields are marked *