The Insolvency and Bankruptcy, Code (Amendment) Ordinance, 2019 introduced new parameters for (A) Homebuyers and (B) Financial Creditors meeting special conditions requiring appointment of Trustee or Agent or Authorised Representative, in order to be eligible to file petition before the Hon’ble Adjudicating Authority (National Company Law Tribunal) seeking Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor/ Builder entity levying the following parameters:
by specified Financial Creditors (Homebuyers)
|Financial creditors meeting specified conditions as per section 21(6A) (a) and (b) of IBC or who are Allottees under a real estate project, an application for initiating CIRP against the corporate debtor shall be filed jointly by satisfying any of the below conditions:
|Existing Cases by specified Financial Creditors (Homebuyers)||Financial creditor referred to in the first or second provisos of section 7 (1) where application has not been admitted by the Adjudicating Authority before the commencement of the IBC (Amendment) Ordinance, 2019, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission.|
If one looks at this pragmatically, this is a draconian amendment and takes away the long struggled powers vested to the Homebuyers to effectively recover their money from the Builder companies and take them for resolution of debts especially in projects stalled for years.
There are various suggestions that ideally the limit should be brought down to 10 persons in number or if the value of the debt collectively exceeds 1 crore CIRP can be initiated against the Builder. It is observed that no data is available regarding the details of the project allottees individual homebuyers.
Further, there is no compulsion on the builders to upload the data on its website and on the other hand the disclosure of the names of the buyers on the website of the builders may affect the right to privacy of Individual Homebuyers.
Section 3 of the Ordinance which adds provisos in section 7 of the IBC and set out new condition for real estate allottee to approach NCLT as being in violation of Article (s) 14 and 21 of the Constitution of India (“Constitution”).
It is expected that after coming into effect the aforesaid amendment in Section 7, there is a likelihood that hombuyer’s cases will deemed to be withdrawn, if they fails to comply with the new requirement given in section 7 of the IBC as the same is near impossible to comply.
Financial Creditors already form a “class” within Creditors under the Insolvency and Bankruptcy Code, 2016 (“Code”) and debt owed to them forms a “class” u/s 5 (8) of the Code. This has already been recognized by the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. and Ors. v/s Union of India and Ors. (2019) 8 SCC 416. The Supreme Court is of view that the IBC is a legislation which can be used as a tool for recovery from the Corporate Debtor in the interest of Unsecured Creditors Like allottees. Therefore the ordinance goes against the aforesaid judgment of the Hon’ble Supreme Court.
The Ordinance differentiates between the Financial Creditor and further imposes a condition on that newly created class. This condition stops them from prevailing the benefits available to others under the Code. This creates a “class within a class” and is unconstitutional and manifestly arbitrary, violating the provisions of Art. 14 of the Constitution of India.
The Ordinance have been brought in such a hurried manner, that it over-turned a law laid down by the Hon’ble Supreme Court. In the light of the Judgement of Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. and Ors. v/s Union of India and Ors. (supra.). Hence, this classification is not reasonable and amounts to Class Legislation within the meaning of “Arbitrariness” and the same is prohibited by Art. 14 of the Constitution.
A home for a family is a basic human need, the present Ordinance which denies Home Buyers their right of approaching NCLT, also denies them accessing their Fundamental Rights.
It is clear that arranging 100 homebuyers is almost impossible task for an individual homebuyer who are running from pillar to post to get their flat or refund of its project value from the Builders.
Interim Stay on amendments to Homebuyers / Class of Financial Creditors new provisions by Hon’ble Supreme Court
The Hon’ble Supreme Court vide its order in several writ petition filed before it seeking quashing of the new amendment to section 7(1) of the IBC via two new proviso’s has granted stay on the amendment to already filed cases before 28.12.2019, when the amendment was effected.
What is means is that the already pending cases of Homebuyers of other financial creditors falling within the ‘Class’ of Financial Creditors before the amendment on 28.12.2019 filed with Hon’ble NCLT (Adjudicating Authority) shall not be required to comply with the amendment within 30 days as specified therein until further orders from Hon’ble Supreme Court on the various writs filed before Hon’ble Supreme Court by home buyers or other investors.
In these matters the Hon’ble Supreme Court has issued notice to the Central Government seeking its reply in these writs challenging the amendments.
The very objective of the Insolvency and Bankruptcy Code to provide resolution of an insolvent corporate debtor would also miss if this significant threshold is remained as the objective is to resolve and make the corporate debtor viable for business requirements and meeting the demands of the Stakeholders.
To sum up, the criteria should be based on such parameters which are reasonable from the perspective of the Builder as well as Homebuyers.
For example the government may consider revisions on following parameters within the purview of IBC:
- Consider some reasonable number of Homebuyers, say Ten (10) homebuyers can collectively file Petition given that the IBC and its Regulations also specify the requirement of ten financial creditors to constitute a “class of financial creditors”. OR
- Consider a higher financial debt default cap for initiation of CIRP petition, say Rs One (1) Crore for Homebuyers, so that they can pursue the remedy against the Builder, as otherwise the limit is Rs One (1) Lakh for considering default. Accordingly, for the homebuyers the limit of significantly higher amount say Rs One (1) Crore could be moderate, which will meet the balance between the homebuyers and the builders fraternity. This will be in sync of the provisions of section 4 of the IBC, which caps a minimum amount of default for initiation of CIRP from Rs 1 Lakh enhanceable to
Rs 1 Crore.
It may be noted that the present norms also requires appointment of Authorised Representative for “Class” of financial creditors with minimum of 10 financial creditors in a class/ homebuyers.
The Hon’ble Supreme Court has laid various landmark judgments in shaping the provisions of the IBC. Let us hope the interest of Homebuyers is yet again protected and right to file petitions by individual Homebuyer is restored under IBC law in the writs filed.
The author Mr Pankaj Jain, Advocate is partner Veda Legal, Advocates and Solicitors with inputs from Ms. Sneha Pandey, Associate. Views expressed are personal.