The Supreme Court in Pioneer Urban Land and Infrastructure Limited vs. Union of India (Pioneer Judgment)[1], has upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018[2]. Via the Amendment Act, the ‘real estate allottees’ (home buyers), as defined under Section 2(d) of the Real Estate (Regulation and Development) Act, 2016 (RERA), were brought within the ambit of ‘financial creditor’ under the Insolvency and Bankruptcy Code, 2016 (IBC).
The Apex Court in a voluminous judgement in a batch of 150 petitions laid down that the Amendment Act to the Code does not infringe the fundamental rights of the Real Estate Developers under the Constitution of India. The Apex court referring to section 88 of RERA also laid down that the RERA is to be read harmoniously with the Code, as amended by the Amendment Act since it is in addition to and not in derogation to other laws being in force and in the event of conflict the Code will prevail over the RERA. The explanation to the Section 5(8)(f) added by the Amendment Act is only clarificatory of the position in law stood before the amendment.
INSOLVENCY COMMITTEE REPORT: Raison d’être for the Amendment Act 2018
The Amendment Act 2018 was passed clarifying the position of law qua the Home Buyers as Financial creditors within the provisions of the Code after an order was passed in ‘Chitra Sharma & Ors. v UOI’[3] including the home buyers in the Committee of Creditors. But the position of law was under a conundrum qua the status of the Home buyers as the Apex Court had recorded in an order in Chitra Sharma(supra) that it was only concerned with those home buyers who intend to obtain a refund of amounts advanced by them, being 8% of the total home buyers/allottees in Jaypee’s case.
FEATURES OF INSOLVENCY REPORT:
The Committee discussed that the amounts so raised are used as a means of financing the real estate project and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. On a plain reading of section 5(8)(f), it was clear that it is a residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing”.
The committee also deliberated on the phenomena of delay in under construction housing projects.
It was duly noted by the Committee that the amount of money given by home buyers as advances for their purchase is usually very high, and frequent delays in delivery of possession may thus, have a huge impact. It was also duly noted by the Committee that the allottees would require adequate representation before the COC and therefore a new proviso should be added to section 21 of the code.
THE INSOLVENCY AND BANKRUPTCY CODE, 2016 IN COMPARISON WITH THE REAL ESTATE (REGULATION AND DEVELOPMENT) ACT, 2016
The Apex Court after detailed discussion was satisfied that the provisions of RERA will be harmoniously construed in comparison with the provisions of the code since RERA came in to effect much before the introduction of the Code and if at all the Parliament wanted a special statute in the form of RERA then it would not have introduced another legislations to enforce rights of the aggrieved and also it would not have added section 88 in RERA. Therefore, in the event of conflict the provisions of the Code would prevail over the provisions of RERA.
FINANCIAL CREDITOR v OPERATIONAL CREDITOR
It was observed by the Supreme Court after a lengthy discussion that the allottees are financial creditors and not operational creditor since the allottees have considerable interest in the timely completion of the project. They invest in the project and expect assured returns till the possession is handed over to them which gives it the colour of commercial debt.
The Supreme Court after referring to the landmark judgements qua the test of Article 14 of the Constitution of India, it held that there existed an intelligible differentia which distinguishes the Real Estate Developers from operational debtors since in this case the developer who is the supplier of the flat/apartment is the debtor inasmuch as the home buyer/allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found and terming them as operational debtors will be contrary to the object of the code to be achieved.
SECTION 5(8)f of the CODE
The Supreme Court was in agreement in upholding the amendment of the code since the amount raised under a real estate agreement which is done with profit as the main aim, such amount would be within the definition of section 5(8)(f) of the code and would have commercial effect of a borrowing culminating into a ‘financial debt’ as defined in the code which is disbursed against consideration for time value of money as it is clear that an allottee “disburses” money in the form of advance payments made towards construction of the real estate project. It further held that both parties have commercial interests in the same project. Therefore, the amount raised from allottees are within the purview of section 5(8)f of the code and for the same, the court need not take advert to the explanation inserted by the Amendment Act 2018.
RETROSPECTIVE EFFECT OF THE AMENDMENT
The Supreme Court of India has cleared the dust from retrospective applicability of the Amendment Act by holding that home buyers were included in the main provision, i.e. Section 5(8)(f) of the IBC with effect from the inception of the IBC. It has further clarified that the explanation was added later in the year 2018 only to clear up any doubts that had arisen in its implementation.
CONCLUSION
The Supreme Court has taken a significant step in holding that the IBC is a ‘beneficial legislation’ that can be invoked by unsecured financial creditors like home buyers. This clears the air for the allottees having commercial units who are deemed allottees under the RERA as they would also be called as Financial Creditors and would possess powers to invoke the provisions of the code under section 7 if they have lost all hope in the management of the defaulting Real Estate Developer, since the amendment act of 2018 of the code has passed the litmus test of Constitutionality. Therefore, it is apposite to aver herein that the explanation to section 5(8)(f) of the code read with section 2(d)(e)(j) of RERA makes a person having commercial unit a financial creditor as well under the code.
To sum it up, the judgment re-affirms the rights of home buyers as financial creditors under the IBC. While this is a landmark judgment for genuine home buyers, there is a long battle in store for the real estate industry, which is already suffering from severe liquidity issues and other operational hurdles.
