AUTHORED BY: GAURAV PURI (MANAGING PARTNER, GLS LAW OFFICES)
- Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) [1] has, since its inception, been surrounded by controversies, clarifications and amendments. One such controversy that arose is whether the home-buyers could be included as financial creditors for the purpose of the code. The home-buyers issue was first raised in the cases of Jaypee-Infratech and Amrapali [2]. In March 2018, the Court pronounced in Chitra Sharma v. Union of India[3] that the homebuyers were financial creditors with respect to the Act. In June 2018, the Government enacted The Second Amendment Act, 2018 [4] to the Code to clarify the position of law with regard to homebuyers by expressly including homebuyers under the purview of financial creditors under Section 3 sub-clause (ii). [5] The amendment led to an addition of an explanation clause to Section 5(8) (defines financial debt). The explanation, in effect, added to the definition of financial debt; any amount raised from an “allottees” for “real estate projects” [as defined in Real Estate (Regulation and Development) Act, 2016]to have the commercial effect of borrowing. Secondly, the above-mentioned amendment allowed appointing a representative in the Committee of Creditors (hereinafter COC) under Section 21(6A) in order to represent the class of homebuyers. [6] The above-mentioned representative was granted voting powers by virtue of Section 25A. [7] In 2019, the Amendment Act was challenged by a large group of builders in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. [8], in which the apex Court upheld the Amendment Act of the Government. The latest amendment to the Code has, vide section 3, refused to entertain individual claims. The law now requires that 10% or 100 homebuyers, whichever is less, from the same real estate project must be present for an application to the Company Courts.[9]
In this article, the author analyses the anomalies of including homebuyers as financial creditors through Article 14 of the Constitution.
A legislative measure to pass the judicial test of Article 14 must pass the following judicial tests:
- Reasonable Classification by Intelligible Differentia
- Rational Nexus to the object of the act
- Non-Arbitrariness
The three tests have been analysed hereinafter under the following heads:
- Conflicting Interests of Home-Buyers
Firstly, the judgment in Pioneer Urban Land (supra) assumes the fact that all home-buyers want the same remedy i.e. a refund of money. It is human-nature to want separate things from a property, which is why a home-buyer cannot constitute a homogenous class in itself represented by a single representative. It is argued that not every home-buyer wants refund of their money. Firstly, there is a class of home-buyers that want possession from the builder(s) of their home and secondly there may be homebuyers that are currently under litigation in either the Consumer Forum or the RERA Courts, irrespective of a consensus of 10% or 100 homebuyers, whichever is less, is achieved (as per the Amendment Act, 2019).
Therefore, treating home-buyers as one class is wrong and imagining that all home-buyers will agree on one way to go in terms of remedy against the default by the builder is an incorrect assumption. This legislative assumption can be inferred from the amendment to Regulation 9A that introduced FORM –F just prior to the second amendment act by which a new class of creditors have been introduced i.e. “other creditors” under for home-buyers, they are also allowed to submit their claims to the COC. [10] Though, under the said form only financial details were asked by making an assumption that money would be the relief that each home-buyer would want. Therefore, the inclusion of homebuyer as financial creditors creates a situation where un-equals are treated equally in terms of the relief they seek which is in direct violation of the Principle of Reasonable Classification based on Intelligible Differentia under Article 14 of the Constitution.
- Recovery is against the Legislative Intent of IBC.
The legislative intent of IBC is “relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority.” [11]
It is clear the Code intends to keep the company alive with considerations of the lives that depend on the company in terms of the people it employs and the lives it affects including the home-buyers. Liquidation is the second step when restructuring fails. The job of the COC is to act together as a team to achieve the said purpose rather than on opposite sides with sole motive of recovery. Recovery is not the purpose of the Code as it will bleed the firm dry rather than trying to restructure it with available assets and keep it a going concern.
The purpose of the Code can be seen throughout the scheme of provisions. For instance, the Code has the provision of a moratorium, which enables the COC to decide the future actions to maximise the value of the firm without the stress of recovery demands. As explained above the heterogeneous demands of home-buyers may not always want to maximise the value of the firm rather they may demand recovery of their money which is anti-thesis to the Code. The Code also envisages a timely resolution which is bound to be affected by this decision.
By being against the legislative intent of the Code, the provision of home-buyers violates the Principle of Rational Nexus i.e. the second principle under Article 14 of the Constitution.
- Generalisation of Builders
The real estate market, which is already in dire straits, has taken another hit. By this power that is granted to the home-buyers, a situation is created where a single company that has multiple projects under it is at the mercy of home-buyers of a single project who can initiate a Corporate Insolvency Resolution Procedure (hereinafter CIRP) for a default of a mere INR 1 lakh without considering the other successful projects, the people that reside in it or even the upcoming constructions that the company may have undertaken and investors of the same. The legislature cannot comprehend every situation to be exactly the same as Jaypee Infratech, Supertech, Amarpali etc. [12]
Secondly, a lot of other anomalies may arise with regards to the question of why the default occurred or the nature of transaction. The NCLT, being very limited in its scope with regards to admission of CIRP against companies, does not adjudicate with regard to the contract between the two parties, rather it merely sees the existence of default, the form and manner of filing application. In Innoventive Industries v. ICICI Bank[13] the process was clarified that “the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due”. The reason for the default and the existence of dispute that is seen under operational debt are matters not delved into by the NCLT in determining financial debt under the Code.
Limiting the article to situations where CIRP is freshly initiated by the home-buyer the Code will not go into the intricacies of the Contract between the builder and the buyer. The Court will not adjudicate with regards to a dispute under the financial debt. Therefore, it will leave builders at the mercy of the home-buyers, even if they are ready and willing to complete contractual obligations. The same may in consequence lead to an otherwise solvent company to be pushed into insolvency and it may dampen the real estate and corporate environment. This constitutes a disproportionate penalty for the builder making the act Arbitrary.
Secondly, the Consumer Protection Act, 1986 (CPA) and RERA, 2016 are already present for the relief of home-buyers. The legislative intent of CPA and RERA is to protect home-buyers and residential interests respectively. The IB code on the other hand intends on maximisation of value. Therefore, the remedy for homebuyers cannot be insolvency of the Company.
Both the abovementioned laws balance the interest of the builder and the buyer whereas IBC may be used as a threat against builders for recovery.
- Way Forward
A possible remedy to the problem may lie if the home-buyers are to be made operational creditors rather than financial creditors. This is because the scheme of Section 8 is with regards to a pre-existing dispute. Secondly, operational creditors do not hamper the restructuring process under the COC. Or in the alternative, either the contract and dispute if any are gone into for purposes of adjudicated of admission of insolvency petition or the home-buyers are granted powers of financial creditors in a set limited number of situations that may change according to facts and circumstances of the case and the nature of transaction.
Currently, the said Amendment Act generalises the whole builder-buyer dispute along the lines of what happened in Jaypee (supra) and others of the same factual scenario, but fails to regard the case of bona-fide builders willing to complete their contractual obligations. It also fails to distinguish between different classes of home-buyers. The Jaypee case was for home-buyers where the company was already under moratorium but giving the power of financial creditors to home-buyers in response does not seem proportional.
REFERENCES:
[1] THE INSOLVENCY AND BANKRUPTCY CODE, 2016, NO. 31 OF 2016.
[2] W.P. (C) 744 of 2017.
[3] Id.
[4] Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. NO. 26 OF 2018.
[5] Supra note 1, at explanation to Section 5 (8) as amended by Insolvency and Bankruptcy Code (Second Amendment) Act, 2018
[6] Id., at Section 21(6A), as amended by Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
[7] Id., at Section 25A, as amended by Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
[8] W.P. (C) 43 of 2019.
[9] Jatin Rajput, Homebuyers & IBC (Amendment) Act, 2020: Four Years, Two Amendments and Journey still Continues, IBCLAW (6th May, 2020), Available at: https://ibclaw.in/homebuyers-ibc-amendment-act-2020-four-years-two-amendments-and-journey-still-continues-advocate-jatin-rajput/
[10] Regulation 9A, INSOLVENCY RESOLUTION PROCESS FOR CORPORATE PERSONS) REGULATIONS, 2016.
[11] Supra note 1.
[12] Anuradha Shukla, ‘No home, No vote’ vow angry home-buyers in Noida duped by builders, NEWINDIANEXPRESS (December 18th, 2018), Available at: https://www.newindianexpress.com/cities/delhi/2018/dec/18/no-home-no-vote-vow-angry-home-buyers-duped-by-builders-1912993.html
[13] AIR 2017 SC 4084.
Published in: Manipal Law Review on 27 May 2020