Home Buyers under IBC

Under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), Homebuyers were at a disadvantageous position with respect to insolvency proceedings since they were not considered as ‘Financial’ or ‘Operational’ Creditors. Homebuyers were neither allowed to initiate the Corporate Insolvency Resolution Process (‘CIRP’) against a defaulting Builder or Real Estate Developer nor were they allowed to be a part of the Committee of Creditors (‘COC’). A guarantee of receipt of liquidation value under the Resolution Plan also was not given to them.

However, in the matter of Chitra Sharma and Ors. Vs. Union of India and Ors., Home buyers/ Allottees approached the Apex Court for protection of their financial interest in an insolvency proceeding against Jaypee Infratech Ltd., a SPV created by holding company Jaiprakash Associates Ltd. The said writ petitions was moved before the Apex Court in the exercise of its jurisdiction under Article 32 to protect the interest of Home Buyers, who had been left in the lurch and they had no locus in the CIRP. Liquidation would leave the home buyers to face an uncertain future. The proceedings under the said matter were instituted for the various reliefs including one i.e. a direction be issued to the Union of India to protect the interest of home buyers in the larger public interest. In the said matter, the Apex Court vide its order dated 11^th September, 2017 directed IRP to ensure that necessary provisions should be made to protect the interest of home buyers. Further, to facilitate the views of the home buyers being placed before the COC the Apex Court nominated Mr. Shekhar Naphade, learned senior counsel to participate in those meeting under section 21 of the IBC. The Apex Court hold that at that stage, it must be noted, the COC as constituted under section 21 of the IBC did not include a representative of the home buyers. Nor were the Homebuyers regarded as financial creditors under IBC. The mechanism evolved by the Court was intended to provide a workable arrangement under the then prevailing regime so that the interests of the home buyers would not be ignored.

The Apex Court appraised that the IBC, as it was originally enacted, did not contain an adequate recognition of the interests of home buyers in real estate projects. Home buyers are vital stake holders. The process of corporate insolvency resolution directly impacts upon their rights and interests. Yet the IBC, as initially crafted, did not protect them. The concerns of the home buyers have been sought to be assuaged by the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 which came into force on 06^th June 2018. As a result of the Ordinance, Homebuyers are brought within the purview of Financial Creditors under the IBC.

As the Insolvency and Bankruptcy (Ordinance) 2018 has came into effect on 06^th June, 2018 whereby homebuyers were given status of Financial Creditor, therefore, the Hon’ble Court keeping in mind the Ordinance and to do complete Justice exercised its power under Article 142 of the Constitution and decided batch of Writ Petitions vide order dated- 09.08.2018 giving various direction to parties concerned including initiations of CIRP afresh form the date of its order, reconstitution of COC afresh, and allowing Homebuyers to be part of COC in the light of Ordinance passed.

The position of Homebuyers under the IBC gained further impetus when the Apex Court followed a similar stance as taken in Chitra Sharma (ibid) in the case of Bikram Chatterji v Union of India, where the Apex Court was dealing with the insolvency resolution of the Amrapali Group, and re-emphasized the observations in Chitra Sharma (ibid) qua Homebuyers.

It is to be noted that aforesaid Chitra Sharma (ibid) was decided on 9^th August, 2018 and within  9 days i.e. on 17th August, 2018 from the date of this order, The Insolvency and Bankruptcy (Second Amendment) Act, 2018 (‘Amendment Act, 2018’) was passed which gave a ray of hope to the Homebuyers in India in the sense that they were to be included under ‘Financial Creditors’ which gave them the right to initiate Corporate Insolvency Resolution Plan against an errant developer as given under section 7 of the IBC. After this  Amendment Act, 2018, ‘Allottees’ as understood under section 2(d) of the Real Estate (Regulation and Development) Act, 2016 (“RERA”) were allowed to initiate CRIP under section 7 of the IBC as Financial Creditors. In order to strengthen the claim of Homebuyers to initiate CIRP against promoters and developers, an explanation to section 5(8)(f) of the IBC was added to include the amount spent by homebuyers into a real estate project as ‘Financial Debt’.

The relevant explanation added to Section 5(8)(f) of the IBC by the Amendment Act, 2018 w.r.e.f. 06.06.2018, is as under-

Explanation- For the purposes of this sub-clause-

(i) Any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) The expression, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016).

Later on the large number of writ petitions that have been filed before the Apex Court in the matter of Pioneer Urban Land and Infrastructure Ltd. v. Union of India, challenge the constitutional validity of amendments including the amendments so made deem allottees of Real Estate Projects to be “Financial Creditors” so that they may trigger IBC, under Section 7 thereof, against the Real Estate Developer. In addition, being financial creditors, they are entitled to be represented in the COC by authorised representatives. However, in a major fillip for the rights of Homebuyers, the Apex Court upheld the  Amendment Act, 2018 and held that the investment of Homebuyers that are utilized by developers and their promoters have the commercial effect of borrowing, as understood under the IBC.

The Legislature as well as the Apex Court have time and again recognized allottees to be a special category of financial creditors. IBC does not provide for any differentiation or any benchmark whatsoever regarding the qualifications of the financial creditors, thus, any CIRP initiated by the allottees ought to be treated in a similar manner as the CIRP initiated by any other financial creditor as per Section 7 of IBC. In fact, as was observed by the Apex Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, there are other financial creditors who may be on a similar footing as allottees, such as individual debenture holders and fixed deposit holders, who may not have the expertise to assess the feasibility of resolution plans, however, the same does not bar them from being a part of the COC.

On 28th December 2019, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was introduced. Under the Amendment Ordinance, a single homebuyer was barred to approach the NCLT under section 7 of the IBC. As per the Amendment Ordinance, the homebuyers were now required to approach the NCLT with a joint application of at least 10% or 100 of the total homebuyers of a project (whichever is less). Later on, the Insolvency and Bankruptcy (Amendment) Ordinance 2019, which was subsequently replaced by the Insolvency and Bankruptcy (Amendment) Act, 2020 (‘Amendment Act, 2020’) w.r.e.f. 28.12.2019 implemented a minimum cap on the number of homebuyers required to initiate CIRP with respect to a real estate project. Under the amended section 7 of the IBC, the threshold was set at either 100 allottees or 10% of the total allottes in a given real estate project, whichever was lesser.

The proviso added to Section 7 by the Amendment Act, 2020 include three provisions which are as under-

Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

The aforesaid minimum cap on the number of Real Estate Allottees was challenged in a Writ petition titled Manish Kumar v Union of India & Anr. (WP(C) No. 26 of 2020 with 40 other writ petitions) as it violates Article 14 of the Constitution of India. In this matter, the Hon’ble Supreme Court vides its order dated 19^th January, 2021 ruled against a group of Allottees of Real-Estate Projects who had challenged such amendment.

In practical, it may be difficult to fulfil the minimum requirement of 10% or 100 Real Estate Allottees to file any petition under section 7 of the IBC, for instance, some of the allottees may be inclined to pursue different legal routes.

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