The real estate sector in India is one of the sacred industries as the ownership of immoveable property is seen as an essential and an important investment of income. However, the last two decades have witnessed numerous builders having defaulted in their obligations to deliver the flats timely and hence, there was a surge in such home buyers in seeking remedies under Consumer Protection Act, 1986 and under the specialized law of Real Estate (Regulation and Development) Act, 2016.
Thereafter, when the Insolvency and Bankruptcy Code, 2016 (‘IBC’) was promulgated,many home buyers sought to invoke the same due to the nature of definition of ‘financial debt’ and ‘default’provided under the IBC originally, and filed applications under Section 7 of the IBC initiating the process of CIRP against the builders.
Initially, there existed a confusion with respect to the position of home buyers under IBC as they were not specifically included under the definition of ‘financial creditor’. However, the same was clarified with the order of the Hon’ble NCLAT in the case of Nikhil Mehta and Sons v. AMR Infrastructure wherein itwas held that amounts raised by developers under assured return schemes had the “commercial effect of a borrowing”. Such amount was shown as “commitment charges” under the head of “financial costs” in the developer’s annual returns.
As a result of this, it was conclusively decided that such allottees were held to be “financial creditors” within the meaning of Section 5(7) of the IBC and hence, were eligible to apply for commencement of the process of CIRP for a corporate debtor.
Thereafter, this issue was also dealt with by the Hon’ble Supreme Court of India in the case of Chitra Sharma v. Union of India, wherebyit upheld the right of the home buyers and appointed a representative of the home buyers; to participate in meetings of the Committee of Creditors of Jaypee Infratech Ltd. A similar decision was also passed by the Apex Court in the case of Bikram Chatterji v. Union of India, wherein the Court cancelled the registration of the developer (Amrapali Group) as it failed to fulfil the obligations towards the home buyers.
Amendments to Definition of Financial Debt under Section 5(8) of the Code
To give clarity regarding the provision of ‘financial debt’ and the status of home buyers under IBC, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 was promulgated as recommended by the Insolvency Law Committee Report, 2018. Section 5(8)(f) of IBC which provides that:
“(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes–………………………
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;……….”
was amended by virtue of Clause 3(ii) of the Ordinance and the following Explanation was incorporated:
“Explanation.- For the purpose 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 expressions, “‘allottees” and “real estate projects” 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 (6 of 2016);”
The said amendment incorporated by the Ordinance received the approval of the Parliament and thereafter, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was passed. A separate category for the home buyers (for submission of claims to the resolution professional) as ‘Creditors in a Class’ was also created by amending the CIRP Regulations.
After the inclusion of homebuyers under the definition of financial creditors, a downside of the same was observed as even single homebuyers filed petitions before NCLT threatening the builders to either settle with them providing their refund or let their Company go under CIRP. Such rampant use of the provisions and the threat caused by the homebuyers, the constitutionality of the amendment was challenged in the Hon’ble Supreme Court by the builders.
The Apex Court in Pioneer Urban Land and Infrastructure Limited v. Union of India, upheld the validity of the clarification that ‘homebuyers’ were ‘financial creditors’ observing that delay in completion of flats/apartments had become a common phenomenon and that amounts raised from home buyers contributes significantly to the financing of the construction of such flats/ apartments.The Court rendered an observation that the home buyers should have representation in the Committee of Creditors; though not that each of the home buyers should have direct position in the Committee of Creditors.
This being the case, it was important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the Code under Section 7 and have their rightful place on the Committee of Creditors when it comes to making important decisions as to the future of the building construction company, which is the execution of the real estate project in which such home buyers are ultimately to be house.
The Hon’ble Apex Court also construed the amendment to Section 5(8)(f) of the IBC and introduced a caveat to the inclusion of such homebuyers in the expression of ‘financial creditor’. It was observed that speculative investors and those not genuinely interested in purchasing the flat/ apartment could be excluded from the definition of ‘financial creditor’.
Numerous real estate companies as a result of this inclusion were faced with spiralling litigations against their company by all categories of home buyers and even the Adjudicating Authorities started clubbing the challenges against each of the builder corporate debtors; to take a holistic view of the exposure to the said corporate debtors.
In respect of certain corporate debtors, it was seen that the home buyers holding a majority led to a lot of indecisiveness; as the creditors in such cases were not able to consider resolution conclusively and there was lack of unanimity indecision making. This led to the executive to consider making further amendments to the Code, for efficacious enforcement of the Code.
[A.] Minimum Threshold qua Homebuyers
On December 12th 2019, the Insolvency and Bankruptcy (Second Amendment) Bill, 2019 was introduced in Lok Sabha which prescribed that in case of home buyer, an application under Section 7 could be only filed jointly by not less than:
(i) 10 percent of the total number of such creditors in the same class, or
(ii) 100 of such creditors in the same class.
The said bill was referred to the Parliamentary Standing Committee on December 23rd 2019 for further review. However, meanwhile, the President promulgated the Insolvency and Bankruptcy (Amendment) Ordinance 2019 exercising powers under Article 123 of the Constitution on December 28th 2019 and thereby, Section 7 was modified (as proposed in the said Bill). The amendment gave a period of 30 days for parties to comply with the said modification (and if not complied, then the application would be deemed to have been withdrawn before its admission).
[B.]Minimum Threshold qua Default
The Central Government exercising powers under Section 4 of the Code passed a notification on 24.03.2020, raising the minimum amount of default from INR 1,00,000/- (Rupees One Lakh Only) to INR 1,00,00,000/- (Rupees One Crore Only).
As a direct result of these amendments, what is clear is that an effort is being made at reducing the scope of initiation of CIRP at the hands of home buyers. While the developers are relieved, hardship has been created for the allottees to invoke the Code and obtain relief. Bringing a threshold just for homebuyers can be referred to as arbitrary as there is no threshold for any other financial or operational creditor.
However, whether these amendments will stand the test of constitutionality will be deciphered only in the time to come. At present, the Supreme Court has granted interim relief by ordering status quo on the matter with respect to the applications already filed by homebuyers.