Landmark Supreme Court Ruling Affirms Homebuyers as Financial Creditors Under Insolvency and Bankruptcy Code
In a groundbreaking move, the Supreme Court of India has resolved a long-standing debate about whether homebuyers should be considered as “financial creditors” under the Insolvency and Bankruptcy Code (IBC) of 2016. This important decision was made by a panel of three judges led by Justice Rohinton F Nariman on August 9, 2019. The case in question, WP (Civil) No. 43 of 2019, Pioneer Urban Land and Infrastructure Limited & Anr v. Union of India & Ors, has far-reaching consequences for the real estate industry and its stakeholders.
The background of this significant ruling traces back to a series of petitions submitted by builders. The Supreme Court’s verdict on August 9, 2019, marked the end of a legal journey that not only confirms homebuyers as financial creditors under the IBC but also sets the stage for a more comprehensive legal framework for addressing their grievances.
The ruling established that remedies available to allottees of flats are concurrent and multifaceted, encompassing remedies under the Consumer Protection Act, 2019 (CPA), the Real Estate (Regulation and Development) Act, 2016 (RERA), and the Insolvency and Bankruptcy Code, 2016 (IBC)4. Historically, the National Company Law Tribunal (NCLT) was instituted to arbitrate disputes concerning companies under both the Companies Act and the IBC. However, prior to a pivotal amendment in 2018, homebuyers were not accorded the status of financial creditors. It was through the 2018 amendment that homebuyers gained recognition as financial creditors, thereby granting them the capacity to initiate insolvency proceedings against defaulting builders under Section 7 of the IBC.
While RERA has provided a platform for addressing grievances of homebuyers, it has often been criticized for lacking effective execution mechanisms. Thus, though redressal mechanisms exist, they sometimes remain confined to paper in various State-level RERA implementations. The IBC, at its inception, did not confer financial creditor status upon homebuyers. Nevertheless, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 rectified this by according priority status to homebuyers through a modification in the definition of “financial debt” under Section 5(8)(f) that states “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”.
The bedrock of this legal discourse revolves around the challenge mounted against the constitutionality of an amendment introduced into the IBC. The specific provisions of the IBC under scrutiny were:
1. Explanation to Section 5(8)(f): This clause of the IBC delves into defining “Financial ” The amendment incorporated an explanation asserting that any amount acquired from an allottee under a real estate project is to be deemed as having the commercial essence of borrowing. This automatically labels allottees as financial creditors under the IBC.
2. Section 21(6A)(b): This section pertains to the Committee of Creditors. The amendment entailed that if a financial debt is owed to a class of creditors exceeding a certain threshold, the interim resolution professional must present an application to the Adjudicating This application should include a list of all financial creditors, along with their authorized representative’s details.
3. Section 25A: This section outlines the rights and responsibilities of authorized representatives of financial creditors.
The stage for this landmark verdict was set by preceding legal actions, most notably the Nikhil Mehta & Sons case, wherein the National Company Law Appellate Tribunal (NCALT) held that homebuyers are indeed “Financial Creditors” under the purview of Section 5(7) of the IBC. The Chitra Sharma case added another layer by appointing a representative for homebuyers in the Jaypee Infrastructure Ltd. matter. This representative was tasked with participating in the committee of creditors’ meetings to safeguard the interests of homebuyers. Likewise, in the case concerning the Corporate Insolvency Resolution Process (CIRP) of the Amrapali Group, the Supreme Court issued a directive that permits the inclusion of a representative for homebuyers in Committee of Creditors (CoC) meetings, ensuring the safeguarding of the homebuyers’ interests.
The Hon’ble Supreme Court’s ruling brings clarity and closure to this legal debate, outlining several critical conclusions:
1. The Court attested that the Amendment Act did not transgress Articles 14, 19(1)(g) read with Article 19(6), or Article 300-A of the Indian Constitution.
2. It underscored that the Real Estate (Regulation and Development) Act (RERA) must harmonize with the IBC, and in situations of conflict, the IBC would prevail.
3. The explanation appended to Section 5(8)(f) of the IBC only serves to clarify allottees’ classification as financial creditors, rather than altering the core intent of the section.
The Court further emphasized that the Code (IBC) and RERA operate in distinct spheres. The IBC focuses on corporate rehabilitation through resolution plans, while RERA is designed to protect individual investors in real estate projects.
This ruling provides homebuyers with a triumvirate of remedies:
1. The ability to approach the National Company Law Tribunal (NCLT) under the IBC as financial creditors.
2. Pursuit of claims before the District Consumer Commission under the Consumer Protection Act of 2019.
3. Resorting to RERA, which accommodates complaints concerning construction defects for up to five years.
The Insolvency and Bankruptcy Code (Second Amendment) Bill of 2019, coming just a year later, rolls back the strides taken to empower homebuyers. This is achieved by implementing upper limits and the necessity of a combined application by property buyers in real estate projects.
Furthermore, the bill stipulates that if financial creditors are individuals who have invested in a real estate project, they must collectively apply to initiate the corporate insolvency resolution process. This application must be jointly filed by no fewer than one hundred of these investors within the same real estate project, or by a number constituting no less than ten percent of the entire group of investors in that project, whichever number is lower. Consequently, the current amendment prevents individual homebuyers from instigating insolvency proceedings under Section 7 of the code. Hence, the act of filing an application or complaint before the appropriate tribunal or commission is influenced not solely by the factual and circumstantial aspects of the case, but also by the specific relief being sought by the aggrieved party, their legal status, and the regulations encompassed within various legislations that qualify the aggrieved party’s eligibility to submit a complaint or application, depending on the specific circumstances.
The Hon’ble Supreme Court’s landmark judgment fortifies the position of homebuyers, reaffirming their status as financial creditors under the IBC. This verdict dispels ambiguity and empowers homebuyers with multiple avenues for redressal. The Court’s meticulous examination of both the IBC and RERA, along with its endorsement of homebuyers’ financial creditor status, underscores the intention to uphold justice, fairness, and the economic vitality of the real estate sector.