Amendment in IBC for Home buyers

HON'BLE SUPREME COURT UPHELD THE CONSTITUTIONAL VALIDITY OF STATUS OF ALLOTTEES AS FINANCIAL CREDITORS UNDER INSOLVENCY AND BANKRUPTCY CODE 2016

The builders had filed spate of writ petitions in Hon'ble Supreme court of India . The Hon'ble Supreme court has taken up WP ( Civil) No. 43 of 2019 titled as Pioneer Urban Land and Infrastructure Limited & Another versus Union of India &Ors. With other petitions which were dismissed on 09.08.2019.

Brief Facts

The builders had challenged the constitutional validity of amendment made in Insolvency & Bankruptcy Cod 2016 ( Hereinafter referred to IBC ).

The following provisions of IBC were challenged:

1. Explanation to Section 5(8)(f):

'5. Definitions

In this part, Unless the context otherwise requires,-

(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;

Explanation- For the purposes of this sub-clause,-

(i) any amount raised from an allottee under areal estate project shall be deemed to be an amount having commercial effect of a borrowing: and

(ii) the expressions , 'allottee' and the 'real estate Project' shall have the meanings respectively assigned in clauses (d) and ( zn) of section 2 of the Real Estate ( Regulation and Development) Act, 2016 ( 16 of 2016);'

2. Section 21(6A)(b)

'21. Committee of Creditors

(6A) Where a financial debt-

(b) is owned to a class of creditors exceeding the number as may be specified , other than the creditors covered under clause (a) or sub-section (6), the interim resolution professional shall make an application to the Adjudicating Authority along with the list of all financial creditors, containing the name of insolvency professional , other than the interim resolution professional , to act as their authorized representative who shall be appointed by the Adjudicating Authority prior to the first meeting of the committee of creditors.

3. Section 25 A

'25A. Rights and duties of the authorized representative of financial creditors-

(1) The authorized representative under sub-section (60 or sub-section (6A) of section 21 or sub-section (5) of section 24 shall have the right to participate and vote in the meetings of the committee of creditors on behalf of the financial creditors he represents in accordance with the prior voting instructions of such creditors obtained through physical or electronic means.

(2) It shall be the duty of the authorized representative to circulate the agenda an minutes of the meeting of committee of creditors to the financial creditors he represents.

(3) The authorized representative shall not act against the interest of the financial creditor he represents and shall always act in accordance with their prior instructions;

Provided that if the authorized representative represents several financial creditors , then he shall cast is vote in respect of each financial creditor in accordance with the instructions received from each financial creditor, to the extent of his voting share.

Provided further if any financial creditor does not give prior instructions through physical or electronic means, the authorized representative shall abstain from voting on behalf of such creditor.

(4) The authorized representative shall file with the committee of creditors any instructions received by way of physical or electronic means, from the financial creditors he represents, for voting in accordance therewith , to ensure that the appropriate voting instructions of the financial creditor he represents is correctly recorded by the interim resolution professional or resolution professional , as the case may be.

Explanation- For the purposes of this section , the 'electronic means ' shall be such as may be specified.'

NCALT on 21st July 2017 in Nikhil Mehta &Sons(HUF)

versus AMR Infrastructure Ltd. Held home buyers are 'Financial Creditors' within the meaning of Section 5(7) of IBC . Hon'ble Supreme court passed an order in WP ( Civil) 74 of 2017 in case Chitra Sharma &Ors versus Union of India , in case of Jaypee Infrastructure Ltd. Appointed a representative of home buyers to participate meeting of committee of creditors in order to protect their interest.

Hon'ble Supreme court held as under-

i. The amendment Act to Code (IBC) does not infringe Articles 14, 19(1)(g) read with Article 19(6) , of 300-A of the constitution of India.

ii The RERA is to be read harmoniously with the Code (IBC) as amended by the Amendment Act. It is only in the event of conflict that code will prevail over the RERA. Remedies that are given to allottees of flat/ apartments are therefore concurrent remedies, such allottees of flat/apartments being in a position to avail of remedies under consumer protection Act, 1986, RERA as well as the triggering of the Code(IBC).

iii. Section 5(8) (f) as it originally appeared in the Code(IBC) being a residuary provision, always subsumed within it allottees of flat/ apartments. The explanation together with the deeming fiction added by the amendment Act is only clarificatory of this position of law.

Hon'ble Supreme court has directed all states/UTs to establish RERA an their appellate Authorities within 3 months.

Opinion

In view above discussion , The flat /apartment buyers have the following three remedies:

1. Home buyer can file petition before NCLT under IBC Act against builder as financial creditor .

2. Before District Consumer Commission as per Consumer Protection Act, 2019 which has replaced Consumer Protection Act , 1986 . The Act has been notified on 9th August 2019 .

3. Before RERA . Even in RERA buyer can file complaint within five years in respect of defects in construction.

The analysis of Judgment in WP (Civil) No. 43 /2019 titled as Pioneer Urban Land and Infrastructure Limited versus Union of India dismissed on 09.08.2019

1. The legislation have buyers free play in the joints which must be given a certain degree of deference by the courts.

2. It can be seen that Insolvency committee found, as a matter of fact , that delay in completion of fats/ apartments has become a common phenomenon and that amounts raised from home buyers contributes significantly to the financing of the construction of such flats/ apartments. It was therefore important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the code (IBC) 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 housed.

3. In real estate projects, money is raised from the allottee being raised against consideration for the time value of money.

4. The amount raised from allottes under real estate projects would, in fact, be subsumed within section 5(8)(f0 even without advertising to the explanation by the Amendment Act.

5. The deeming fiction that is used by the explanation is to put beyond the fact that allottees are to be regarded as financial creditors within the enacting part contained in section 5(8)(f0 of the code( IBC).

6. The alllottees/ home buyers were included in the main provision, i.e. Section 5(8)(f0n with effect from the inception of the Code (IBC) , the explanation being added in 2018 merely to clarify doubts that had arisen.

RERA versus IBC

1. Under Section 88, the provisions of TRTA are in addition to and not in derogation of the provisions of any other law for the time being in force . No similar Provision exists in the code (IBC).

2. Hon'ble Supreme court further stated that it is difficult to accede to arguments made on behalf of petitioners , that RERA is a special enactment which deals with real estate development projects and must therefore be given precedence over the code (IBC) , which is likely a general enactment dealing with insolvency generally . From the introduction of the explanation to Section 5(8)(f) of the Code ( IBC) came into force on 6th June 2018 , it is clear that parliament was aware of RERA and applied some of the definition provisions so that they could apply when the code is to be interpreted .

3. It is clear that the code amended must be given precedence over RERA.

4. Even by a process of harmonious construction , RERA and the Code (IBC) must be held co-exist and in the event of a clash, RERA must give way to the Code. RERA therefore can not be held special statute which in case of a conflict, would override the general statute viz. the Code (IBC).

5. The code and RERA operate in completely different spheres. The code deals with a proceeding in rem in which the focus is the rehabilitation of the operate debtor by means of resolution plan, so that the corporate debtor may be pulled out of the woods and may continue as going concern, thus benefitting all stakeholders involved . It is only as a last resort that winding up of the corporate debtor is resorted to, so that its assets may be liquidated and paid out in the manner provided by section 53 of the Code(IBC) . On the other hand , RERA protects the interests of the individual investor in real estate projects by requiring the promoter to strictly adhere to its provisions.

Remedies for Home Buyers-

a.The remedies under RERA to allottees are additional and not exclusive remedies.

b. The allottees of fats/ apartments have concurrent remedies under Consumer Protection Act, RERA as well as triggering of the Code (IBC).

c. On prima facie 'default' is made out on an application under section 7 of Code .we may mention here that once the prima facie case is made out, the burden shifts on the promoter / real estate developer to pint out in their reply and in the hearing before NCLT, that the allottee is himself a defaulter and would , therefore , on a reading of the agreement and applicable RERA Rules and Regulations, not be entitled to any relief including payment of compensation and /or refund, entailing a dismissal of the said application. This the real estate developer may do by pointing out, for example , that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/ apartment. They can also point out that in a real estate market which is falling , the allottee does not, in fact, want to go ahead with its obligations to take possession of the flat/ apartment under RERA but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it.

Given the above, it is clear that it is difficult to accede to the petitioner' contention that wholly one sided and futile hearing will take place before the NCLT by trigger-happy allottees who would be able to ignite the process of removal of the management of the real estate management of the real estate projects and/or lead the corporate debtor to the death.

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