Homebuyers challenge IBC amendment dealing with minimum requirement to initiate insolvency against developer

A group of homebuyers has moved the Supreme Court challenging the Insolvency and Bankruptcy (Amendment) Ordinance, 2019, that sets a minimum threshold of allottees for homebuyers to be able to initiate insolvency proceedings against a real estate developer, saying that it is against 'fundamental rights guaranteed in the Constitution' and against the objective of the IBC itself.

Homebuyers have said that in the absence of any public data being available, such a threshold is almost impossible to meet.

In December, an ordinance was passed by the government to amend the Insolvency & Bankruptcy Code under which a threshold of 100 buyers or 10 percent of homebuyers is required to take a real estate developer to an insolvency court.

"…Real Estate Allottees who are Financial Creditors under Section 5(8) of the IBC have been rendered remediless and have been subjected to absolute discrimination by putting a precondition/threshold in the form of minimum number of Allottees of a particular project required for filing an application for triggering the code under Section 7 of the IBC, which is not applicable to other financial creditors under IBC," the writ petition filed by 11 homebuyers has said.

"Because the Ordinance runs in complete contradiction to IBC and imposing such a pre-condition on the filing of the application under Section 7 of the IBC is completely against the objective of the IBC, as the pre-condition for any financial creditor to approach the adjudicating authority is quantum of the debt and not the number of financial creditors," it said.

On December 12, 2019, a bill titled 'The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 (“Second Amendment bill”)' was introduced in the Parliament. As per the changes, homebuyers wanting to take a developer to an insolvency court, will now have to ensure that a minimum of 100 home buyers or 10 percent of the total homebuyers file for bankruptcy against the developer.

The Lok Sabha has referred the Second Amendment bill to a standing committee on the 23 December 2019. The standing committee has three months to submit its report before the Lok Sabha. A feature in the Second Amendment bill is that it seeks to amend Section 7 of the IBC which deals with financial creditors approaching the Insolvency Courts against a corporate debtor. The Second Amendment bill specifically seeks to add a proviso to Section 7 which provides minimum thresholds for initiating insolvency proceedings.

The proviso reads as follows: Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process 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."

"The condition imposed on the buyers to file a petition under IBC is highly arbitrary. How can homebuyers be expected to put together this number and then approach the court. There are thousands of cases pending against the builders in NCLTs across the country which in the light of this Ordinance will be automatically dismissed,"said Aditya  Parolia of PSP Legal, who has filed the writ petition on behalf of 11 buyers from across projects.

"The Ordinance is completely against the fundamental rights guaranteed to the Homebuyers (Financial Creditors) under Article 14 and 21 of the Constitution of India. The Union of India has brought in the Ordinance with absolute discrimination by putting a precondition/threshold in the form of minimum number of Allottees of a particular project required for filing an application for triggering the code under Section 7 of the IBC, which is not applicable to other financial creditors under IBC," the writ petition said.

"The ordinance is contrary to the well settled principle as laid down in the Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India (W.P.(C) No. 43 of 2019 decided on 09.08.2019) and has rendered the said judgment ineffective. Further, the retrospective effect of the Ordinance has made all the petitions infructuous as in absence of any public data being available, such a threshold is almost impossible to meet," it said.

In its judgment dated August 9, 2019 of Pioneer Urban Land and Infrastructure Limited and Ors. Vs. Union of India and Ors. ("Pioneer Judgment"), the Supreme Court upheld the amendments made to the IBC. The Supreme Court observed that legislations such as the IBC and Real Estate (Regulation and Development) Act, 2016 ("RERA") would run concurrent to each other, and in case of a conflict, the IBC would prevail over RERA.