Upholding the constitutional validity of the amendments made to the Insolvency and Bankruptcy Code (IBC) 2020, the Supreme Court on January 19 made it clear that no less than 10 percent of total allottees in a project can initiate the insolvency process against an erring real estate developer.
The amendments had mandated that a minimum of 100 homebuyers should come together to file an insolvency application in the National Company Law Tribunal (NCLT) against a defaulting real estate developer.
Section 3 of the IBC (Amendment) 2020 had inserted certain additional conditions for homebuyers to initiate insolvency proceedings against defaulting builders.
The said provision, adds certain provisos to Section 7 of the IBC to state there should be at least 100 real real estate allottees or ten percent of the total number of allottees, whichever is lesser, to maintain an insolvency petition in respect of a real estate project. The amendment also stated that the application of Section 3 of the amendment Act shall be retrospective, affecting pending applications.
A three-judge bench of Justices Rohinton Fali Nariman, KM Joseph,and Navin Sinha also held that Sections 3 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, which introduced these changes, do not violate the right to equality under Article 14 of the Constitution.
Justifying the need for the amendment making 100 or more approach the NCLT to initiate proceedings against a defaulting developer, the top court said "it cannot be in dispute that under the law, an allottee can seek remedies under the RERA or consumer protection act".
"No doubt, Section 71 of the RERA permits a person who has filed a complaint in respect of matters governed by Sections 12, 14, 18 and 19 of the RERA to withdraw the complaint and file the same before the Adjudicating Officer under the RERA," the order said.
As for the difficulty that buyers face in gathering information about other buyers in order to come together to file a case against the developer, the court said: “As far as availability of information is concerned, be it the mechanism of an Association of Allottees contemplated under the RERA or the requirement under the said Act to post details of the allotment, at least, in law, the Legislature was not making a capricious command. So also, is the case with the creditors covered by the first proviso, having regard to the clear requirement of Section 88 of the Companies Act, 2013. There are registers, which can be perused and information gathered.”
Experts termed the apex court order as "pragmatic" and "equitable".
“The approach of the Supreme Court while passing this judgment appears to be both pragmatic and equitable. By upholding the amendments to Section 7 of the IBC, the Supreme Court has empowered the allottees of a real estate project who meet the minimum threshold requirements, to initiate insolvency against the defaulting developer. In my experience this is a desirable option in cases where the developer company has abandoned the project in its entirety, and the allottees are left with no alternative recourse but to try and salvage their investment,” said Yudhist Singh, Senior Partner, YNS & Associates.
Some homebuyers, however, said it was bad news for them as it would now be difficult to initiate IBC proceedings against builders.
Previously, even a single aggrieved homebuyer could initiate insolvency proceedings based on the amended provisions of the IBC. Consequently, this amendment shall radically reduce the number of cases being filed under the Section 7 against real estate companies.
"The decision of the Supreme Court upholding the validity of the IBC amendment 2020 comes as a huge setback to all the homebuyers who have been denied home as well as their hard-earned money," Ashwarya Sinha, the lawyer leading the challenge to the amendment, told Moneycontrol.
"I challenged the 2020 amendment immediately upon its passing on the ground of it being unconstitutional and arbitrary amongst other grounds. Its quite unfortunate that even the Hon'ble Supreme Court in its wisdom did not deem fit to intervene with such an unjust amendment. The effect of upholding the amendment is that for homebuyers to approach the NCLT the mandatory onus will be upon them to come in as group of 100 allottees or 10% of allottess of the project. This mandatory requirement makes it extremely difficult for already suffering homebuyers to approach the NCLT in majority of cases," he said.
It was monumental effort of the SC in the landmark Jaypee Case which paved way for amendment to Section 5(8)(f) in 2018 which elevated the status of homebuyers as financial creditor and gave the right to even a single aggrieved homebuyers to approach the NCLT. The 2020 amendment and this decision of the SC although keep the right of homebuyers to approach the NCLT as class or group intact, its exercise has almost been made impracticable for individual homebuyers, he said.
"The decision is a big blow to thousands of aggrieved homebuyers who, although still not secured creditors, could be able to approach the NCLT individually," he added.
“The main concern of homebuyers is to do with meeting the minimum threshold. In the absence of any public data, such a threshold is difficult to meet. Another concern is to do with petitions that were filed prior to the ordinance by homebuyers. They would now have to look for a different legal recourse for redressal of their grievances and that may take more time compared to the time taken by the NCLT,” said Piyush Singh, Partner PSP Legal, who represented homebuyers in the case.
The Supreme Court on January 13, 2020, had agreed to hear homebuyers’ plea against an IBC amendment.
A group of homebuyers had challenged additions made to Section 7 of the Insolvency and Bankruptcy (Amendment) Ordinance, 2019, saying the number requirement was against “fundamental rights guaranteed in the Constitution” as well as the very objective of the IBC.
The ordinance discriminated against homebuyers as no such pre-conditions were required of other financial creditors under the IBC, the petition had said.
Bonafide builders who have completed projects may not be adversely impacted by this order, but those who may have over leveraged finances may face challenges going forward, experts said.