1. Introduction

The rights of home buyers in the context of the insolvency proceedings have been under the scanner for a while. Earlier, home buyers were treated as other creditors’ and they were not regarded as “financial creditors” or as “operational creditors”, which restricted their ability to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) against a defaulting builder/developer. More importantly, being neither financial nor operational creditors, they were not legally entitled to any minimum payout in the corporate insolvency resolution process (“CIRP”) of a real estate company; and were accorded a very low position in the statutory payment waterfall in the event of liquidation. They could, nonetheless, file appropriate proceedings under the RERA and Consumer Protection Act, 1986.

2. 2018 IBC Amendment

In recent times, the  status of the home buyer i.e. an ‘allottee’ as defined in the Real Estate (Regulation and Development) Act, 2016 (“RERA”), has undergone a lot of change  post the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 enacted on August 17, 2018 (“2018 Amendment Act”) and the Insolvency and Bankruptcy Code (Amendment) Act, 2020 enacted on March 13, 2020 (with effect from December 28, 2019) (“2020 Amendment Act”).

According to the 2018 Amendment Act, if an allottee were to claim an amount against a developer pertaining to a real estate project then that amount will be considered to have an impact similar to the commercial impact of a borrowing. Therefore, the amounts paid by the home buyers to a builder were to be considered a financial debt and the home buyers were categorized as financial creditors. This has enabled the home buyer to initiate insolvency proceedings against a defaulting builder company under the IBC and to be entitled to a representation on the committee of creditors.

3. Pioneer Urban Case

The 2018 Amendment Act created ripples in the developer community and the same was challenged in the case of Pioneer Urban Land and Infrastructure Limited vs. Union of India [AIR 2019 SC 4055] (“Pioneer Urban case”) on the grounds of it being violative of Article 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. It was also argued that since home buyers have remedies under various other statutes such as the Consumer Protection Act, 1986 and the RERA, permitting them to initiate corporate insolvency process under the IBC would merely result in duplication of remedies.

After analyzing the submissions made by both the parties, the Supreme Court held in the Pioneer Urban case that the money raised by developers from the homebuyers is done with a profit making motive and therefore it was held that it has the commercial effect of a borrowing and hence, is included within the definition of ‘financial debt’ under Section 5(8)(f) of the IBC.

4. 2019 IBC Ordinance

Whilst the 2018 Amendment Act read with the ruling of the Supreme Court in the Pioneer Urban case entitles even a single homebuyer or allottee to initiate the corporate insolvency process against defaulting builder, the Insolvency and Bankruptcy (Amendment) Ordinance, 2019 (“2019 IBC Ordinance”) (which has now been replaced with the 2020 Amendment Act) sought to impose minimum threshold on the number of home buyers for initiating the insolvency process. As per the 2019 IBC Ordinance, application for initiating the resolution process was to be filed jointly by at least 100 allottees or 10% of the total allottees under the said project, whichever is lesser. The 2019 IBC Ordinance was challenged by home buyers under various petitions on the grounds of it being violative of Article 14 and Article 21 of the Constitution and the ruling of the Supreme Court in the Pioneer Urban case.

5. Manish Kumar Case

The Supreme Court had passed an order in the case of Manish Kumar and Union of India [Writ Petition (Civil) No. 26/2020], ordering status quo to be maintained with respect to the applications already filed by allottees against defaulting real estate developers and had also stayed the provision under the 2019 IBC Ordinance which dismissed applications of home buyers if they do not fulfill the minimum threshold requirement as prescribed under the ordinance.

6. 2020 Amendment Act

However, as per the 2020 Amendment Act (which replaced the 2019 IBC Ordinance), inter alia, Section 7 of the IBC was amended to the effect that the application for initiating the resolution process is to be filed jointly by at least 100 allottees or 10% of the total allottees under the said project, whichever is lesser. The 2020 Amendment Act has clarified that matters already filed by individual home buyers but not yet admitted by the adjudicating authority before the commencement of 2020 Amendment Act shall be dismissed if they are not modified to fulfill the minimum threshold requirement as stated above within 30 days from the commencement of the 2020 Amendment Act.

7. Karvy Investors case

Given that the 2020 Amendment Act has come into force, the effect of the ruling passed by the Supreme Court in the case of Manish Kumar v. Union of India will be limited only to the applications on which a stay has been granted by the Supreme Court. However, recently, in the matter of Association of Karvy Investors v. Union of India [Writ Petition (Civil) No. 579/2020], constitutional validity of the 2020 Amendment Act has once again been challenged and the Supreme Court of India has, by its order dated June 16, 2020, ordered status-quo to be maintained with respect to the pending applications filed under Section 7 of the IBC (as amended by the 2020 Amendment Act) that do not fulfill the minimum threshold required as imposed by the 2020 Amendment Act.

8. NCLAT judgment in Sushil Ansal v. Ashok Tripathi & Ors.

Recently, the National Company Law Appellate Tribunal (“NCLAT”), while adjudicating upon an order of admission of application under Section 7 of IBC filed by Ashok Tripathi and Saurabh Tripathi (“Allottees”), held that a decree granted by the real estate regulator in favour of a homebuyer cannot be the basis of filing an application under Section 7 of the IBC. In the said matter, the Allottees had approached the Uttar Pradesh Real Estate Regulatory Authority (“UPRERA”) after a developer known as Ansal Properties failed to comply with the timelines mentioned in the agreement. Subsequently, the UPRERA passed a decree in favour of the Allottees recognizing the failure on part of the developer. Thereafter, instead of executing the decree under the civil law, the Allottees filed an insolvency application against the developer. Deciding on the validity of the insolvency application filed by the Allottes, the NCLAT held that a decree holder cannot be classified as a financial creditor as defined under the IBC. It held that a decree is an adjudicated amount and does not have the commercial effect of a borrowing which is imperative for a financial creditor to initiate insolvency process under the IBC.

The NCLAT also made a reference to the challenge against the constitutionality of the 2020 Amendment Act under Manish Kumar and other related matters; however, it did not make any observations in respect of the same as the matter is sub-judice before the Supreme Court.

9. Analysis

Whilst, the 2020 Amendment Act had rendered the Supreme Court ruling in Manish Kumar toothless, it could be implied that the order passed by the Supreme Court in the case of Karvy Investors extends the earlier protection granted by it under the Manish Kumar case to the pending applications already filed by the homebuyers which do not meet the minimum threshold requirement. As such, it remains to be seen how the Supreme Court will look into the constitutionality of the 2020 Amendment Act in Manish Kumar, Karvy Investors and other related matters.

Whilst providing the home buyer the status of a financial / operational creditor is a big step in protecting the rights of home buyers, it is essential that a reasonable balance should be maintained so as to avoid a situation where developers are taken advantage of  by one or a few home buyers and at the same time  to ensure that grievance of one or few home buyers do not cause unreasonable delays or impediments in development of a project especially considering that home buyers have other remedies under RERA and Consumer Protection Act, 1986.

Authors:

Nohid Nooreyezdan, Senior Partner
Monika Bhonsale, Partner
Sohni Kherada, Senior Associate
Lavish Paliwal, Associate