The Insolvency and Bankruptcy Code (Amendment) Act, 2020: Unjust Discrimination Against Homebuyers

*Hitesh Nagpal

Introduction

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“2020 Amendment”) which came into force on 13th March 2020 has affected the rights of the homebuyers to initiate a corporate insolvency resolution process (“CIRP”) against the builders and real estate developers by introducing a minimum threshold to file an application under Section 7 of the Insolvency and Bankruptcy 2016 (“Code”). In this Article, the author analyses the issues that emanate from the 2020 Amendment.

Before proceeding with the issues, it is imperative to have an overview of the position of the homebuyers prior to the 2020 Amendment as their position under the Code has evolved significantly over the years. 

Position of homebuyers under the Code prior to the 2020 Amendment

Initially, the homebuyers did not have the locus standi to initiate CIRP against the builders or real estate developers as they were neither recognized as ‘financial creditors’ nor as ‘operational creditors’. The homebuyers could avail remedies under the Consumer Protection Act, 1986 (“CPA”) and the Real Estate (Regulation and Development) Act, 2016 (“RERA”).

In 2017, the National Company Law Appellate Tribunal (“NCLAT”) in Nikhil Mehta and Sons v. AMR Infrastructure Ltd., held that homebuyers come within the purview of ‘financial creditor’ as defined under Section 5(7) of the Code. The NCLAT observed that the amount raised by way of share purchase agreement acquires the status of ‘financial debt’ as it has a commercial effect of borrowing. Despite the decision of the NCLAT in the aforementioned case, there were controversies as to whether a homebuyer qualifies as a ‘financial creditor’ under the Code.  This controversy reached its conclusion when the Insolvency and Bankruptcy (Second Amendment) Act, 2018 (2018 Amendment) came into force. The 2018 Amendment amended the definition of ‘financial debt’ to include “any amount raised from an allottee under a real estate project”. The 2018 Amendment further states that ‘allottee’ and ‘real estate project’ shall have the same meaning as defined under the RERA. Accordingly, homebuyers were given the status of ‘financial creditors’ and were accorded the right to initiate CIRP and to be a part of the committee of creditors of the corporate debtor.

Subsequently, a series of petitions were filed by the builders challenging the constitutionality of the 2018 Amendment, which was upheld by the Supreme Court in the landmark case of Pioneer Urban Land and Infrastructure Limited v. Union of India. In this case, the Supreme Court placed reliance on Nikhil Mehta and Sons v. AMR Infrastructure Ltd. and held that an amount raised from homebuyers under a real estate project has the commercial effect of borrowing and therefore, by treating homebuyers as ‘financial creditors’, the 2018 Amendment is neither arbitrary nor discriminatory as such amount is subsumed within Section 5 (8) (f) of the Code.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020

The 2018 Amendment was extremely beneficial to homebuyers as a plethora of applications were filed under Section 7 against the real estate developers. However, the 2020 Amendment came as a relief to the real estate developers as it restricted the homebuyers from initiating CIRP by imposing a minimum threshold.  The 2020 Amendment provides that an application for initiating CIRP against real estate developers cannot be filed by less than one hundred allottees or ten percent of the total number of allottees under the same real estate project, whichever is lesser. It is pertinent to note that the amendment to Section 7 has retrospective application as the 2020 Amendment stipulates that pending applications filed under the said section “shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission”.

A writ petition challenging the constitutional validity of the 2020 Amendment has been filed before the Supreme Court in the case of Manish Kumar v. Union of India.

Issues

Restriction in initiating the CIRP

A bare reading of the 2020 Amendment makes it evident that it has been enacted to protect the interests of the defaulting real estate developers by taking away the rights of the homebuyers. By virtue of the Code, an individual homebuyer, who previously had the right to invoke Section 7 of the Code, is now barred from initiating CIRP against the real estate developers.

The 2020 Amendment has left the homebuyers with little legal recourse as bringing claims under the RERA or CPA are the only options left. However, it shall be noted that these remedies available to individual homebuyers are not only time consuming as compared to the proceedings under the Code but will also be futile once the adjudicating authority declares moratorium for the purposes mentioned under Section 14 of the Code. Even in cases wherein no application has been admitted and the moratorium has not been declared by the adjudicating authority, homebuyers may not be able to avail remedies under the Code. Since a homebuyer does not possess information of other allottees under the same real estate project, he/she may find it extremely difficult to gather 99 other allottees or 10 percent of the total allottees, in order to initiate CIRP against the corporate debtor.  Moreover, different allottees under the same real estate project may seek different reliefs. For instance, some homebuyers may seek possession whereas others may seek a refund. For those seeking a refund, may not prefer to file an application under the Code because their remedies are provided under the RERA. This would decrease the number of allottees seeking to avail remedies under the Code and as a result, such allottees may not be able to meet the minimum threshold requirement.

Violation of Article 14  

The Code provides remedies for two classes of creditors, namely, financial creditors and operational creditors, which are defined under Sections 5(7) and 5 (20) of the Code respectively. The 2020 Amendment creates a classification with a class of creditors as it introduces a minimum threshold only for a particular class of financial creditors i.e., the homebuyers. While other financial creditors can file applications under Section 7 either by itself or jointly, the homebuyers can only file a joint application under the aforementioned section.

Therefore, by treating homebuyers differently from other financial creditors, the 2020 Amendment amounts to the creation of a ‘class within a class’, which is arbitrary and violative of Article 14 of the Indian Constitution.

The Objective of the Amendment Does Not Justify The Threshold

According to the statement of objectives and reasons of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2019, Section 7 has been amended to “prevent potential abuse of the Code by certain classes of financial creditors”. It shall be noted that there is no data to confirm that homebuyers have abused the Code by filing false applications against builders. Assuming that some homebuyers have abused the Code, this is not a justified reason to take away the rights from the innocent homebuyers as the Code contains a specific provision to ensure that the Code is not misused by any applicant. Section 65 of the Code stipulates that the adjudicating authority may impose a penalty upon a person for filing fraudulent or malicious proceedings and therefore, a homebuyer or any other creditor who abuses the Code can be penalised under Section 65. Moreover, it is pertinent to note that in Pioneer Urban Land and Infrastructure Limited v. Union of India, the Supreme Court rejected the suggestion of introducing a similar threshold for homebuyers to file applications under Section 7 of the Code.

In light of this, the reason provided for the amendment of Section 7 is not a justified ground for restricting a homebuyer’s rights under the Code.

Conclusion

By introducing a minimum threshold for filing applications under Section 7, the 2020 Amendment has rendered the homebuyers remediless under the Code. The most common problem faced by the homebuyers is delayed possession and due to the 2020 Amendment, there would be a further delay in the grant of possession. The creation of ‘class within a class’ would prevent the homebuyers from availing the benefits available to other financial creditors, therefore, making it ultra vires the Indian Constitution.

In light of the above, the author is of the opinion that Section 3 of the 2020 Amendment should be struck down by the Supreme Court to ensure that the homebuyers are allowed to reap the benefits available to other financial creditors under the Code. 

*The author is a student pursuing B.A., LL.B. (Hons.) at Maharashtra National Law University, Mumbai.