Homebuyers vs. Developers: A Tug of War?
-By Anjasi Shah
5th Year, Institute of Law, Nirma University
The Insolvency and Bankruptcy Code Amendment Act, 2020 was assented by the president on 13th March 2020. The amendment brought many changes, amongst the particular change, it impacted the homebuyer’s rights to bring a claim against the developers under the Insolvency and Bankruptcy Code, 2016. Initially, Homeowners did not have the locus standi under the code to bring claims against the developers as they were not recognized as financial creditors. It was the judgment of the Supreme Court in Pioneer Urban Land and Infrastructure Limited vs. Union of India, in the year 2019, that brought homebuyers under the ambit of the definition of “financial creditors”. A hard-long fight indeed. Since their status, the Insolvency and Bankruptcy Code has been highly utilized by homebuyers for relief against the developers for delayed projects and possession of flats. Homebuyers are again troubled with the introduction of the threshold of bringing an application under section 7 through the amendment, and their rights under the code are now again questioned.
Why the amendment?
At the time, when homebuyers were given the status of financial creditors, around 1,281 cases had been filed against the developers for the delay in possession and completion of the projects.((Ashwini Kumar Sharma, Developers resents buyers filing cases under IBC, Livemint (25 Nov 2019, 10:26 PM), https://www.livemint.com/money/personal-finance/will-homebuyers-remain-creditors-under-ibc-11574661744701.html)) After the conferment of the status, allegations were made by the developers that homeowners/allottees were misusing the law. Initially, homeowners were not classified as creditors under the code which lead to criticism from various sides. The conferment of the status as financial creditor given to homeowners through amendment also raised criticism from developers. For example, the Confederation of Real Estate Developers Association of India protested the amendment demanding threshold limit for homeowners to invoke the code, demanded that homeowners should firstly exhaust remedy under RERA.((Developers Resent Buyers filing Cases under IBC, ascgroup (Nov. 26, 2019), https://www.ascgroup.in/developers-resent-buyers-filing-cases-under-ibc/)) With these demands, the homeowners had responded against the demands of developers – stating that the judgment rendered by the Supreme Court must be respected and the demands are illegal as such.((Ashwini Kumar Sharma, Developers resents buyers filing cases under IBC, Livemint (25 Nov 2019, 10:26 PM), https://www.livemint.com/money/personal-finance/will-homebuyers-remain-creditors-under-ibc-11574661744701.html)) Now, the new amendment has brought a threshold for the allottees to invoke the code. Thus, beginning once again, a tug of war between the homeowners and the developers in light of the amendment.
The amendment: Bars the allottees to initiate application under section 7?
Before the amendment, the allottees could bring a claim against the developer under section 7 of the Insolvency and Bankruptcy Code, 2016, if there is a default of a minimum of 1 lakh. Now, Section 3 of The Insolvency and Bankruptcy Code (Amendment) Act, 2020 seeks to change the triggering of the code for the allottees (homebuyers) under the “class” of financial creditors.
Section 3 of Insolvency and Bankruptcy (2020) Amendment states the threshold.((Section 3, The Insolvency and Bankruptcy Code (Amendment) Act, 2020.)) It provides the procedure for financial creditors to initiate the corporate insolvency resolution process, which is allottees under real estate projects. The threshold to invoke the code:
The application must be filed jointly by allottees of same real estate project, amongst whichever less as mentioned below –
- Minimum 100 allottees; or
- Minimum 10% of total allottees
Section 3 of the amendment amends section 7 of the Insolvency and Bankruptcy code, putting condition precedent for the homebuyers that they can only initiate application under section 7 of the code, if the application is filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent. of the total number of such allottees under the same real estate project, whichever is less – accepting the fact that the homeowners fall under the definition of financial creditors. Further, the amendment sought to bring a claim of as a compulsory “class action” suit, meaning in this case the claim has to be mandatorily filed by a group of homeowners of the same real estate project, as per the threshold.
As expected, huge chaos has been created by this amendment and stakeholders from lawyers to homebuyers have raised concern.((Shweta Gupta, Homebuyers file plea in SC challenging IBC’s latest Amendments, Taxguru (6th April, 2020), https://taxguru.in/corporate-law/homebuyers-file-plea-supreme-court-challenging-ibcs-latest-amendments.html)) Further, the amendment also provides a 30-day window for the existing applicants to conform with the amended threshold, meaning retrospective application. Various petitions have been filed before the supreme court on the grounds of the amendment being discriminatory, being violative of Article 14 of the constitution of India, amongst other issues. Temporary relief has been granted to the homebuyers where the supreme court has issued notice to the government on the said petition and further putting status quo on the matter itself.((KR Srivats, Insolvency ordinance: Home buyers get some reprieve as SC orders status quo on pending cases, The Hindu Business line (13th January, 2020), https://www.thehindubusinessline.com/economy/insolvency-ordinance-home-buyers-get-some-reprieve-as-sc-orders-status-quo-on-pending-cases/article30558758.ece))
The introduction of threshold besides being discriminatory amongst its class is on the farce of condition precedent seeks to indirectly bar homebuyers to initiate application under section 7 of the Insolvency and Bankruptcy Code, 2016. The amendment provides for the threshold to have at least 100 allottees or 10% of the total number of such allottees under the same real estate project, which raises the concern of its fulfilment by the future applicants as the allottees. It becomes practically impossible to bring homeowners together to jointly file the application, again this concern which has been raised by the petitioners in the petitions. Further, the intention can be reflected through the demand of existing applicants to conform with the threshold. This again brings homebuyers to the position as they were before they were considered as financial creditors, meaning that they cannot initiate application unless they fulfil the threshold limit, therefore violating Article 14 of the constitution of India being differentiated against other financial creditors.
Article 14 is violated:
Firstly, the Insolvency and Bankruptcy Code, 2016 is triggered for both operational and financial creditors when the default is of 1 lakh [ now 1 crore in light of CO-VID situation]. On the constitutional front, Article 14 guarantees the right to equality to every citizen of India before the law and prohibits unjust discrimination. Article 14 allows discrimination based on reasonable classification and prohibits hostile discrimination and class legislation. Article 14 enumerate two concepts – equality before the law and equal protection of laws, wherein the former is a negative concept and the latter is a positive concept.((M P Jain, Indian Constitutional Law, 879 (7th ed. 2014))) For this topic, understanding equal protection of laws is necessary. Equal protection of law denotes that, the application of law should be treated alike, without discrimination to the persons who are of the same class or similarly situated.((Jagannath Prasad v. State of Uttar Pradesh, AIR 1961 SC 1245.)) If there is a violation of Article 14, the only defence with the state remains, that it needs to show intelligible differentia. Invoking the defence of reasonable classification must be based on two conditions –((The State of West Bengal vs Anwar Ali Sarkar, 1952 AIR 75))
- There must be distinction between the groups sought to be included and the group sought to be excluded.
- The distinction must have a rational nexus with the objective of the Act.
Bringing the threshold to invoke the code for allottees is a violation of Article 14 without any intelligible differentia – as they are differentiating the application of the act between allottees and financial creditors.
Let me point out the earlier controversy between when the act was introduced in the year 2016 – the debate of discrimination between the operational creditors and the financial creditors. The supreme court in the Swiss Ribbon case held that there was no discrimination between operational and financial creditors under Article 14, essentially on the line, that both of the classes are different, meaning that intelligible differentia is present amongst the classes. However, what is the intelligible differentia between the allottees/homebuyers and other financial creditors? Do they not belong in the same class? Are they different because another remedy is available to them under RERA, which may be a more appropriate forum than NCLT?
The definition of the financial creditor under section 5(7) is in general terms. The definition does not classify separate classes or differentiates financial stakeholders. The definition merely states a person to whom a financial debt is owed and includes a person who has been assigned debt or transferred through legal means. The definition does not exclude those persons merely on the basis that another remedy is available, meaning that the allottees and other financial creditors are the same. It is important to remember that in the case of Pioneer Urban Land and Infrastructure Limited vs. Union of India, the court explicitly stated that the remedy under RERA is not exclusive but merely to work as an additional remedy.
The defence falls weak to invoke reasonable classification as “allottees” and “other financial creditors” falls under the same class. The amendment creates two classes within financial creditors without any reasonable classification and treats them differently, treating “allottees” different from other financial creditors for triggering the code even when they fall under the same definition prescribed under the act. As per the definition, the requirement is that “financial debt must be owed” to be considered as a financial creditor and does not provide for any other threshold to invoke the code. The amendment is nothing but class legislation, meaning the amendment discriminates by imposing unjust conditions on the “allottees” excluding other financial creditors to invoke the code, even though they are similarly situated as other financial creditors. Even assuming that the threshold was brought with good intention to address false cases, the amendment targets only allottees, with the inherent fact that the other financial creditors also bring false claims.
The amendment is a relief for the developers, however, the homebuyers/allottees have become the victim of unjust discrimination. The amendment was intended to circumvent the judgment of the Supreme Court which considered homebuyers as financial creditors. Hardship has been created for the allottees to invoke the code – despite homebuyers being introduced under the legislation through the Insolvency and Bankruptcy (2018) Amendment with the intention for them to participate in the proceedings with equal status as that of the financial creditors.
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