HOME BUYER A FINANCIAL CREDITOR

The Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited & Anr v. Union of India & Ors. (Writ Petition (Civil) No. 43 of 2019) has held that the homebuyers from now onwards shall be considered as Financial Creditors under the Insolvency and Bankruptcy Code.

Facts &Background

Various writ petitions were filed by Pioneer Urban Land And Infrastructure Limited (hereinafter referred to as “the Petitioner”) before the Supreme Court against Union of India  challenging the constitutional validity of the amendment, made under Section 5, 21 and 25 of I&B Code, 2016 in regards to the Insolvency Committee Report, which suggested “Home buyers” of the Real Estate projects to be considered as Financial Creditor and should be allowed to be represented in the Committee of Creditors by Authorized Representative. 

Judgments considered for making amendments in the Insolvency Committe Section 5, 21 and 25 of I&B Code, 2016 in

NCLAT  in the case of Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd. held that

 

“The amount raised by developer from allottees under assured return scheme had the effect of “commercial effect of a borrowing”. Further, the amount so raised by developer was shown as “commitment charges” under the head “Financial Cost” in the annual return, which made it clear for the NCLAT to consider such allottees as “Financial Creditor” within the meaning of Section 5(7) of I&B Code.”

Supreme Court in the case of Chitra Sharma & Ors. v. Union of India allowed Home Buyers to participate in committee of creditor to protect their interest.

On the basis of the above judgments the Insolvency Committee Report suggested that there is need to make amendments to the I&B Code to clarify the position of Home Buyers under I&B Code. Therefore, amendment was made under Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (hereinafter referred to as “The Amendment Ordinance”) which allowed Home Buyer to be considered as Financial Creditor and to be represented in Committee of Creditor by Authorized Representative.

 

Thereafter, the said writ petitions were filed before the Supreme Court of India

Issues

1.      Whether Home Buyers can be considered as “Financial Creditor” under I&B Code, 2016?

2.      Whether explanation added to Section 5(b)(f) is of clarificatory nature or can enlarge the scope of Section 5?

3.      Whether I&B Code, 2016 will have overriding effect over RERA?

4.      Whether consideration of Home Buyer as Financial Creditor violates Article 14, 19(1)(g) and 300-A of Constitution of Indi

Decision

·         With regards to First issue, Supreme Court stated that Home Buyer can be considered as “Financial Creditor” under Section 5 of I&B Code. Financial Creditor is a person to whom Financial Debt is owned as per Section 5(7) of the Code and “Financial Debt” is a debt which is paid against consideration for “time value of money”, in simple words which means that lenders lent money to  borrower to utilize such money and after utilization borrower is required to repay such money or equivalent of money to the lender under Section 5(8) of the Code. SC confirms this relation between the Develoe 7 Home Buyer

·         On Second issue SC further analysed for clear understanding the commendation given under Insolvency Committee Report in which it was stated that, the delay in completion of flats/apartment has become a common phenomenon, which affects allottees/home buyers adversely as they contribute significantly for construction of flats/apartment.

·         It was therefore, felt important that there is need to clarify home buyers/allottees as “Financial Creditor” so that they can initiate CIRP under Section 7 of I&B code and have rightful place in committee of creditors to decide the future of the building construction company in regards to the execution of Real Estate Project.

·         With regards to Fourth issue, petitioner argued on two points

1)That treatment of allottees/home buyer as Financial Creditor is in violation of article 14 of Constitution of India, as here unequals are treated equally, and equals are treated unequally

2)There is no intelligible differentia between Financial Creditor and Operational Creditor and such differentiation has no nexus with the objective of the Code.

However, Supreme Court did not agree with the contention of the petitioner and said that it is impossible to say that there is no intelligible differentia, which distinguishes Home Buyer from other Financial Creditor and gave several reasons that why real estate developer are unique from operation debtor.

In operational debt, a person who supplies goods and services is creditor and the person who has to pay for such goods and services is the debtor.

Whereas, in the case of real estate developer, the developer who is the supplier of the flat/apartment is the debtor as the home buyer/allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found.

Further, operational creditor has no interest in or stake in the corporate debtor. Whereas, in the case of real estate developer the allottee of a real estate project is vitally concerned with the financial health of the corporate debtor, as otherwise, the real estate project may not be completed on time.

Analysis

The Hon’ble Supreme Court held that The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. Further, RERA is to be read harmoniously with the Code, as amended by the Amendment Act and in case of a conflict I&B Code will prevail over RERA. Further, the remedies that are given to allottees of flats/apartments are concurrent remedies, and therefore, allottees of flats/apartments are in position to avail remedies given under the Consumer Protection Act, RERA as well as I&B Code. Further, Section 5(8)(f) as it originally appeared in the Code is a residuary provision, which always incorporated within it allottees of flats/apartments. The explanation together with the deeming fiction was added by the Amendment Act to only clarify the position of law.

 

By Dr Prem Lata

 

 

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