Pioneer Urban Land and Infrastructure Limited V. Union of India

This decision brought a new tool to the homebuyers' arsenal by giving them an extra recourse against the developers, it did not leave the developer in a lurch because it also offered an assortment of protections that the developer might use to hold wily allottees at bay.
Estimated Reading Time: 9 minutes

Introduction

The Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited V. Union of India[1] upheld the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which provided for inclusion of ‘real estate allottees’ within the meaning of ‘financial creditors’ under Section 5(8)(f) of the Insolvency and Bankruptcy Code. The decision is a milestone that gives protection to allottees, who will now have the right to enforce the Code but will also be a part of the Committee of Creditors on the same terms as banks and other financial institutions.

Facts

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, was in pursuant to the recommendations made by the Insolvency Law Committee Report, published by Ministry of Corporate Affairs in March 2018.

The recommendations were made based upon the decision given by the National Company Law Appellate Tribunal (NCLAT) in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited[2]. In this case, several petitions were filed by the allottees against the real estate developers, who entered into “assured returns / committed returns” arrangement with those developers, whereby the developer undertook to pay a certain amount to allottees on a monthly basis from the date of execution of the agreement, on payment of a substantial part of the total sales consideration in advance at the time of execution of the agreement, till the date of handing over of possession to the allottees.

It was held that the sums collected by developers under the guaranteed return schemes had the “commercial effect of borrowing” which was evident from the developer’s annual returns in which the sum collected was seen as “commitment payments” under the heading “financial costs”. In the light of this, the recommendations were made for the Amendment.

Therefore, various Writ Petitions were been filed before the Hon’ble Supreme Court challenging the validity of the 2018 Amendment.

Issue Raised

  • Whether Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, constitutionally valid as it infringes Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Constitution of India?
  • Whether the amendment is disproportionate to Real Estate (Regulation and Development) Act, 2016?

Contentions/Arguments from Both the Sides

Arguments made by the petitioners:

  • It was argued that recognizing allottees as financial creditors infringes two facets of Article 14. Firstly, that the law is unjust in so far as it views differences similarly and minorities unequally, without any intelligible differentiation; and secondly, there is no connection with the artifacts which the Code aims to accomplish. Further, the amendments do not justify the objectives the Code aims to achieve, i.e., to optimize asset value such that the shareholders of a corporate debtor do not have to suffer from bad management or poor management.
  • The amendment was contended to be manifestly arbitrary, excessive, disproportionate, irrational and without any principle being determined. For the same cause, the constitutional right of the petitioners under Article 19(1)(g) of the Indian Constitution was said to be infringed, and hence the amendments, not being a fair restraint of the public interest under Article 19(6), was plead to be struck down. Also, the amendments made to Section 21 and the insertion of Section 25A of the Code only benefits the commercial wisdom of the Committee of Creditors, and are therefore, manifestly arbitrary on this count.
  • It was further argued that the Real Estate (Regulation and Development) Act, 2016, which deals with the real estate sector in depth and allows for the adjudication of conflicts between allottees and developers, along with a wide range of provisions in favor of the allottee, including substantive agreements and application of the amendments will override the agreements reached between the allottees and the developer. Therefore, a reading of RERA would demonstrate that all issues of the allottees would be resolved by this specific legislation and that the impugned amendments are excessive, disproportionate and violates Articles 14 and 19(1)(g) of the Constitution.

Arguments made by the respondents:

  • It was argued that the Insolvency Law Committee found that delay in constructing flats / apartments has become a prevalent occurrence, and that sums collected by home buyers substantially lead to the funding of building these flats / apartments. It was also important to explain that home buyers are regarded as financial creditors so that they can cause the Code under section 7 and have their rightful position on the creditors’ committee when it comes to making crucial decisions regarding the future of the construction business, which is the execution of the real estate project in which such home buyers are ultimately to be housed.
  • It was contended that the Code and RERA operate in completely different spheres. The Code deals with a process in rem through which the emphasis is on the recovery of the corporate debtor by a settlement program, such that the corporate debtor may be taken out of the wilderness and will proceed as a continuing issue, thereby helping those concerned stakeholders. At the other hand, RERA preserves the individual investor ‘s rights in real estate developments by ensuring that the developer stick exclusively to its requirements. The treatments to allottees under RERA are supplemental and not exclusive treatments. Therefore, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code.
  • However, it was argued that the legislature acknowledged and appropriately recognized the need of the citizens and that the amendment to the Code is aimed at problems made manifest by experience, as found out by the Committee on Insolvency Law, demonstrates the presumption of constitutionality. The objects of the Code are sub-served by treating allottees as financial creditors. The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Constitution of India. Homebuyers should be treated as operational creditors as they are akin to individual financial creditors such as debenture holders and fixed-deposit holders who advance corporate debtors’ sums. The amounts raised from homebuyers significantly contribute to the financing of the real estate projects. Furthermore, there has to be a consideration for the time value of money to be categorized as a financial creditor and a project allottee actually fulfils these criteria.

Decision of the Apex Court

The Hon’ble Supreme Court concluded the judgment in the following terms:

  1. 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.
  2. The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of a conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.
  3. Section 5(8)(f) as it originally appeared in the Code is a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.

Analysis

The provisions which were specifically been challenged are Section 5(8)(f), Section 7, Section 21, and Section 25A of the Insolvency and Bankruptcy Code. In order to get a proper analysis of the whole case, it is important to get an overview of these provisions.

Section 5(8)(f) of the Code provides the definition of financial debt as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

Section 7 states about the initiation of corporate insolvency resolution process by financial creditor. As per the amendment, any amount raised from an ‘allottee’ of a ‘real estate project’ shall be deemed to be an amount having the commercial effect of borrowing, and he is a financial creditor under the Section 7 of the IBC.

Section 21 of IBC states about Committee of Creditors. Clause 6 provides that –

Where the terms of the financial debt extended as part of a consortium arrangement or syndicated facility or issued as securities provide for a single trustee or agent to act for all financial creditors, each financial creditor may—

(a) authorise the trustee or agent to act on his behalf in the committee of creditors to the extent of his voting share;

(b) represent himself in the committee of creditors to the extent of his voting share;

(c) appoint an insolvency professional (other than the resolution professional) at his own cost to represent himself in the committee of creditors to the extent of his voting share; or

(d) exercise his right to vote to the extent of his voting share with one or more financial creditors jointly or severally.

Section 25A states the rights and duties of authorized representatives of financial creditors i.e., the authorised representative under sub-section (6) or sub-section (6A) of section 21 or sub-section (5) of section 24 shall have the right to participate and vote in meetings of the committee of creditors on behalf of the financial creditor he represents in accordance with the prior voting instructions of such creditors obtained through physical or electronic means.

With regard to the first issue that the amendment infringes Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Constitution of India, the Supreme Court observed that the Code is a beneficial legislation which can be triggered to put the corporate debtor back on its feet in the interest of unsecured creditors like allottees, who are vitally interested in the financial health of the corporate debtor, so that a replaced management may then carry out the real estate project as originally envisaged and deliver the flat/apartment as soon as possible and/or pay compensation in the event of late delivery, or non-delivery, or refund amounts advanced together with interest.

Thus, applying the Shayara Bano v. Union of India[3] test, it cannot be said that a square peg has been forcibly fixed into a round hole so as to render Section 5(8)(f) manifestly arbitrary i.e., excessive, disproportionate or without adequate determining principle. For the same reason, it cannot be said that Article 19(1)(g) has been infracted and not saved by Article 19(6) as the Amendment Act is made in public interest, and it cannot be said to be an unreasonable restriction on the Petitioner’s fundamental right under Article 19(1)(g). Also, there is no infraction of Article 300-A as no person is deprived of its property without the authority of a constitutionally valid law.

The Apex Court, for the second issue, relied upon its own judgement given in Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited[4], where it was held that Debt Recovery Tribunal proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and winding up proceedings under the Companies Act, 1956 can carry on in parallel streams. Therefore, the court concluded that “even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code.”[5]

Conclusion

While this decision brought a new tool to the homebuyers’ arsenal by giving them an extra recourse against the developers, it did not leave the developer in a lurch because it also offered an assortment of protections that the developer might use to hold wily allottees at bay. Hence, it can be concluded after reviewing the above judgment that this landmark judgment would undoubtedly prove to be a major deterrent against the fraudulent builders. Through upholding the substantive validity of the provision in the Insolvency and Bankruptcy Code, 2016, the Supreme Court has given a major sigh of relief to the aggrieved homebuyers who can now seek relief without any trouble under the Code.


[1] 2019 SCC OnLine SC 1005

[2] Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited, Company Appeal (Insolvency) No. 07 of 2017 (India).

[3] Shayara Bano v. Union of India, (2017) 9 SCC 1 (India).

[4] Infrastructure Private Limited v. Kotak Mahindra Bank Limited, (2019) 3 SCC 620 (India).

[5] Pioneer Urban Land and Infrastructure Limited v. Union of India Writ Petition (Civil) No. 43 of 2019 (India).

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