This article is written by Varun Akar, a student of Institute of Law, Nirma University, Ahmedabad. In this article, the author has mentioned whether homebuyers are to be considered as Financial Creditors or not with the help of a case analysis.

Introduction

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

In the present case, various writ petitions were filed by Pioneer Urban Land And Infrastructure Limited (hereinafter referred to as “the Petitioner”) before the Supreme Court of India against Union of India (hereinafter referred to as “the Respondent”) to challenge 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.  

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 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. Further, 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 India. 

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. 

In the present case, Home Buyers/Allottee pay a substantial amount of money to the Real Estate Developer in advance for completion of the Project in exchange of which Real Estate Developer provides Flat/Apartment to the Allottees. Now, the amount of instalment paid by allottees for completion of flat is much less, than the amount he would be required to pay at the time of purchase of a readymade flat, this enables allottees to get time value of money. Therefore, court concluded that the current definition of ‘financial debt’ is sufficient to include the amounts raised from home buyers/allottees under a real estate project, and hence, they are to be treated as Financial Creditors under the I&B Code. 

Further, for clear understanding court analysed the recommendation 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 regard to Second issue, the petitioner argued that Section 5(8)(f) should be interpreted as per principle of noscitur a sociis, which says that in case if statute is defined loosely or ambiguous in nature than it should be interpreted in accordance with the statute surrounding it as a result of which, definition of “Financial Debt” should be interpreted as loan of money given with or without interest which should be returned in the form of money only. 

However, Supreme Court did not agree with the contention of the petitioner and said that Section 5(8)(f) is a residuary provision which is “catch all” in nature and therefore, the word “any amount” or “any transaction” not covered under any other clause will be considered as “Financial Debt” if they have effect of “Commercial Borrowing”.  Therefore, the advance given by Home Buyer to real estate developer for completion of project in exchange of flat/apartment will be considered as “borrowing”. Further, both parties have commercial interest in this project as Real Estate Developer will earn profit by selling such apartment and Home Buyer will have profit as he will get flat/apartment in a much lesser value than the value of readymade flat which will give time value for money to the allottee.

Therefore, the amounts raised from allottees by real estate developer under real estate projects is included within the scope of section 5(8)(f) of the Code even without referring to the explanation added by the amendment. Therefore, the deeming fiction that is used by the explanation is to put beyond the doubt that allottees are to be regarded as financial creditors within Section 5(8)(f) of the Code. Hence, The explanation added to Section 5(8)(f) of the Code by the amendment does not in fact enlarge the scope of the original Section instead it just clarify the doubt that may arise.

With regard to Third issue, the petitioner argued that RERA is a special statute as it deals with real estate development project whereas I&B Code is a general statute as it deals with insolvency and therefore, RERA will have overriding effect over I&B Code. However, Supreme Court did not agree with the contention of the petitioner and provided two reason why I&B Code will have overriding effect over RERA. 

First, Section 88 of RERA lays down that the provision of RERA are in addition to any other provision and not a relaxation for any other provision therefore, the remedies available under RERA will be additional remedies than the remedies available under I&B Code. Second, the non-obstante clause of RERA came into force on 01 May 2016 whereas the non-obstante clause of I&B Code came into force on 01 December 2016. Further, the amendment which introduced explanation to Section 5(8)(f) came into force on 06 June 2018, which shows that parliament was aware about the provision of RERA and they still brought this amendment so that some definition of I&B Code can be used when it is needed. Therefore, as it is clear that both the test given above are fulfilled, as the I&B code was amended later in time and therefore, I&B Code will be given preference over RERA. Therefore, as per the process of harmonious construction RERA and I&B Code must co-exist together however, in case if there is clash between the two than I&B Code will have overriding effect over RERA. 

Further, the objective of both I&B Code and RERA is completely different as both these acts operate in completely different spheres. I&B Code deals with the proceeding in rem in which the focus is to rehabilitate the corporate debtor through resolution plan, so that the corporate debtor may be pulled out of the woods and may continue as a going concern, thus benefitting all stakeholders involved. Whereas, on the other hand RERA protects the interests of the individual investor in real estate projects by requiring the promoter to strictly adhere to its provisions.  

With regards to Fourth issue, petitioner argued 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 as 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. 

Further, for operational creditor, there is no consideration for time value of money as consideration for operational debt is only the goods or services that are either sold or availed from operational creditor. Whereas, in the case of real estate developer money is raised from the allottee against consideration for the time value of money, as even the total consideration agreed at the time, when flat/apartment is incomplete, is significantly less than the price the buyer would have to pay for a ready flat, and therefore, he gains the time value of money. 

Therefore, based on above reasoning court said that these are the fundamental differences on the basis of which real estate developer is considered as Financial Debtor and therefore, it is impossible to argue that classification of home buyer is not founded upon intelligible differentia. Further, court said that as far as unequals being treated as equals is concerned, home buyer/allottees could be considered as similar to other individual financial creditor such as debenture holder and fixed deposit holder, who has given certain amount to the Corporate Debtor. Thus, home buyer/allottees considered as individual Financial Creditor like debenture holder and fixed deposit holder shows that, home buyer belong to a larger class of Financial Creditor and therefore, the classification of home buyer/allottee as Financial Creditor is not in violation of Article 14 of Constitution of India.  

Further, in regards to the violation of article 19(1)(g) and 300A of Constitution of India, Court said that, the I&B Code is a beneficial legislation as it is triggered to put the Corporate Debtor back on its feet so that the interest of unsecured creditor, like home buyer/allottees can be protected who are vitally interested in the financial health of Corporate Debtor, so that the replaced management can carry out the real estate project and deliver flat/apartment as soon as possible and pay refund or compensation in case of late delivery or non-delivery of the flat/apartment to the home buyer. Thus, applying the “Shayara Bano v. Union of India test, it cannot be said that a square peg has been forcibly fixed into a round hole to render Section 5(8)(f) manifestly arbitrary”.

Therefore, based on above reasoning, it cannot be said that Article 19(1)(g) has been violated and not saved by Article 19(6) as the amendment was brought in public interest, and therefore, it cannot be said to be an unreasonable restriction on the Petitioner’s fundamental right under Article 19(1)(g). Further, court said that, article 300-A of Constitution of India is not violated as no person was deprived of its property without the authority of a valid constitutional law. 

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 subsumed 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.

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