Supreme Court upholds Home buyers status as financial creditors

Supreme Court upholds Home buyers status as financial creditors. Constitutional validity of amendments to IBC 2016 also upheld

ABCAUS Case Law Citation:
ABCAUS 3109 (2019) (08) SC

Important case law relied upon by the parties:
Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd.
Chitra Sharma & Ors. v. Union of India
Bikram Chatterji v. Union of India

Number of writ petitions had been filed in the Hon’ble Supreme Court challenging the constitutional validity of amendments made to the Insolvency and Bankruptcy Code, 2016 (the Code), pursuant to a report prepared by the Insolvency Law Committee dated 26th March, 2018 (Insolvency Committee Report).

The said amendments namely Explanation to Section 5(8)(f) of the Act had given the deem allottees (home buyers) of real estate projects the status of “financial creditors” so that they may trigger the Code, under Section 7 thereof, against the real estate developer. In addition, amendment made to section  21(6A)(b) and 25A being financial creditors, such allottees made entitled to be represented in the Committee of Creditors by authorised representatives.

It was argued on behalf of the real estate developers that the treatment of allottees as financial creditors violates two facets of Article 14. One, that the amendment is discriminatory inasmuch as it treats unequals equally, and equals unequally, having no intelligible differentia; and two, that there is no nexus with the objects sought to be achieved by the Code.

It was submitted that developers who have completed building projects in time and are in every way compliant with the law, can yet be jeopardised by Section 7 petitions filed under the Code to blackmail them into making payments which would divert funds which are otherwise to be used for the purpose of the project.

It was contended that the Real Estate (Regulation and Development) Act, 2016 (RERA), which deals in detail with the real estate sector, and provides for adjudication of disputes between allottees and the developer, together with a large number of safeguards in favour of the allottee, including agreements in statutory form, which would replace the agreements entered into between the developer and the allottees.

The Hon’ble Supreme Court upheld the constitutional validity of the amendments and held that allottees/home buyers were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen.

Supreme Court upholds Home buyers status as financial creditors

The conclusion reached by the Hon’ble Supreme Court were as under:

(i) 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.

(ii) The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of 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.

(iii) Section 5(8)(f) as it originally appeared in the Code being 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.

Also, The Court sought an affidavit be filed by the Union of India within three months as to the steps taken that NCLT and the NCLAT are manned with sufficient members to deal with litigation that may arise under the Code generally, and from the real estate sector in particular. 

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