THE CONUNDRUM: CLASSIFICATION OF HOMBUYERS

PREFATORY

The position of homebuyers has always been a question of interpretation in the Insolvency and Bankruptcy Code, 2016(hereinafter Code). In order to initiate a Corporate Insolvency Resolution Process (hereinafter CIRP), a person needs to be an operational creditor, financial creditor, or the corporate debtor itself; the code provided no remedy to homebuyers as they were included neither in the category of operational creditor nor in the financial creditor. The NCLT, however, in “Nikhil Mehta v AMR Infrastructure Ltd” distincted homebuyers as financial creditors who have entered into an agreement that contains a clause of assured or committed returns. In a limited sense, agreements with such boilerplate clause only are capable enough to trigger CIRP proceedings.

The judgment was preceded by The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which amended section 5 clause (8) in sub-clause (f) of the code by explaining that “any amount raised under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.” Technically, the corporate debtor meets part of his fund requirement by the money taken from homebuyers, and the effect of this transaction falls into the commercial effect of borrowing thus including homebuyers into the category of financial creditor u/s 7 of the code.

RERA AND HOMEBUYERS

Before the commencement of The Real Estate (Regulation and Development) Act 2016, NCDRC under the Consumer Protection Act 1986 entertained any grievance of homebuyers. RERA has given much relief to homebuyers by making the transaction process transparent. RERA, despite its entire benign motive, has created a backlog in the Real Estate industry. Looking from the perspective of the homebuyers, a homebuyer has various forums to knock for the remedy of his grievance: RERA, CPA, and IBC. It takes about 2-3 years getting redressal under the RERA act and 5-6 years under CPA for adjudication of dispute by consumer forum. Since code is a time-bound process and redressal is expedite here, homebuyers tend to seek relief through the code. In cases where the developer or builder becomes insolvent, and the project is stuck, the objective of homebuyers’ changes to get their money back instead of the house. Hence approaching NCLT under code becomes the best alternative to get their claims from CIRP Proceedings.

THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2019

The IBC (Amendment) Ordinance, 2019 was signed by the Hon’ble President of India on 28th December 2019. The objective of the Ordinance is to fulfil the critical gaps in the corporate insolvency framework, but instead, it gives rise to a conundrum in section 3 of the Ordinance which amends section 7(1) of the code which reads as follows:

“3.       Provided that for the financial creditors, referred to in clauses (a) and (b) of subsection (6A) of section 21, an application for initiation corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent of the total number of such creditors in the same class, whichever is less…….such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission.”

The said provision is pleaded ultra vires of Constitution as being violative of Article (s) 14 and 21 of the Constitution. Homebuyers already form a ‘class’ within creditors under the code, and the aforementioned condition obstructs them from availing the benefit of the code (which is already legitimated in “Pioneer Urban Land and Infrastructure Ltd. and Ors. v Union of India and Ors) by creating a “class within a class” u/s 7, which is manifestly arbitrary and violates article 14 of the Constitution.

 CRITICAL ANALYSIS

The Hon’ble Supreme Court has formulated two tests that must be satisfied in order that the court may uphold the classification made by legislature as a reasonable classification consonant with the guarantee of equal protection under article 14:

• “that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of this group

• that that differentia must have a rational nexus to the object sought to be achieved by the statues in question.”

The expression of Intelligible Differentia means the factor on which a class is separated from another, that distinction should be capable of being understood. The purpose of the Ordinance is to put the corporate debtor back on its feet while securing the interest of creditors like allottees, and this section of the Ordinance is argued as not based on any intelligible differentia nor the same has any nexus with the objective of the bill to be achieved. Thus, this classification is pleaded not reasonable and manifestly arbitrary under article 14 of the Constitution.

 It is stated in the case of “Shayara Bano v Union of India” that “Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary.” The said section of the Ordinance is argued arbitrary because it has been made unreasonably and done capriciously at the pleasure without adequate determination of the principle of the legislation. The Hon’ble Supreme Court in the case of “Pioneer Urban Land and Infrastructure Ltd. and Ors. v Union of India and Ors”hasalready negated the idea of setting some kind of threshold limit for the real estate allottees before they seek relief from NCLT under section 7 of the code; therefore, this Ordinance goes against the judgment of the apex court.

The Hon’ble Supreme Court, in the case of “M/s Shantistar builders v Narayan Khimalal Totame” observed that “having a house for a family was a basic human yearning wherein hard-earned money was invested in the hope of obtaining a roof over their heads. In diverse contexts, it (having a home) has been held by the court to be a part of the right to life as a fundamental Constitutional guarantee.” Further, this section of the Ordinance abstains homebuyers from enforcing their right to livelihood under article 21 of the Constitution.

 One of the major contentions in the Ordinance is the retrospective effect given to amended provisos, which entails financial creditors (homebuyers) to approach the NCLT with compliance to the new provisions. This would also include cases that are at their final stage of hearing and will hamper the progress of the case. Also, if the petitioner fails to bring remaining allottees on board to file the case, his case will be deemed to be withdrawn before the admission. The apex court has provided relief by issuing notice to the government of India, asking NCLT to maintain the status quo with respect to the applications already filed by homebuyers and investors against defaulting developers.

Because purchases are a continuous process, homebuyers have difficulty finding out how many units have been sold to calculate the 10% of the overall number of units sold in real estate projects. The Amendment Ordinance has failed to specify the implementation where the total number of allottees is uncertain, which makes it impractical.

 The apex court states that Article 13 is a protective provision and an index of importance. Article 13(2) puts a definite limitation on the wide legislative powers conferred by article 246. When ascertaining the constitutional vires of law (and the word ‘law’ includes Amendment) enacted by Parliament, the court gives regard to the principle of presumption in favour of the Constitutionality of law made by Parliament and enactment to be struck down if any Constitutional infirmity is found.Section 3 of this Ordinance is advocated to curtail the fundamental rights conferred in part 3 and also contravenes Article 13 of the Constitution.

CONCLUSION

It is felt that the Ordinance has been brought hurriedly without giving proper thought to the practical implementation of some provisions of the Ordinance. It is common knowledge that a single homebuyer is able to bring down a healthy company to its heels, and with the advent of the IBC many homebuyers have approached NCLT instead of RERA misusing and abusing the code.The piling of the cases at NCLT runs contrary to the very goals of IBC and does not support real homebuyers or honest developers. The need for homebuyers and developers should be balanced. At the same time, rigid laws also wipe away homebuyers’ true right for the grievance redressal. Although the code has an overriding effect over contemporary laws, it must be harmoniously construed with RERA for the benefit of homebuyers.

The contention on the law is sub judice in the Hon’ble Supreme Court. It would be inappropriate to reach a conclusion as to the constitutional validity of the Ordinance. The judgement will come as a leading pronouncement for the position of homebuyers in the Insolvency laws.

ABOUT THE AUTHOR

Ritik Khatri is a first year law student at National Law University, Odisha

In content picture credits: financialexpress.com