India: Insolvency And Bankruptcy Code (Amendment) Act 2020: Home Buyer's Remorse?

The Supreme Court of India ("SC") in the recent judgment of Manish Kumar and others vs. Union of India¹, ruled against a group of allottees of real-estate projects who had challenged the amendments to the Insolvency and Bankruptcy Code (Amendment) Act 2020 ("Amendment Act"). The Petitions inter alia challenged the constitutional validity of amendments to Section 7(1) of the Insolvency and Bankruptcy Code, 2016 ("Code").

Amendment to Section 7(1) incorporated a proviso that allottees under a real estate project (financial creditors), desirous of triggering the insolvency resolution process under the Code, are required to file an application jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of allottees under the same real estate project, whichever is less ("1st Amendment").

Further, the Petitioners sought to challenge another proviso amending Section 7 (1) of the Code, that those applications under Section 7 which had not been admitted would stand withdrawn within thirty days, if the newly declared minimum threshold of one hundred allottees or ten per cent of the allottees, whichever is lower, was not garnered by the respective applicant/s ("2nd Amendment").

However, the SC in what may be viewed as a blow to allottees of real estate projects, has upheld the provisions amending Section 7 (1) of the Code.

Contentions of the Petitioners

The Petitioners contended that the second proviso to Section 7(1) of the Code was unreasonable, arbitrary, irrational, ultra-vires the Indian Constitution and violated basic fundamental rights. It was contended that the amendments resulted in a hostile discrimination between the Petitioners and the other financial creditors, lacking any intelligible differentia. The Petitioners argued that the 1st Amendment was impractical as there was an information asymmetry. It was also argued that there existed no platform for the exchange and availability of information with details pertaining to the allottees. The Petitioners contended that if the aforesaid proviso were upheld, they would for all practical purposes fall outside the purview of a financial creditor and their status would be worse than that of an operational creditor.

Contentions of the Respondent

On the other hand, the Respondent's raised a counter argument stating that the Amendment Act was perfectly valid and formed part of an economic measure. The Respondents further contended that the Amendment Act was introduced to prevent multiplicity of proceedings being filed and to ease the burden of pending cases before the already overburdened adjudicating authorities.

The Judgment

1st Amendment

The Bench comprising of Justices R.F. Nariman, N. Sinha and K.M. Joseph observed that on the basis of existence of default against one applicant and in the event the corporate insolvency resolution process of the corporate debtor is unsuccessful, liquidation would commence, which not the objective of the Code. If a single allottee, , is allowed to move a Section 7 application, the interests of all the other allottees may be jeopardised and the entire project put in peril. Considering the issue of the arbitrariness and practicality of the minimum threshold of allottees suffering the same fate under the same real estate project coming together to jointly file a Section 7 application, the Court held that the rationale behind 1st Amendment is to promote the object of the Code and streamline the working of the Code.

One of the Petitioners argued that the minimum threshold as laid down under the Amendment Act should not be limited to the same real estate project but applicable for all projects being executed/developed by a Promoter. The SC held that this would make the task of the applicant more cumbersome. It was held that an individual allottee was always free to avail of other remedies in its arsenal including under the Real Estate (Regulation and Development) Act, 2016 ("RERA"), the Consumer Protection Act, 2019, or by filing a civil suit, and the Amendment Act would not exhaust the Petitioners' alternative remedies.

The SC further clarified that it does not matter whether a person has one or more allotments in the name of his family; all independent allotments would qualify as separate allottees and would be accounted for in the calculation of hundred allottees/one-tenth of the allottees. It was then clarified that in case of a joint allotment to more than one person, the allotment is to be treated as a single allotment.  This clarification was to make clear the object of the Amendment Act, which is to ensure that there is a critical mass of persons 'who agree that the time is ripe' to invoke the Code.

In respect to the contention on different default dates of each allottee, the SC held that any number of applicants, without any amount being due to them, could move a Section 7 application, provided that they are financial creditors and the default is in the sum of one crore, even if the one crore amount is owed to none of the applicants but to any other financial creditor. It is not necessary that there must be a default qua any of the applicants.

The SC observed that if the Legislature, after taking into consideration the sheer magnitude of provisos in question which would encompass a significant number of a group of creditors, finds it to be within the ambit of intelligible differentia, distinguishing the allottees from the other financial creditors; the SC would not be inclined to sit in judgment over the wisdom of such a measure. Reliance was placed on the doctrine of separation of powers stating that the presumption would be that the democratically elected representatives of the people drafting our legislation, would be conscious of every fact which would go to sustain the constitutionality of the law.

Addressing the concern of whether the condition of allottees were not rendered equivalent to or even worse off than an operational creditor, the SC distinguished basis that the developer is the debtor, as an allottee funds his own apartment by paying amounts in advance. An operational creditor has no interest regarding the financial soundness of the corporate debtor. However, the allottee of a real estate project is vitally concerned with the financial health of the corporate debtor.

2nd Amendment

The SC upheld the amendment and rejected the arguments put forth by the Petitioners. Whilst acknowledging that the period of thirty days to comply with the requirement of the minimum threshold could have been fairer and longer, the SC was unable to conclude that the thirty-day time limit was impossible to comply with. Prescribing a time limit in regard to pending applications, cannot be described as arbitrary, as otherwise, it would result in an endless and uncertain procedure. Further, "withdrawal" of the proposed applicant as contemplated under the Code, will not stand in the way of invoking the same default and filing the application afresh.

In summation, the SC upheld the provisos on the basis that they satisfied the litmus test to be justified as reasonable classification introduced in furtherance of the objects of the Code and that the case was not one of no intelligible differentia.

Concluding remarks

The Judgment marks another key milestone in the overall progression and development of the Code. The SC upon reviewing the data made available to it, in all its wisdom has determined that the Amendment Act would not only further streamline the insolvency process as envisaged under the Code but would also serve as a blockade against frivolous applications filed by opportunistic litigators not representing the critical mass.

Some would argue that this Judgment would be detrimental to home buyers/allottees of real estate projects, the net effect of the Amendment Act would likely achieve its primary objective of advancing the objects of the Code and enable speedy redressal. Alternative remedies remaining available, the overall effect of the Judgment and the Amendment Act seems sound.

Footnote 

1 Writ Petition (C) No. 26 of 2020