Setback For Buyers As SC Upholds Amendments To IBC

The Supreme Court, on January 19, 2020, upheld the constitutional validity of the amendments made in the Insolvency and Bankruptcy Code (IBC) , which said at least 100 homebuyers or 10 per cent of allottees have to come together, to start insolvency proceedings against an erring real estate developer.

Before the amendments in Sections 3, 4 and 10 of the IBC (Amendment) Act 2020 came into picture, even a single homebuyer was free to start insolvency proceedings against an erring builder.

The amendment to Section 7 provided that homebuyers, in their capacity of financial creditors, can initiate insolvency resolution process against the  builder jointly by not less than 100 such allottees or not less than 10 per cent of the total number of such allottees  in the same project.

"If a single allottee, as a financial creditor, is allowed to move an application, the interests of all the other allottees may be put in peril. Some of them may approach the Authority under the RERA. Others may, instead, resort to the fora under the Consumer Protection Act, though, the remedy of a civil suit is, no doubt, not ruled out," the three-judge bench of the SC said.

The top court also rebuffed the petitioners for stating that the amendments by parliament were ‘created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests’.

"Such an argument is nothing but a thinly disguised attempt at questioning the law of the legislature based on malice. A law is made by a body of elected representatives of the people. When they act in their legislative capacity, what is being rolled out is an ordinary law. Should the same legislators sit to amend the Constitution, they would be acting as members of the Constituent Assembly. Whether it is ordinary legislation or an amendment to the Constitution, the activity is one of making the law. While malice may furnish a ground in an appropriate case to veto administrative action, it is trite that malice does not furnish a ground to attack a plenary law," the SC said in its 465-page order.

In January 2020, the SC had agreed to hear the plea of homebuyers, who had challenged the amendments to the code, on the basis that it opposed their fundamental rights guaranteed under the Constitution.

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September 25, 2020: The Corporate Affairs Ministry, on September 24, 2020, extended the suspension of the Insolvency and Bankruptcy Code (IBC) for another three months. This means, corporate lenders will not be able to initiate insolvency proceedings against companies in case of defaults, till December 24, 2020. This is likely to offer respite to a large number of corporates across sectors, including real estate, at a time when the COVID-19 pandemic has made survival difficult for many companies.

With a view to offer some respite to businesses in the country that have been reeling under the impact of the Coronavirus-induced lockdown that resulted in the economy shrinking by 23.4% in the first quarter of the current financial year (April-June 2020) , the government, in June, announced the suspension of the Insolvency Code for a period of six months. Expecting further deterioration in economic growth amid growing cases of virus infections in India, the centre has decided to extend the suspension by another three months. Note here that this nine-month grace period will not cover defaults committed prior to March 25, 2020.

To give effect to the changes, the government has promulgated an ordinance, suspending Section 7, Section 9 and Section 10 from the IBC, while inserting Section 10A, which enables the government to extend the suspension for a period of up to one year.

Although beneficial for the builder community that has been battling for survival amid a multi-year demand slowdown, a liquidity crunch and increasing unsold stock, the move will further limit the legal options available to homebuyers, in case of defaults by real estate developers.

As it is, the government has said that builders can cite the force majeure clause as a legal justification for delays in project deliveries. Under the Real Estate (Regulation and Development) Act, builders could use this clause to escape defaults for a period of up to one year. This means builders in India may not be liable to pay any interest penalty for projects delays occurring between May 2020 and May 2021. The fact that the government has also extended the suspension of the IBC, means that homebuyers cannot approach insolvency courts either, during the grace period to report delays.

Recall here that under Section 7 of the Code, homebuyers have the right to initiate insolvency proceedings against real estate developers.

The Supreme Court, in August 2020, upheld the constitutional validity of amendments made to the IBC in 2018, which conferred the status of financial creditors to homebuyers, in effect entitling them to be a part of the Committee of Creditors (CoC) in insolvency proceedings against builders.  

“It was important to clarify that homebuyers are treated as financial creditors so that they can trigger the Code under Section 7 and have their rightful place on the CoC, when it comes to making important decisions as to the future of the building construction company, which is executing the real estate project in which such home buyers are ultimately to be housed," the SC said while delivering its verdict, in August 2020.

The apex court also said that the RERA should be read harmoniously with the IBC, but in case of a conflict, the Code would prevail.

Strengthening the homebuyers’ position against defaulting developers, the Supreme Court, on August 9, 2019, upheld amendments to the Insolvency and Bankruptcy Code (IBC) , under which buyers get the status of financial creditors, if a builder were to go insolvent. The top court also ruled that the real estate law (RERA) should be read harmoniously with the amendments made in the IBC, but the Code would prevail, in case of a conflict.

On August 1, 2019, the Parliament approved the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, to 'strengthen' the role of homebuyers, when resolution plans of embattled real estate developers are worked out.

The amendments to seven sections of the code, gives the committee of creditors (CoC) of a defaulting company explicit authority over the distribution of proceeds, in the resolution process. It also states that the resolution plans for cases that reach the IBC, must be worked out within 330 days. Further, the resolution plan worked out by the CoC, would be binding on all authorities concerned, the central government said.

It must be noted that thousands of homebuyers, who have invested in various projects of insolvency-hit developers, which include high-profile cases of Japyee, Amrapali and Unitech, have failed to get much relief. After waiting for their homes for several years, these buyers' cases are now before the National Company Law Tribunal (NCLT) and the Supreme Court (SC) . A more efficient insolvency code that clearly establishes their rights in the CoC ─ buyers are part of this ─ would mean that homebuyers would have a larger role in the resolution plan.

Homebuyers in various Jaypee Infratech projects, moved court against IDBI Bank taking the developer to the NCLT to start insolvency proceedings. Several moved the SC, saying that insolvency proceedings against the developer in the NCLT, would thwart their attempts to find justice.

Chitra Sharma, who moved the apex court on behalf of about 32,000 affected buyers against Jaypee going insolvent, said, in her plea that under the Insolvency and Bankruptcy Code of 2016, flat buyers did not fall in the category of secured creditors and hence, they could get back their money, only if something was left after repaying the secured and operational creditors. Keeping in mind the interests of buyers, the SC stayed the insolvency proceedings against the real estate firm.

Similar fears drove homebuyers of various projects of the Amrapali Group to move the apex court, when Bank of Baroda moved the NCLT against the developer. The Amrapali Silicon City Flat Owners Welfare Society moved the SC against an order of the NCLT that admitted the bank's insolvency petition against Amrapali's Silicon City project, in Noida in Uttar Pradesh. The number of affected buyers, in this case, is estimated to be 42,000. The SC has now entrusted state-run NBCC, with the responsibility of completing the embattled developer’s stuck projects.

It was the corporate ministry itself, which recommend that real estate major Unitech LTd, be declared insolvent. The company’s bosses, Sanjay and Ajay Chandra, are in Tihar jail in a criminal case lodged against them in 2015, by 158 homebuyers of the company's two projects in Gurugram. Once again, buyers knocked at the doors of the top court seeking protection. The number of affected buyers, in this case, is estimated to be 16,000. The SC again stayed the insolvency proceedings against Unitech.

The need for homebuyers to approach the SC was felt, owing to the fact that the Insolvency and Bankruptcy Code (IBC) , 2016, placed consumers right at the end of the queue, when it comes to distribution of assets, if a company is liquidated - a fault that now stands corrected. Homebuyers were designated as 'financial creditors', under the code in June 2018.

Allaying fears of homebuyers further, finance minister Nirmala Sitharaman has said that resolutions plans would be worked out, in such a way that cash-strapped companies are able to sail through and liquidation should not be the priority.

While homebuyers are now at par with financial creditors and can exercise their right, in selecting the resolution professional, they were earlier placed right at the bottom of the list in the CoC. Under the earlier code, there are eight levels of distribution, in case a builder goes bankrupt and his assets are liquidated, to compensate the stakeholders.

First to be compensated are resolution professionals and administrators.

The second in line are financial creditors.

Third to be compensated would be the workmen.

Following them at number four, are employees who are not workmen.

Fifth in line are unsecured financial creditors.

The government will get its dues after that, at number six.

The remaining money would be used to compensate equity shareholders.

Homebuyers were placed at number eight.