The Hon’ble Supreme Court of India in its judgment dated 9th August 2019 upheld the constitutional validity of the Insolvency and Bankruptcy Code Amendment Act, 2018, resolving and dismissing around 200 petitions by various Realtors. According to this amendment, Home-buyers are treated as financial creditors. The proceedings with respect to insolvency of corporate bodies can be initiated by Financial Creditors, Operational Creditors and the corporate debtor itself.
Section 2 (10) of the IBC, 2016 defines a creditor as a person to whom a debt is owed which includes financial creditors, operational creditors, secured creditor, unsecured creditor and a decree holder. The Financial Creditors are those creditors whose connection with the organisation is purely based on financial contract such as through loan or debt security.
The judgment was passed by a three judges bench comprising Justice R.F. Nariman, Sanjiv Khanna and Surya Kant, which primarily rejected the argument that amendments in the code are arbitrary, unreasonable, excessive, disproportionate and held that it does not violate Article 14 and 19(1) (g) of the constitution of India. The primary bone of contention was the explanation to section 5(8) (f) of the code which stated that ‘any amount raised from a real-estate allottee shall be deemed to have the commercial effect of a borrowing’. In simple words, it means those amounts which possess a commercial effect of any borrowings are to be treated as ‘financial debt’.
The bench observed that the amendments were based on the reports of Insolvency Law Committee in the backdrop of Jaypee and Amrapali project crisis. It was found by the Insolvency Law Committee that inordinate delay in the completion of projects have become a common phenomenon and the amounts hoisted from home buyers significantly contributed towards the finance of such constructions. Hence, the court observed that, when such is the scenario the home buyers must be dealt as financial creditors so they can rightfully benefit under section 7 of the code and secure a place in the Committee of Creditors, when it comes to making future decisions of the construction company.
However, the realtors argued that the home buyers at large can be treated as operational creditors only. Justice Nariman clearly stated that in operational debts, when goods are supplied by a person, generally such person is the creditor and the person who has to make payment for such services is the debtor. Hence, in present case the developer who is the supplier of apartments is the debtor because the home buyers is financing the developer by paying in advance to him, for the construction of the building where his apartment is to be allotted.
Further, the court clarified that the code and section 88 of the RERA Act (which says that application of other laws is not barred), operates in completely different spheres and it is an additional remedy available to the home buyer and will not bar his other remedies available. In Nitika Verma vs M/s ATS Estate Pvt. Ltd., it has been observed that the provisions of RERA are in addition to and not in derogation to the provisions of any other law.
The petitioners further raised an important issue before the court that the term “borrowing” implies taking a loan for a temporary period of time with the motive of returning it back with interest. Hence, advance by home buyers cannot be treated as loan since they will get a flat in return and not money with interest. The Supreme Court rejected this view and stated that tyhe term “borrowing” has a wide scope and includes advance as loan since it is given by the home buyers to a developer for temporary use mainly the construction of project so far to give ‘something equivalent to money’ in return and that equivalent is apartment as intended by the agreement
The present judgment thus clarified that amendment of 2018 does not violate Article 14. 19(1) (g) read with 19(6) or 300(a) of the constitution of India. Also, the provisions of RERA are to be read in harmony with the code and in case of conflict between the two, the code will prevail over RERA and other remedies available to allottees are always open.