The Hon’ble Supreme Court of India in its judgment dated 9 th August 2019 upheld the constitutional validity of the Insolvency and Bankrupt...
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.
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