SUPREME COURT HAS UPHELD CONSTITUTIONAL VALIDITY OF AMENDMENTS TO INSOLVENCY AND BANKRUPTCY CODE 2016

The Supreme Court has recently upheld the constitutional validity of the amendments made to the Insolvency and Bankruptcy Code 2016 as amended thereof in 2018 (the Code), in Pioneer Urban Land and Infrastructure Limited & Anr. vs. Union of India & Ors., vide Judgment dated 09-08-2019, thereby treating homebuyers or allottees of real estate projects as financial creditors under the Code and also entitling them to be represented in the Committee of Creditors by authorised representatives.

The real estate developers had challenged the said amendments of the Code on the following significant grounds:

1. That the amendments would enable the homebuyers to arbitrarily initiate case under Section 7 of the Code to compel them to refund payments which would adversely affect the projects that had already been commenced. Thereafter, the resolution plans would also be rejected by the committee of creditors, of which the homebuyers would also be a part of, and thus, a normal solvent company would have to be forcibly wound up, which would not be in the interest of the developers. Thus, the amendments would infringe the fundamental rights of the developers, i.e. Article 19 (1) (g) of Constitution of India 1950 as amended thereof (the Constitution).
2. Further, in case of any issue or dispute between allottees and developers, they can approach the authority established under the Real Estate (Regulation and Development) Act, 2016 as amended thereof (the Act), which is a real estate sector-specific legislation, and not approach the authority established under the Code, which is only a general enactment dealing with insolvency. Thus, there is a need that the Act be given precedence over the Code.

But the Apex Court upheld the constitutional validity of the amendments made to the Code on the following grounds:

1. That an allottee would trigger the provisions of the Code against the developer only in the event that he has lost faith in the management of the developer, because once the petition for insolvency resolution is admitted, then there would be a lengthy process of rehabilitation of the developer and less chances of recovering the entire amount due from the developer as there would be other creditors and stakeholders making claims against the said developer. Whereas, if an allottee triggers the Act, there would be higher probability that the court would direct the developer to refund the money to the allottee or direct him to adhere to the provisions of the Act and the agreement executed between the allottee and the developer for completion of the construction of the flat/apartment, etc. Thus, there is no or limited scope for allottees to trigger the provisions of the Code arbitrarily and thus, there is no or limited scope for any adverse effect on the interests of the developers.
2. That the Act provides that the remedies provided to allottees under the Act are only in addition to any other provision of law, and thus, are not exclusive remedies.
3. That the allottee makes payments in instalments in order to obtain a flat/apartment, which are co-terminus with phases of completion of the real estate project, and thus, homebuyers can be placed equally with other financial creditors who advance certain amounts to the developer-corporate debtor.

Thus, the Supreme Court upheld the constitutional validity of the amendments made to the Code and held that the Act has to be read harmoniously with the Code. The Court further directed the National Company Law Tribunal (NCLT) to take up applications filed by homebuyers or real estate allottees under the Code, to decide the matters in light of the Judgment of the Supreme Court dated 09-08-2019.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer