Pioneer Urban Land and Infrastructure Ltd. and Anr. V. Union of India and Ors.

Introduction:

In Pioneer Urban Land and Infrastructure Limited V. Union of India[1], the Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which included ‘real estate allottees’ within the definition of ‘financial creditors’ under Section 5(8)(f) of the Insolvency and Bankruptcy Code. The ruling marks a watershed moment for allottees, who will now not only be able to enforce the Code but will also be able to join the Committee of Creditors on the same terms as banks and other financial organizations.

Facts[2]

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, was enacted in response to the Insolvency Law Committee Report, which was released by the Ministry of Corporate Affairs in March 2018. The suggestions were based on the ruling in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited[3] by the National Company Law Appellate Tribunal (NCLAT). In this case, allottees filed several petitions against real estate developers who entered into “assured returns / committed returns” agreements with those developers, under which the developer agreed to pay a certain amount to allottees monthly from the date of execution of the agreement, in exchange for payment of a substantial portion of the total sales consideration in advance at the time of execution. The funds collected by developers under the guaranteed return programs had the “commercial impact of borrowing,” as evidenced by the developer’s yearly filings, which included the sums obtained under the heading “finance charges” as “commitment payments.” In light of this, proposals for the Amendment were made. As a result, multiple Writ Petitions contesting the legitimacy of the 2018 Amendment have been filed before the Hon’ble Supreme Court.

Issues Raised[4]

1. Whether Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, constitutionally valid as it infringes Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Constitution of India?
2. Whether the amendment is disproportionate to Real Estate (Regulation and Development) Act, 2016?

Arguments

Arguments by the Petitioners[5]

• The recognition of allottees as financial creditors was considered to violate two aspects of Article 14. First, the legislation is unfair in that it treats minorities unequally and regards differences alike, with no discernible distinction; and second, there is no relationship with the goals that the Code intends to achieve. Furthermore, the revisions do not support the Code’s goals, which are to maximize asset value so that a corporate debtor’s shareholders do not have to suffer from incompetent or inept management.
• It was argued that the amendment was arbitrary, exorbitant, disproportionate, and unreasonable and that no principle had been established. For the same reason, the petitioners’ constitutional rights under Article 19(1)(g) of the Indian Constitution were allegedly violated, and the modifications were said to be unconstitutional since they were not a fair constraint of the public interest under Article 19(6). Furthermore, the changes to Section 21 and the addition of Section 25A to the Code primarily benefit the Committee of Creditors’ commercial judgment and are thus obviously arbitrary on this point.
• It was also argued that the Real Estate (Regulation and Development) Act of 2016, which deals in-depth with the real estate sector and allows for the adjudication of conflicts between allottees and developers, as well as a wide range of provisions in favor of the allottee, such as substantive agreements and application of amendments, will override the agreements reached between the allottees and the developer. As a result, a reading of RERA demonstrates that this specific law will remedy all of the allottees’ complaints and that the challenged modifications are excessive, disproportionate, and in violation of Articles 14 and 19(1)(g) of the Constitution.

Arguments by the Respondents[6]

• It was asserted that the Insolvency Law Committee discovered that delays in the construction of flats/apartments have grown common and that monies collected from property buyers contribute significantly to the finance of these flats/apartments. It was also necessary to explain that home buyers are considered financial creditors for them to invoke Section 7 of the Code and claim their rightful place on the creditors’ committee when it comes to making critical decisions about the future of the construction business, namely the execution of the real estate project in which such home buyers will eventually be housed.
• The Code and RERA, it was argued, operate in fundamentally separate realms. The Code addresses a procedure in rem in which the focus is on the recovery of the corporate debtor through a settlement program so that the corporate debtor can be brought out of the wilderness and continues as an ongoing problem, therefore benefiting those involved stakeholders. RERA, on the other hand, protects private investors’ rights in real estate developments by requiring developers to adhere strictly to its criteria. Treatments provided to allottees under RERA are complementary, not exclusive. As a result, RERA and the Code must coexist, with RERA giving way to the Code in the case of a conflict.
• However, it was stated that the legislature understood and adequately recognized the citizens’ demand and that the change to the Code is focused on difficulties shown by experience, as discovered by the Committee on Insolvency Law, which indicates the presumption of legality. By recognizing allottees as financial debtors, the Code’s goals are furthered. Articles 14, 19(1)(g) read with Article 19(6), and 300A of the Indian Constitution are not violated by the Code Amendment Act. Homebuyers should be recognized as operational creditors, as they are similar to individual financial creditors who advance corporate debtors’ payments, such as debenture holders and fixed-deposit holders. The funds obtained by homeowners make a substantial contribution to the real estate projects’ funding. To be classified as a financial creditor, there must also be a concern for the time worth of money, and a project allottee must meet these conditions.

Judgment[7]

The verdict was concluded by the Hon’ble Supreme Court in the following words:

1. Articles 14, 19(1)(g) read with Article 19(6), and 300-A of the Indian Constitution is not violated by the Code Amendment Act.
2. The RERA should be read in conjunction with the Code, as it has been changed by the Amendment Act. The Code will take precedence over the RERA only in the case of a disagreement. Allottees of flats/apartments are thus entitled to concurrent remedies, with allottees of flats/apartments being able to make use of remedies under the Consumer Protection Act, 1986, RERA, and the Code’s triggers.
3. Section 5(8)(f), as written in the Code, is a residuary clause that has always included allottees of flats/apartments. The explanation, together with the deeming fiction imposed by the Amendment Act, only serves to clarify this legal situation.

Analysis[8]

The provisions of the Insolvency and Bankruptcy Code that have been explicitly challenged include Section 5(8)(f), Section 7, Section 21, and Section 25A. It is necessary to have an overview of these laws to properly analyze the entire case. Financial debt is defined in Section 5(8)(f) of the Code as a debt, including interest, that is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, that has the commercial effect of a borrowing. Section 7 explains how a financial creditor might start the insolvency resolution procedure for a company. Any sum generated from an ‘allottee’ of a ‘real estate project’ is regarded to be an amount having the commercial impact of borrowing, and he is a financial creditor under Section 7 of the IBC, according to the modification. The Committee of Creditors is described in Section 21 of the IBC. Clause 6 states that if the conditions of a financial obligation extended as part of a consortium arrangement, syndicated facility, or securities allow for a single trustee or agent to act for all financial creditors, each financial creditor may –

To the extent of his voting share, authorize the trustee or agent to act on his behalf in the committee of creditors.

1. To the extent of his voting share, represent himself in the creditors’ committee;
2. To the extent of his voting share, appoint an insolvency professional (other than the resolution professional) at his own expense to represent him in the committee of creditors; or
3. Exercise his right to vote with one or more financial creditors jointly or severally to the extent of his voting share.

The authorized representative under sub-section (6) or sub-section (6A) of section 21 or sub-section (5) of section 24 has the right to participate and vote in meetings of the committee of creditors on behalf of the financial creditor he represents following the prior voting instructions of such creditors obtained through physical or electronic means, according to Section 25A. Regarding the first issue, that the amendment violates Articles 14, 19(1)(g) read with Article 19(6), or 300A of the Indian Constitution, the Supreme Court stated that the Code is a beneficial legislation that can be triggered to put a corporate debtor back on its feet in the interest of unsecured creditors such as allottees, who are keenly interested in the corporate debtor’s financial health so that new management can carry out the real estate transaction. Applying the Shayara Bano v. Union of India[9] test, it cannot be stated that a square peg has been forced into a round hole, rendering Section 5(8)(f) arbitrary, i.e., excessive, disproportionate, or lacking in a sufficient governing principle. For the same reason, because the Amendment Act is adopted in the public interest, it cannot be stated that Article 19(1)(g) has been violated and is not rescued by Article 19(6), nor that it is an unjustified limitation on the Petitioner’s basic right under Article 19(1). (g). Also, no one is deprived of their property without the authority of a legally authorized statute, hence there is no violation of Article 300-A. For the second issue, the Supreme Court cited its own decision in Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited[10], which held that Debt Recovery Tribunal proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and winding-up proceedings under the Companies Act, 1956 can run concurrently. As a result, the court determined that “even via a process of harmonious building, RERA and the Code must be held to coexist, and, in the case of a conflict, RERA must yield to the Code.” As a result, RERA cannot be considered special legislation that, in the event of a disagreement, would supersede the general statute, namely the Code.”[11]

Conclusion

While this judgment provided homeowners with a new tool in their inventory by providing them with further redress against developers, it did not leave the developer in the dark since it also provided a variety of defenses that the developer might utilize to keep nefarious allottees away. After studying the foregoing decision, it can be stated that this historic decision will surely serve as a big deterrent to unscrupulous builders. The Supreme Court has offered a big sigh of relief to disgruntled homeowners by confirming the substantive legality of the clause in the Insolvency and Bankruptcy Code, 2016, which allows them to seek relief without difficulty under the Code.

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References:

[1] 2019 SCC OnLine SC 1005

[2] Writ Petition (Civil) No. 43 of 2019, (Nov 4, 2021, 10:00 AM), https://ibbi.gov.in/uploads/whatsnew/9cb1453bf7337c6eb76ac1aa331bd2ad.pdf

[3] Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited, Company Appeal (Insolvency) No. 07 of 2017 (India).

[4] Supra 2

[5] Supra 2

[6] Supra 2

[7] Ajay Shukla, ALLOTEES ARE FINANCIAL CREDITORS : SUPREME COURT, (Nov 5, 2021, 1:00 PM), https://www.centrik.in/blogs/pioneer-urban-land-and-infrastructure-limited-vs-union-of-india/

[8] Prachi Bhardwaj, Big relief for homebuyers as SC upholds the validity of the 2018 Amendments to IBC, (Nov 6, 2021, 10:00 AM), https://www.scconline.com/blog/post/2019/08/09/big-relief-for-homebuyers-as-sc-upholds-the-validity-of-the-2018-amendments-to-ibc/

[9] Shayara Bano v. Union of India, (2017) 9 SCC 1 (India).

[10] Infrastructure Private Limited v. Kotak Mahindra Bank Limited, (2019) 3 SCC 620 (India).

[11] Pioneer Urban Land and Infrastructure Limited v. Union of India Writ Petition (Civil) No. 43 of 2019 (India).