Introduction

Taking money from the allottees of the real estate project is a common phenomenon. Further, this money is used by the developers for construction purposes. This is a true fact that sometimes developers take money from the allottees but do not fulfil the promise at their end.

One option that can be availed of by the homebuyers regarding this issue is to file a complaint under the RERA Act, but this is a very time-consuming process. Thus, an amendment in the insolvency and bankruptcy code in the year 2018 brought a breakthrough for homebuyers by treating them as the financial creditors. This brought a great relief for homebuyers, but on the other hand, it brought distress for the developers, builders of the real estate projects. As a result, many petitions were filed in the court challenging this amendment, which led to an important ruling in the case of Pioneer Urban Land and Infrastructure Limited & Anr vs. Union of India & Ors.

CASE: PIONEER URBAN LAND AND INFRASTRUCTURE LIMITED & ANR VS UNION OF INDIA & ORS, 2019 SUPREME COURT, CIVIL ORIGINAL/APPELLATE JURISDICTION, WRIT PETITION (CIVIL) NO. 43 OF 2019

Brief Facts Of The Case

Relying upon the report of the Insolvency Law Committee in the year 2018, there was a significant amendment in the Insolvency and Bankruptcy Code, 2016. It added two explanations to Section 5(8)(f) of the code. According to the first explanation, any money received from a homebuyer who is an “allottee” of a “real estate project” will be considered as having the commercial effect of borrowing, making him a financial creditor for the purposes of Section 7 of the IBC which permits financial creditors to file an application in NCLT to start the corporate insolvency resolution process against a company that is in default. The amendment further granted homebuyers, who were financial creditors, voting rights and representation in the Committee of Creditors.

After this amendment more than 150 buyers filed the writ petitions in the court challenging the constitutional validity of this amendment. The real estate project developers, builders argued in the court that classification of homebuyers as financial creditors is an unreasonable classification having no intelligible differentia and that’s why is violative of Article 14 of the Indian Constitution. Further it was argued by the developers and builders that handful of homebuyers together can hamper the development of the real estate projects.

Arguments Of The Real Estate Developers

The petitioners contended that the allottees are not meeting any of the requirements needed to qualify as financial creditors. The senior advocate for petitioners also argued that homebuyers can be considered as operational creditors, which will limit the number of applications for initiation of CIRP because then there will be a chance of showcasing the pre-existing dispute between the parties. The main point of contention was that the homebuyers can avail the remedy under the RERA Act; thus, there is no need to make a separate amendment in the code to address the grievances of the homebuyers.

Analysis Of The Supreme Court Judgment

While pronouncing the judgment, the Supreme Court highlighted the reports of the insolvency law committee. The court emphasized that in the report it was mentioned that the delay in the competition of the construction of buildings is a common phenomenon. The report further mentioned that the amount raised from the allottees contributes to the financing of the construction work, resulting in having the commercial effect of borrowing. Thus, the committee concluded that the allottees are treated as financial creditors and can initiate the insolvency process against the real estate developers. The homebuyers have a rightful position in the committee of creditors as it takes the important decision regarding the construction of buildings, flats, etc., which ultimately concerns the homebuyers.

The honourable Supreme Court denied the contention of the petitioners to treat the allottees as operational creditors rather than treating them as financial creditors. The court clearly mentioned that the operational debts and allottees of real estate projects are completely different. The operational creditor has no interest in the corporate debtor, but on the contrary, the real estate allottees are significantly concerned with the financial health of the corporate debtor for ensuring the fruitfulness of the project. The court highlighted another important distinction: in operational debts, the time value of money is absent, whereas it is present when the amounts are raised from the allottees.

The Supreme court while distinguishing the division of debts into two categories under the code that is financial and operational debts one resulting from the loans and other arising from the sale of products or the provisions of services categorically mentioned that the real estate developers are directly within the Code’s purview. The court further held that in terms of treating unequal’s equally, allottees can be integrated with other individual creditors who have advanced specific sums to the corporate debtor, such as holders of debentures and fixed deposits.

The Court noted that the Code is a beneficial legislation which can be triggered to put the corporate debtor back on its feet just like allottees, who are vitally interested in the financial health of the corporate debtor, so that the apartments/buildings can be delivered to them as soon as possible, or to pay the compensation on account of failure.

Conclusion

After examining the aforementioned ruling, it is clear from analysis that this historic decision will serve as a strong disincentive to dishonest and unethical builders. Homebuyers who have been wronged by a purchase can now easily file for bankruptcy under the Insolvency and Bankruptcy Code, 2016 thanks to the Constitutional Bench of the Supreme Court’s ruling affirming the amendment’s constitutional legitimacy.