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SC upholds the IBC amendment of 2018: Declares it non-arbitrary to treat homebuyers as financial creditors

Author - Associate Shereen Abdin

A bench consisting of Justices R.F. Nariman, Surya Kant, and Sanjiv Khanna passed a judgment titled ‘Pioneer urban land and infrastructure ltd. and Anr vs. Union of India’. This judgment states that the amendments that were made to the Insolvency and Bankruptcy Code (or IBC) in 2018 do not violate either article 14 or article 19 (1)(g) of the Indian constitution. The bench also mentioned that the argument of these amendments being ‘arbitrary, unreasonable, excessive, and disproportionate’ is in no ways valid. This was a response to an explanation that was added to Section 5(8)(f) of the IBC regarding financial debt. This explanation deemed any real estate investment for allotting apartments to be a ‘financial debt’, moreover, it also stated that "any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing".

It was also noted that the amendments were carried out keeping in mind a report produced by the’ Insolvency Law Committee’, which had suggested the same concerning the Amrapali and Jaypee projects as its backdrop. Jaypee was granted permission to participate in a meeting which was held among the Committee of Creditors. This had taken place during the Chitra Sharma case. Further, the following points were raised by real estate companies:

1. Payments made in advance for flat allotments cannot be considered to be financial lendings.
2. An unreasonable classification arises when homebuyers are treated as financial creditors, as it leads to the treatment of unequal as equals.
3. There exists, under the RERA act, a separate provision for the grievance redressal of homebuyers.

Homebuyers as financial creditors

It has been argued extensively whether the homebuyers can be aptly referred to as operational creditors instead of financial creditors. In light of this, one can turn to ‘the Justice Nariman judgment’, which had stated the definitions of a creditor and a debtor concerning operational debts and the supply of goods and services. It then went on to specify the differences between the allottees of real estate projects and operational debts by reflecting on who is the stakeholder when it comes to corporate debts. Another distinction which was mentioned was surrounding the recovery of the compensation or refund in cases of the real estate project not being materialized (no compensation is recovered from corporate debtors in such cases). It was further discussed that the consideration is absent for the time value of money when it is availed from the operational creditor, as in such cases, the consideration happens in terms of the goods and services sold from them.

No treatment of unequal as equals

This aspect has also been discussed by the bench, which mentioned that the allottees, being individual financial creditors like debenture holders and fixed deposit holders and having been classified as such; show that they fall under the category of financial creditors without causing any infraction to the article 14. Therefore, when it comes to the treatment of unequal as equals, homebuyers or allottees can be easily assimilated with different financial creditors such as fixed deposit holders and debenture holders, as they all hold a certain amount to corporate debtors in advance. Next, the differences between fixed deposit holders and financial creditors have also been discussed.

Financial debt: Advance for flat booking

It was argued by many petitioners that borrowing can refer to taking temporary loans to return it along with interest. Keeping this in mind, advance payments by homebuyers cannot be classified as loans since they are not expecting to get money and interest, and are instead of expecting a flat in return. This idea was rejected by the Court, as it was proclaimed that ‘borrow’ is quite wide a term and it can be used to include temporary payments or advances by homebuyers as well, as in their case, the flat or the apartment would stand to be ‘something equivalent’. The Court also elaborated on the idea of ‘commercial effect’ and what does it stand for according to Section 5(8)(f).

RERA as a parallel remedy

The Court highlighted section 88 of the RERA act and mentioned that it was simply an additional remedy and would not bar any other remedies which were available to a homebuyer. This is also because the RERA act and IBC operates in starkly different spheres. Thus, to sum up, the entire judgment can be concluded in the following points:

1. The IBC amendments do not infringe or encroach upon the articles 14, 19(6), 19(1)(g) and 300-A of the Indian constitution.
2. In the act, section 5(8)(f) acts as a residuary provision and stands to provide added clarification concerning the Amendment act.
3. RERA act is meant to be read along with, and not in contrast with the IBC. In case there is any conflict, the IBC will hold grounds over the RERA act.