SC seeks govt response on plea against financial creditor status to homebuyers

By: | Published: January 22, 2019 2:43 AM

This right given to allottees is in addition to claims before consumer fora and Rera, which according to real estate developer Pioneer Urban Land and Infrastructure, has the effect of driving a financially solvent and healthy real estate developer/business into insolvency.

SC seeks govt response on plea against financial creditor status to homebuyers

The Supreme Court on Monday sought response from the Centre on a petition challenging the constitutional validity of the newly inserted explanation to the Insolvency and Bankruptcy Code (IBC) that made real estate allottees financial creditors who can initiate corporate insolvency proceedings against developers.

This right given to allottees is in addition to claims before consumer fora and Real Estate Regulatory Authority (Rera), which according to real estate developer Pioneer Urban Land and Infrastructure (PULIL), is “over-reaching in its impact” and has the effect of driving a financially solvent and healthy real estate developer/business into insolvency .

A bench led by Justice RF Nariman sought response from the ministries of corporate affairs, law and justice and housing, and others on a petition by PULIL, challenging the constitutional validity of the Explanation to Sections 5(8)(f), 21(6A)(b) and 25A of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, and also Section 7 as being violative of Articles 14 and 19(1)(g) of the Constitution. As a result of the impugned provision, amounts raised by a corporate debtor from an allottee of a real estate project are brought within the definition of ‘financial debt’ under Section 5(8), the developer alleged.

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It further said the consequences of the inserted provisions are that allottees, in addition to filing their claims before a consumer court and Rera, can initiate CIRP against a real estate developer under Section 7 as they are entitled to a seat at the committee of creditors (CoC) along with voting rights.

“In view of the large number of allottees in most real estate projects, who will now have to be accommodated in the CoC as a result of the amendment, allottees as a class of financial creditors are entitled to be represented by a single representative who is to attend CoC meetings and vote on behalf of each allottee to the extent of his/her voting share (pursuant to Clause 6A inserted to sections 21 and 25A vide the Amendment Act),” the Gurugram-based real estate developer said, which claimed to be solvent and not in default of its financial obligations.

Stating that it has the fundamental right to carry on their business of real estate, the firm said the direct and inevitable effect of the impugned provisions is to impinge upon this right. “The impugned provisions are arbitrary and cannot be termed as ‘reasonable restrictions’ within the meaning of Article 19(6) in as much as the provisions are excessive compared with the object sought to be achieved,”it stated.

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