SC upholds threshold for home-buyers to move NCLT

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January 20, 2021 3:00 AM

“We aim to file a review in order to seek certain clarifications as well as modifications,” Sinha, who appeared for Association of Karvy Investors, said.

A Bench led by justice Rohinton Nariman dismissed around 40 petitions filed by home-buyers and others challenging the rule, saying the petitioners have failed to prove arbitrariness in the provision of the threshold that was introduced by the 2020 amendment.A Bench led by justice Rohinton Nariman dismissed around 40 petitions filed by home-buyers and others challenging the rule, saying the petitioners have failed to prove arbitrariness in the provision of the threshold that was introduced by the 2020 amendment.

The Supreme Court on Tuesday upheld the Insolvency and Bankruptcy Code (Amendment) Act, 2020, that mandates a threshold of at least 10% of home-buyers in a project or 100 of the total allottees for initiating insolvency proceedings against the real estate developer.

This means that a single home-buyer is barred from approaching the National Company Law Tribunal (NCLT) under Section 7 of the IBC to initiate insolvency proceedings against the real estate developer/builder. Section 3 also allows home-buyers to seek the Corporate Insolvency Resolution Process (CIRP) against builder only when 100 allottees or at least 10% of allottees make a joint application to NCLT.

Prior to the move, a home-buyer – just like any financial or operational creditor – could file an insolvency case against their realty developer if the default amount involved is `1 lakh or more. However, this rule was tweaked with the aim to prevent a few potentially unscrupulous elements within the home-buyer community from abusing the spirit of the IBC by unsettling real estate companies at the behest of or in connivance with rival firms. However, home-buyers continue to be treated as financial creditors.

A Bench led by justice Rohinton Nariman dismissed around 40 petitions filed by home-buyers and others challenging the rule, saying the petitioners have failed to prove arbitrariness in the provision of the threshold that was introduced by the 2020 amendment.

“A vested right under a statute can be taken away by a retrospective law. A right given under a statute can be taken away by another statute. We cannot ignore the fact that there was considerable public interest behind such a law. The sheer numbers, in which applications proliferated, combined with the results it could produce, cannot be brushed aside as an irrational or capricious aspect to have been guided by in making the law. Being an economic measure, the wider latitude available to the Law Giver, cannot be lost sight of,” the apex court said.

According to top court, “from the standpoint of public interest, every application maintained by a single applicant, is perceived as a veritable threat to the fulfillment of the objectives of the Code. The continuance of the applications could not, therefore, be in public interest. It is, as if, the Legislature intended to apply its brakes in the form of asking the applicants to obtain the consensus of a minimum number of similar stakeholders, before the applications could be further processed.”

“Public interest would, undoubtedly, also encompass, the economy of the country, which can be understood in terms of all the objects, for which the Code was enacted. They would include the speed with which the Code is worked. It would include, also, safeguarding the interests of all the stakeholders. This may necessarily include the corporate debtor as a stakeholder, being protected from applications, which are perceived as frivolous or not representing a critical mass,” it said.

In its August 2019 order, the apex court had upheld the government decision to grant home-buyers the status of financial creditors. Subsequently, the government introduced the IBC (Amendment) Act, 2020, that mandated a threshold of at least 10% of home-buyers in a project or 100 of the total allottees for initiating insolvency proceedings against the real estate developer. This was done to prevent real estate projects from being stalled by few disgruntled home-buyers/investors.

Legal experts said that bringing such a threshold just for home-buyers was arbitrary while no such thing exist for other financial or operational creditors. “SC has upheld the amendment, however, has failed to consider several crucial nuances with respect to private lenders. Home allottees and private lenders have been painted with the same brush, whereas lenders were always the original intended beneficiary of IBC. The only relief for pending applications that are deficient, is that they will be permitted to withdraw and refile before NCLT without having to repay court fees. However, only two months-time has been granted to meet the threshold. This paves the way for corporate debtors to retain control of their otherwise insolvent enterprise at the cost of helpless individuals, advocate Srijan Sinha told FE.

“We aim to file a review in order to seek certain clarifications as well as modifications,” Sinha, who appeared for Association of Karvy Investors, said.

Challenging Sections 3 & 10 of the Act, the petitions alleged that the new law was in violation of Articles 14 (equality before law) of the Constitution as it had rendered the buyers, who are financial creditors, remediless and also subjected them to discrimination by putting a pre-condition in the form of minimum number of allottees of a particular project required for filing an application under Section 7 of the IBC for initiation of the IRP.

According to petitions, “the government has failed to appreciate that the contact details of individual investors spread across the country may not be available publicly, thus making it impossible to proceed against a developer, the petition stated, adding because of this logistical nightmare, the impugned Act effectively diminishes the right of individual financial creditors to prefer an application under Section 7 of IBC.”

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