Home Buyers as Financial Creditors under IBC : The Secured v. Unsecured Conundrum
The Insolvency and
Bankruptcy Code, 2016 (“the Code”) was introduced with a view to overhaul the
overlapping laws and adjudicatory bodies that dealt with the insolvency and
bankruptcy of corporates and individuals. It offers a comprehensive process, overriding
all other legislations on the subject and therefore provides a smooth
resolution process. Despite these obvious advantages among many others, the
Code has historically failed to fully appreciate the concerns of Home Buyers when
it comes to insolvency resolution or liquidation of companies that deal with
real estate projects.
The question of
whether Home Buyers should be treated as financial creditors or operational
creditors has very often come up as the subject of discussion among members of
the bar and the bench alike. The Amrapali judgment, [1] The Jaypee
Infratech Judgment [2] and
the Supertech judgment [3] are
some major cases where the position of Home Buyers vis-a-visother
creditors was analysed by the Apex Court.
In light of the position
of Home Buyers under the Code, a much needed relief came in the form of The Second
Amendment to the Act, [4] which
introduced the explanation following Section 5(8)(f) of the Code. [5] The
said explanation provided that any sum of money raised from an allottee under a
real estate project, i.e. a Home Buyer; shall be deemed to be a borrowing in
its commercial sense and shall have the same effect as well. In another welcome
move, the provisions of Section 7 of the Code were amended to introduce
three provisos, wherein the second proviso provided that allottees under a real
estate project shall be financial creditors and be entitled to initiate
Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor
(“CD”). However, not less than 100 such allottees (Home Buyers) or not less
than 10% of the allottees, whichever is lesser, must file the application
jointly in order to initiate CIRP. [6]
While the judgments
passed by the Hon’ble Supreme Court and the amendments to the Code, over the
years have made it absolutely clear that Home Buyers shall be treated as
financial creditors for the purpose of the Code, what is not very clear is that
whether they shall be treated as secured or unsecured financial creditors.Most
recently, in Pioneer Urban Land and Infrastructure v. Union of India, [7] while
dealing with the constitutional validity of the amendments to the Code, the
Hon’ble Supreme Court observed that real estate allottees are unsecured
creditors. The following paragraphs make an attempt to analyse the existing
literature available on this subject, including statutory provisions and
judgments in order to determine whether there is enough ground to treat Home
Buyers as secured financial creditors.
It had also dealt with
the same question inChitra Sharma v. Union of India, [8] in a
fleeting manner and while the Court thought it was best not to decide the
question of whether Home Buyers should be treated as secured or unsecured
creditors, it did go into a short and informative discussion.It was admitted on
record that Home Buyers rely on statements made by developers and invest in
real estate projects. While a handful of these Home Buyers have sufficient
funds at their disposal, most Home Buyers, avail of loan/ credit facilities
from various banks and financial institutions; it is these Home Buyers who
suffer the worst fate, on one hand, they are deprived of the property promised
to them and on the other, the banks/ financial institutions chase them for
repayment of the loan/ credit availed.
The Hon’ble Supreme
Court further went to state that Home Buyers have made valuable investment of
their hard-earned money in hope of having a roof over their heads, which is
also a basic human need (food, shelter and clothing). It further
recognised the Home Buyers’ right to have representation on the Committee of
Creditors (“CoC”), in accordance with Regulation 16A. [9]
However, despite having almost made a case for Home Buyers to be treated as
secured financial creditors, the Court decided to keep the question open and
not give a final verdict upon it.
While the judgment in
Chitra Sharma, [10]
did not give a concrete solution, it did acknowledge the fact that Home Buyers
are almost invariably put in a precarious situation and their rights haven’t
yet been protected to the extent they should have been. In this light, it is
important to note the provisions of Article 300A of the Constitution, [11]
which guarantees a right to property and states that no person may be deprived
of this right, unless such deprivation is backed by appropriate legal sanction/
authority. While the right to property under Article 300A does not have the
sanctity of a fundamental right, it is not just a constitutional right; it is
more in the nature of a human right. [12] In
this context the judgment of the Hon’ble Supreme Court in M/s Shantistar
Builders v. Narayan Khimalal Totame [13]
must be brought to the fore. In this judgement, the Hon’ble Supreme Court held
that “A reasonable residence is indispensable for fulfilling the
constitutional goals in the matter of development of man and should be taken
as included in ‘life’ in Article 21.” Therefore, on a combined reading
of the judgements cited above and the provisions of Article 300A, it may be
conclusively stated that though Article 300A is not a fundamental right, it is,
as a matter of fact, fundamental to the very existence of every person and
therefore makes an extremely strong case in favour of Home Buyers for
preferential treatment during the CIRP.
It is also pertinent
to look into the provisions of RERA [14]
which confer certain rights upon Home Buyers. Section 18 (1) provides
that:
“… in case the promoter fails to
complete the construction or give possession of the apartment to the allottee (a) in accordance
with the terms of the agreement for sale; or (b) due to discontinuance of his
business as a developer, suspension or revocation of registration under RERA or
for any other reason;”
the promoter shall be
liable to return to the allottee the entire amount received by him with
interest at the prescribed rate, without prejudice to any other remedy
available to the allottee. In the event that the allottee does not wish to
withdraw from the project, the promoter must pay interest at the prescribed
rate, for every month of delay till such time that the possession is handed
over to the allottee.
While the RERA
provides for express rights to the allottees in terms of refund of money or
interest till the time of handover of apartment, plot etc. followed by actual
possession of the same being delivered to the allottee, the Code seems to
attack these rights at their very core. Section 14 [15] of
the Code strictly prohibits the initiation and/ or continuation of any
proceedings against the Corporate Debtor (“CD”) during the CIRP. Therefore, the
enforceability of the rights under Section 18(1) of the RERA comes to be
questioned. Further Section 238 [16]
provides that in case of a conflict of any provision of the Code with any
provision of any other statute for the time being in force, the provisions of
the Code shall prevail over the provisions of the concerned statute. A conjoint
reading of these two Sections makes it absolutely clear that despite the
existence of rights of Home Buyers/ allottees under the RERA, those rights
cannot be enforced.
The interpretation of
Section 238 above has been affirmed by the Courts in a plethora of judgments,
the most notable of them being Innoventive Industries Limited v. ICICI
Bank Limited, [17]Bank
of India v. Ketan Parekh [18] and Sterling
SEZ Infrastructure Ltd. v. Deputy Director, Directorate of Enforcement,
Prevention of Money Laundering Act. [19] In Pr
Commissioner of India v. Monnet Ispat and Energy Limited, [20] the
Hon’ble Supreme Court confirmed that Section 238 of the Code will override
anything inconsistent contained in any other enactment, including the Income
Tax Act. Further, in Pioneer, [21] the
Hon’ble Supreme Court categorically held that “…RERA and the Code must be
held to co-exist, and in the event of a clash, RERA must give way to the Code.”
Another important
point of view arises from the Transfer of Property Act, 1882 (“the Act”). Section 55(6)(b) of the Act explicitly
states that the buyer of a property is entitled to a charge on it. This charge
of the buyer is to the extent of purchase money paid by the buyer and the
interest thereon; and can be exercised against the seller as well as all
persons claiming under the seller. Therefore, even under the Act, Home Buyers
have a charge on the property, against the seller. Such charge should qualify as
a right of security interest under Section 2(31) of the Code, thereby according
to the status of secured financial creditors to Home Buyers.
Further, In Rajesh Goyal v. Babita Gupta, [22] the
NCLAT while disagreeably holding Home Buyers to be unsecured creditors, held
that no creditor can be given preference over Home Buyers, as the
project has been approved for them and therefore the property/ flat/ apartment
must be used to satisfy the claims of the Home Buyers. The protection of the
interests of Home Buyers has been consistently upheld by the Supreme Court of
India as well as the NCLAT. [23]
Treating them as secured creditors is only in line with the same principle of
protection of the interests of Home Buyers.
It is also pertinent to note that while the rights available to Home Buyers under RERA, Transfer of Property Act and the Constitution are suspended by virtue of Section 14 and 238, the Code hardly addresses their concerns. While on one hand, Constitutional as well as statutory provisions along with consistent judicial decisions make a strong case for special preferential treatment for Home Buyers, on the other hand, the Code seeks to take away such treatment. In light of the foregoing analysis, it would only be fair to treat Home Buyers as secured creditors under the Code, having an undivided security interest in the land and/or plot which was part of the real estate project under which they were allottees. This would ensure, that in the event the CD goes into liquidation, Home Buyers will have access to certain rights under Section 52 [24]. In case they decide to not relinquish their security interest they will have priority over other financial creditors in the waterfall mechanism provided in Section 53 of the Code.
[1] Bikram
Chatterji & Ors. v. Union of India & Ors., Supreme Court of India, Writ
Petition (C) No. 940 of 2017.
[2] Anuj
Jain v. Axis Bank Limited Etc. Etc., Supreme Court of India, Civil Appeal No.s
8512-8527 of 2019.
[3] M/s
Supertech Ltd. v. Rajni Goyal, Supreme Court of India, Civil Appeal No.s 6649-50
of 2018.
[4] The
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.
[5]
Section 5 (8) (f) of the Insolvency and Bankruptcy Code, 2016.
[6]
Proviso 2 to Section 7 of the Insolvency and Bankruptcy Code, 2016. Inserted by
the Insolvency and Bankruptcy Code (Amendment) Act, 2020.
[7] 2019 SCC OnLine SC
1005.
[8] Chitra
Sharma and Ors. v. Union of India and Ors., Writ Petition (Civil) No. 744 of
2017.
[9]
Regulation 16A of the Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016.
[10]Supra
at 8.
[11]
Article 300A of the Constitution of India, 1950.
[12] Indian
Handicrafts Emporium v. Union of India, AIR 2003 SC 3240.
[13] AIR
1990 SC 630.
[14] The
Real Estate (Regulation and Development) Act, 2016.
[15]
Section 14 of the Insolvency and Bankruptcy Code, 2016.
[16]
Section 238 of the Insolvency and Bankruptcy Code, 2016.
[17] NCLAT,
Company Appeal (AT) Insolvency No. 1 & 2 of 2017.
[18] [2009] 92 SCL 309
(SC).
[19]
Supreme Court of India, MA 1280 of 2018 in CP 405 of 2018.
[20]
Supreme Court of India, Special Leave to Appeal (Civil) No. 6483 of 2018.
[21]Supra at 7.
[22] [2020] 117
taxmann.com 720 (NCLAT).
[23] P Dot G Constructions
(P) Ltd. In re, [2019] 112 taxmann.com 271 [NCLT Chennai].
[24]
Section 52 of the Insolvency and Bankruptcy Code, 2016.
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