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The Homebuyer Amendment: No Home,No Hall Of Justice

Rohan Chawla
20 May 2020 2:19 PM GMT
The Homebuyer Amendment: No Home,No Hall Of Justice
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Owning a home is a dream that is common to many Indians. It is the ultimate security. Unfortunately for most, the path to owning a home is treacherous and cumbersome. It's an uphill battle that begins with saving enough for the down payment and then continues into finding a house that matches your dreams; one that is often just a picture in a brochure. After signing many agreements (on the dotted line) with the builder and the lender bank, and making payments (in all sorts of colours), the wait begins. The fate of under-construction projects is almost always destined to be delayed[1]. The builder/developer blames everyone but itself. The homebuyer waits patiently. Like all Indians accustomed to inefficient services, she hopes that this too will sort itself out. When, finally, it becomes clear that she has no alternative but to knock the doors of the court, she realizes that justice is going to take its own course – sometimes after multiple trips to the Apex Court.

The experience of homebuyers and getting relief under the Insolvency and Bankruptcy Code, 2016 ("the Code") has been difficult and exhausting since the inception of the Code. Initially, their entitlement to get relief under the Code as financial creditors was questioned[2]. This was statutorily resolved through a clarificatory amendment[3], the constitutional validity of which was then challenged by real estate developers in Pioneer Urban Land & Infrastructure Limited & Anr. v. Union of India & Ors.[4] (hereinafter 'Pioneer'). The Hon'ble Supreme Court upheld the constitutional validity of the amendments.

It was suggested during the course of the hearings in Pioneer, that the homebuyers ought to come to the Tribunal as a group, satisfying a minimum number of homebuyers before any insolvency application could be filed by them (Para 64[5]). These suggestions were put forward by the real estate developers and were intended to persuade the Court to read down the amendments that clarified that homebuyers were financial creditors. It was held that these arguments were based on the presumption that some allottees may want to back out of the transaction and that a reading down of the provisions would obviate such a problem. Further, it was held that in an application made by an allottee, the NCLT's "satisfaction" will be with both eyes open i.e. the NCLT will not turn a Nelson's eye to the legitimate defenses by a real estate developer and thus there was no necessity to read down any of the provisions.

Thereafter, in December 2019, The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019 was brought into force, which brought in the minimum threshold for a homebuyer to institute insolvency proceedings[6]. It provided that at least 100 allottees/homebuyers or 10% of the total number of allottees/homebuyers (whichever is lesser) of a real estate project must jointly file for the purposes of an application under Section 7 of the Code. Further, it gave 30 days to pending applications to comply with the minimum threshold requirement, lest the application would be dismissed.

On 20.02.2020, the Insolvency Law Committee gave its report, in which it recommended that there should be a requirement for a minimum threshold number of certain financial creditors in a class for initiation of the CIRP. Interestingly, the report came after the promulgation of The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019, which had already incorporated the said change.

On 13.03.2020, the Insolvency and Bankruptcy Code (Amendment) Act, 2020 was passed by the Parliament formalizing the increased threshold. Prior to the amendments being approved by Parliament, the matter was referred to a Standing Committee on Finance. In March 2020, it gave its 6th Report, which had 3 dissents to the introduction of the amendment.

Even prior to all this, certain homebuyers had challenged[7] the constitutional validity of the amendments brought about by The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019.

This article focuses on analyzing the reasons given by the Insolvency Law Committee (February 2020) for proposing the amendment. In the author's view, the reasons do not justify the introduction of the amendment. While some of these reasons had been explicitly dealt with in Pioneer, others fail to show intelligible differentia qua operational creditors. The amendments are also devoid of any accompanying rules and makes misplaced comparisons to other class-action remedies.

The following table illustrates this:

S No.

Reasoning in ILC Report

Remarks

"….there was a concern that the CIRP can be initiated by only one or few such financial creditors following minor disputes. This may exert undue pressure on the corporate debtor, and has the potential to jeopardise the interests of the other creditors in the class who are not in favour of the initiation of CIRP."

  • The issue of one allottee instituting IBC proceedings was specifically raised in Pioneer – see Para 5. This contention was explicitly rejected in Paras 51-52 of the judgement, by holding that all creditors would be a part of the Committee of Creditors (CoC) and would have a say regarding the future plans. It also held that if the management of the corporate debtor is a strong and stable one, then nothing debarred the same erstwhile management from offering a resolution plan, subject to Section 29A, which may well be accepted by the CoC. In fact, even the Union of India made the submission that if the company is solvent, then the CoC may decide to continue the same management (Para 12).

  • This reasoning applies equally to Operational Creditors, yet no provision has been made for them, making the position of allottees worse than Operational Creditors. While a single operational creditor (of the same amount as an allottee) may be able to institute insolvency proceedings, an allottee would have to search for other similarly situated allottees.

"This may also impose additional burden upon the Adjudicating Authority to hear objections to heavily disputed applications. The Committee noted that this may be antithetical to the value of a time-bound resolution process, as the already over-burdened Adjudicating Authorities are unable to list and admit all such cases filed before them."

  • The issue regarding disputed applications was also raised in Pioneer – see Para 53. The same was rejected in Para 56, by holding that The Real Estate (Regulation & Development) Act, 2016 (hereinafter 'RERA') provides enough provisions such that allottees can come armed with information to make at least a prima facie case of default. After the prima facie case is made, the burden is on the real estate developer to show that the allottee is not entitled to compensation/refund. Additionally, the remedy under Section 65 of the Code is also available to the real estate developers.

  • In fact, during the course of the hearings in Pioneer, it was the Union of India which suggested that all that NCLT would have to be supplied with by the allottee in his Section 7 petition would be the RERA information bank, and after receiving a reply from the real estate developer, the NCLT would then easily be able to decide whether any compensation/refund is due (Para 12).

  • This issue of time-bound resolution and burdened Adjudicating Authorities was also raised in Pioneer – see Para 57. It was rejected in Para 58 by holding that 'Unfortunately both the NCLT and NCLAT do not have sufficient members to deal with the flood of applications and appeals that is before them. The time taken in the queue by applicants who knock at their doors cannot, for no fault of theirs, be put against them.' In fact, in Para 103, the necessity to have sufficient members in the NCLT and NCLAT was reiterated.

  • The minimum threshold only exacerbates the contentiousness of an application, instead of decreasing it. The minimum threshold compounds the alleged contentiousness by the number of applicants, as now the facts of each allottee have to be examined by the Adjudicating Authority. The amendment assumes that all allottees have the same set of facts and the Corporate Debtor has the same defense against all of them.

  • The reasoning of disputed applications equally applies to Operational Creditors. In fact, the likelihood of dispute is more in an application filed by an Operational Creditor vis-à-vis an allottee. This was recognized in Para 42 of Pioneer, where it was held that the information supplied by the Real Estate Developer under RERA makes it easier for the allottee to approach NCLT under the Code and this was one of the vital differences between allottees and operational creditors. Despite this, a heavily disputed application can be maintained by an Operational Creditor without the requirement of any minimum threshold.

"However, it was acknowledged that initiation of CIRP by classes of similarly situated creditors should be done in a manner that represents their collective interests. It was felt that a CIRP should be initiated only where there is enough number of such creditors in a class forming a critical mass that indicates that there is in fact large- scale agreement that the issues against a corporate entity need to be resolved by way of a CIRP under the Code. This may well be a more streamlined way of allowing a well-defined class of creditors to agree upon initiating what is a collective process of resolution under the Code."

  • Firstly, 10%/100 allottees does not indicate 'enough number' or 'large scale agreement'. As stated in Pioneer, once the CoC is formed (which would include all the creditors/allottees), it may well be decided to accept the resolution plan of the existing management. Thus, the initial threshold of 10%/100 allottees is not an indicator of the majority will of the creditors of the corporate debtor.

  • With respect, the Committee mixes up the issues of initiation and resolution. It is not in dispute that CIRP is a collective process, where the majority of the CoC decides the future course of action. However, that does not imply that the initiation/commencement of CIRP also has to be a collective process. If that were so, then CIRP can never be initiated by a sole applicant.

  • The requirement of agreement between a class of creditors regarding initiation of insolvency proceedings places the cart before the horse, as it contemplates an agreement between members of the CoC, even when the CoC has not been formed.

"In this regard, and specific to the interests of homebuyers, the Committee also noted that in cases where a homebuyer cannot file an application for initiation of CIRP for having failed to reach the aforesaid critical mass, she would still have access to alternative fora under the RERA and under consumer protection laws. For instance, as recognised by the Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited and Ors. v Union of India, the remedies under the Code and under the RERA operate in completely different spheres. The Code deals with proceedings in rem, under which homebuyers may want the corporate debtor's management to be removed and replaced so that the corporate debtor can be rehabilitated. On the other hand, the RERA protects the interests of the individual investor in real estate projects by ensuring that homebuyers are not left in the lurch, and get either compensation or delivery of their homes. Thus, if there is a failure to reach a critical mass for initiation of CIRP, it may indicate that in such cases another remedy may be more suitable."

  • Pioneer categorically records that the remedies under RERA, Consumer Protection Act, 1986 and the Code are concurrent (Para 100).

  • Furthermore, in Para 30 of Pioneer, it was held that if an allottee wants that the corporate debtor's management itself be removed and replaced, so that the corporate debtor can be rehabilitated, she may refer an application under the Code. This being the avowed objective of the Code, the remedies under RERA and the Consumer Protection Act, 1986 are not alternative fora to the Code. These remedies are different[8], which the Committee also recognizes.

  • The failure to reach critical mass for initiation of CIRP does not imply that the allottees do not wish to institute CIRP. The failure to reach critical mass could well be because of the practical impossibility in achieving the same.

  • As explained in detail hereinbelow, there is no repository of allottees of a particular project/real estate developer, which an individual allottee can access. If the corporate debtor is a defaulter and knows that an individual allottee is likely to use this information to gather other allottees to initiate CIRP, then the corporate debtor would not provide this information, thereby frustrating the initiating of CIRP. No corresponding amendments were brought in RERA to mandate furnishing such information to authorities under RERA and/or to an individual allottee.

  • Furthermore, given that the default is in delay of possession, the allottee is aggrieved in respect of under-construction projects. This implies that there is only a small, if any, chance that an association of allottees has been formed. Without any readily available information, it may not be possible for an individual allottee to single-handedly gather other allottees.

  • Lastly, an individual allottee is already a person of limited means and to cast a burden upon her to gather other allottees would be grossly unfair.

"In this regard, the Committee considered if a cue may be taken from the requirements for filing of class actions suits as provided under the Companies Act, 2013. Class action suits may inter alia be filed by a hundred members or depositors or by at least 5 per cent of the total number of members or depositors of the company. Similar to this requirement, and keeping with the extant situation of classes of creditors under the Code, it was suggested that Section 7 of the Code could be amended in respect of such classes of creditors to allow initiation by a collective number of at least a hundred such creditors or at least ten percent of the total number of such creditors forming part of the same class."

The cue taken from Section 245 of the Companies Act, 2013 is misplaced:

  • Firstly, even if a member does not have the requisite threshold to institute a petition for oppression & mismanagement u/s 245, she can institute a petition u/s 241 craving for an exemption u/s 244[9]. Therefore, a member can always institute a proceeding, provided it is able to satisfy the NCLT for exempting the minimum threshold. No such exemption has been carved out for allottees.

  • Secondly, Section 245 is a provision concerning Oppression & Mismanagement. It is well known that a petition for oppression and mismanagement is maintainable only if the petitioner shows that it is just and equitable that the company be wound up[10]. The threshold provided u/s 245 for a depositor to institute a proceeding that would show that it is just and equitable to wind up the company is lesser than the threshold provided under the Code for seeking commencement of insolvency resolution process.

  • Thirdly, a company has to statutorily maintain a Register of Members[11] u/s 88 of the Companies Act, 2013. Any member is entitled to inspect and take copies[12] of the Register of Members. Thus, a member has the ability to contact other members by seeking a copy of the Register of Members. This was also recognized in the judgment of the Chancery Division in Mutter v. Eastern and Midlands Railway Company[13]. Similarly, the Company has to statutorily maintain a Register of Deposits[14] containing the contact details of the Depositors, albeit such Register is not open to inspection to the Depositors.

  • Lastly, a class action suit is aimed at reducing multiple litigation by clubbing various petitioners with commonality of interests. The ability to institute a class action proceeding by joining forces does not preclude an individual petitioner from instituting an independent proceeding. The minimum threshold for allottees makes it mandatory for them to institute a proceeding only by way of a class action.

"The Committee also noted that the collective number of homebuyers that form the threshold amount for initiation of a CIRP, should belong to the same real estate project. This would allow homebuyers that have commonality of interests, i.e. allottees under the same real estate project, to come together to take action for initiating CIRP against a real estate developer."

  • One of the serious issues that has plagued the Indian real estate sector is concerning diversion of funds from one project to another and to other promoter controlled entities[15], which ultimately led to delay in competition of the projects. Such issues concern all allottees across all projects, especially since allottees account for 50-100% of the funding of the individual projects[16]. Thus, if at all there has to be a threshold, it cannot be restricted to a single project.

  • The amendment presumes that a real estate developer may have more than one project[17]. The allottee has to gather other homebuyers from the same real estate project and is precluded from including homebuyers of other projects of the same real estate developer. This is absurd because the eventual outcome of the CIRP is the replacement of the management of the real estate developer (and not of a specific project[18]), which outcome would effect allottees of all projects. It may well be the case that there are large number of aggrieved allottees across projects of the same real estate developer. The allottees of other real estate projects of the same developer are eventually going to be a part of the CoC.

"However, to ensure that there is no prejudice to the interests of any such creditor in a class whose application has already been filed but not admitted by the Adjudicating Authority, the Committee agreed that a certain grace period may be provided within which such creditor in a class may modify and file its application in accordance with the above-stated threshold requirements. However, if the creditor is unable to fulfil the threshold requirements to file such modified application within the grace period provided, the application filed by such creditor would be deemed withdrawn."

  • The amendment is retrospective and affects the maintainability of pending proceedings (which were validly instituted at the time of presentation). The amendment provides a period of 30 days for pending applications to comply with the minimum threshold. In the author's view, the period of 30 days is unreasonable, insufficient and therefore arbitrary.

  • Firstly, the amendment is not accompanied by any rules/regulations providing for automatic consolidation of pending proceedings. The burden of consolidation and finding other allottees remains on the individual allottee. As stated above, there is no ready database of allottees and their contact details that an allottee can access. She would likely have to give an advertisement in the newspaper, at her own expense. Thus, it reasonable that an allottee would need several weeks to track down individual allottees. The invisible hand takes its own time.

  • Secondly, the period of 30 days shows the gross ignorance of the legislature in respect of the time and effort needed to compile the information concerning 10%/100 allottees. The petition would have to narrate the facts of each allottee, contain the contracts/allotment letters of each allottee, would have to be signed/contain a power of attorney/vakalatnama of each allottee etc. and would likely run in thousands of pages. This doesn't even take into account the general apprehension of individuals in respect of signing documents. Further, it would require logistical co-ordination in respect collection of fees, documents etc. Of course, all of this would be experimental and shots in the dark, as no corresponding rules have been framed or separate forms released in respect of the procedure and formalities of filing of such class action proceedings. Needless to say, 30 days is not sufficient.

  • Thirdly, what makes matters worse is that the period of 30 days starts ticking from the commencement of the amendment (i.e.: 28.12.2019- the day when the ordinance came into force). Therefore, all applications had to comply by 27.01.2020 irrespective of their individual date of hearing.

  • Lastly, no power has been vested with the Adjudicating Authority to condone the delay beyond 30 days. The above shows that consolidating the claims of 10%/100 allottees would take much longer than 30 days and even in the most just and equitable situations, the Adjudicating Authority would have no alternative but to dismiss the application as withdrawn.

The issues raised by the Insolvency Law Committee had already been thoroughly ironed out by the Hon'ble Supreme Court in Pioneer. After Pioneer, there did not remain any pending concerns regarding insolvency applications by homebuyers/allottees. In the author's view, to refer to the issues raised by the Petitioners in Pioneer, after they had been rejected by the Hon'ble Supreme Court, to justify the minimum threshold amendment would be manifestly arbitrary. It would imply that the amendments had been unreasonably enacted and without adequate determining principle, as the justifications for the amendment had already been dealt with in Pioneer. As pointed above, some of the justifications for the amendment are contrary to the Union of India's own submissions in Pioneer, when in fact there has been no change in the circumstances since Pioneer and the promulgation of The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019. This is, of course, not the first time that the Hon'ble Supreme Court has laid down the legal position with great clarity, only for the legislature to pass legislation to the contrary by referring to the report of a committee; after which the Hon'ble Supreme Court has had to strike down the amendment as manifestly arbitrary and violative of Article 14 of the Constitution of India[19].

In addition, in the author's view, the minimum threshold amendment also makes the position of individual homebuyer financial creditor inferior to individual operational creditor in respect of initiation of CIRP and therefore is violative of Article 14 of the Constitution of India on that ground as well.

During the debates in Parliament on the homebuyer amendments, the Hon'ble Finance Minister stated that the amendments were necessary to curb frivolous litigation[20]. However, the above shows that the amendments have a chilling effect on insolvency litigation initiated by homebuyers against real estate developers. It becomes practically impossible for a homebuyer/allottee to initiate insolvency proceedings. Furthermore, existing litigation is likely to also be dismissed for the want of 'enough' numbers. In one stroke, majority of the litigation concerning real estate developers in the insolvency courts will disappear. It seems that the promise of a home and of justice for the average Indian is more than a long and delayed one, it may be but an impossible dream.


[1] See the Report of The Insolvency Law Committee (March 2018) – Para 1.3

[2]Nikhil Mehta & Sons v. AMR Infrastructure 2017 SCC OnLine NCLAT 377

[3] Insolvency & Bankruptcy Amendment Ordinance, 2018 (06.06.2018) followed by Insolvency & Bankruptcy (Second Amendment) Act, 2018 (17.08.2018)

[4] (2019) 8 SCC 416

[5] The paragraph numbering is as per the Report of the Supreme Court Cases (SCC)

[6] Clause 3

[7] Manish Kumar v. Union of India - Writ Petition 26 of 2020

[8] See Para 41 of Pioneer

[9] Interestingly, there appears to be a disconnect between the thresholds provided under Section 244 and 245 of the Companies Act, 2013. Section 244 provides that a petition u/s 241-242 for oppression/mismanagement can be filed by 100 members or 1/10th of the total number of members or members holding 10% shares. However, Section 245 (and the rules made thereunder) provide that a class action petition for oppression/mismanagement can be filed by 100 members or 5% of the total number of members or members holding 5% shares. Significantly, while the thresholds in Section 244 have been provided by the statute, the thresholds under Section 245 are provided in the rules by way of delegated legislation. Whether thresholds to institute the same nature of proceedings given by the legislature in one case can be different from that given by the executive in another, is an article for another day.

[10] See Section 242 of the Companies Act, 2013. This phraseology is not explicitly incorporated in Section 245. However, Section 245(1)(h) provides the Tribunal has the power to pass any order that it may deem fit, which, in the author's opinion should take colour from Section 242.

[11] See Rule 3 of The Companies (Management and Administration) Rules, 2014, which provides the Form of the Register of Members, which includes contact details.

[12] See Section 94 of the Companies Act, 2013

[13] (1888) 38 Ch. D. 92 at page 107

[14] Rule 14 of The Companies (Acceptance of Deposits) Rules, 2014

[15] See the judgment in Bikram Chatterji & Ors v. Union of India & Ors. (2019) 8 SCC 527 (Amrapali), Interestingly, the Hon'ble SC remarked that the banks (i.e.: the 'other' financial creditors) had been mute spectators to the diversion of the funds; Also see the order-dated 18.12.2009 in Civil Appeal No. 10856 of 2016 – Bhupinder Singh v. Unitech Ltd.

[16] See Para 61 of Pioneer

[17] Interestingly, this is contrary to the Union of India's submission in Pioneer that each project is usually carried out by a SPV, being a corporate entity on its own, and that it would not be correct to say that the admission of an insolvency application filed by an allottee would destabilize the management which has brought in large funds for many projects (Para 12).

[18] The NCLAT in its judgment-dated 04.02.2020 in Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 926 of 2019 held that if allottees or banks or operational creditors of one project initiated CIRP against the Corporate Debtor, then it shall be confined to that particular project and would not affect any other project(s). With respect, in author's view, while the principle is laudatory, there is no statutory provision permitting breaking up of the corporate personality of the Corporate Debtor into various projects and restricting the application of the Code to a particular project of a company. Of course, it would be a different matter if the CoC were to decide how individual projects will be handled. Project-wise CIRP is a discussion for another time.

[19] Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. (2019) SCC OnLine SC 1520

[20] Uncorrected Verbatim Debates – Rajya Sabha (12.03.2020). Relevant extract: "Primarily, this is to avoid frivolous litigation, that we have come up with a hundred or ten, whichever is the lowest, because we have had several issues of one home buyer who would probably go rightly asking for justice, but, in the process, the Resolution itself gets delayed and the time and the value of money has got to be kept in mind."

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