SC Issues Notice On Plea Against Conditions Introduced By IBC Amendment Act 2020 For Homebuyers' Insolvency Petitions

The Supreme Court on Tuesday issued notice on petitions which challenge the constitutional validity of the conditions introduced by Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 on the homebuyers' right to file insolvency petition against defaulting builders.

A bench comprising Justices R F Nariman, Navin Sinha and B R Gavai also ordered status quo on the petitioner's applications pending in NCLTs.

The petition filed by Association of Karvy Investors challenged Section 3 of the Insolvency and Bankruptcy Code (Amendment) Act 2020. The said provision, adds certain provisos to Section 7 of the Insolvency and Bankruptcy Code (IBC) to state there should be at least one hundred real estate allottees or ten percentage of the total number of allottees, which ever is lesser, to maintain an insolvency petition in respect of a real estate project. The amendment also stated that the application of Section 3 of the amendment Act shall be retrospective, affecting pending applications.

The plea states that the classification made with respect to homebuyers is "arbitrary and discriminatory".

"the classification as sought to be made vide the Impugned Act is without any intelligible differential and therefore is ultra vires Article 14 of the Constitution of India", the plea read.

Reference is also made to the recent SC decision in Pioneer Urban Land and Infrastructure case, which upheld the right of a homebuyer to move insolvency petition against a defaulting builder.

The plea states that the condition is "onerous" for homebuyers, who are also covered under the definition of "financial creditors" under Section 5(7) of the IBC.

"such an onerous and one sided condition makes it abundantly clear that the Impugned Act reeks of biasness and indifference towards the plight of an Individual Investor. It goes without saying that the only person who benefits out of the aforesaid amendment are the promoters of the defaulting corporate debtor, since in a case wherein the only Creditors are individuals, till the time joint application is not filed by such Creditors, the promoters of the defaulting company continue to be in control". 

Highlighting the practical difficulties in homebuyers coming together to file joint application, the plea states :

"the effect of the Impugned Act is that in cases wherein the Corporate Debtor has availed loans only from individuals, till the time the Creditors do not prefer an Application jointly  against the Corporate Debtors, the management of the defaulting company continues to be in control, even after repeated defaults, which is completely contrary to the object of the IBC.

The Respondent has failed to appreciate that the individual investors of a Company are not necessarily localised and are spread out across the Country. Furthermore the contact details of the investors of the Company are not available publicly. Most of such investments are made through an intermediary, which itself is hand in gloves with the defaulting Corporate Debtor. In the absence of the contact details being available with the Investor about other similar investors in the Company, it is not possible for them to contact each other and arrive at a consensus to prefer an Application against the Corporate Debtor. 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".

In January, the SC had issued notice and ordered status quo in a petition which had challenged the similar changes introduced by the IBC(Amendment) Ordinance 2019.

Insertion of Section 32A also challenged

The plea also challenged Section 10 of the Act which inserted Section 32A in the IBC, whereby the liability of a Corporate Debtor, will cease to exist on the date a Resolution Plan is approved and new management takes over the Corporate Debtor.

This, according to the petitioner, leaves the individual creditor without remedies.

"the Respondent has failed to appreciate that approval of a Resolution Plan and appointment of a New Management, does not necessarily means that the interests of all the Creditors have been taken care off. As per Section 30(4) of the IBC, for a Resolution Plan to get approved it only requires voting share of 66% of the Financial Creditors. The effect of the same is that even if the other 34% Creditors are not in favour, the Resolution Plan will get approved by the Committee of Creditors. The Respondent has failed to appreciate that in several cases banks are the biggest lenders and constitute the majority of the Voting Share. Therefore they can easily outvote the smaller investors if the Resolution Plan is favouring them. In such a scenario, the only option left with an Individual is to pursue the Criminal Remedy as available to it. However by inserting Section 10 in the Impugned Oridnance , the Respondent has closed the doors for the Individuals, thereby rendering them remediless". 

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