Top
Top Stories

Threshold Requirement Brought So That Other Homebuyers & Creditors Are Not Hurt: Centre Defends IBC Amendment Act 2020

Mehal Jain
9 Oct 2020 2:59 AM GMT
Threshold Requirement Brought So That Other Homebuyers & Creditors Are Not Hurt: Centre Defends IBC Amendment Act 2020
x

The Supreme Court on Thursday heard the Centre in a batch of petitions challenging the constitutional validity of conditions introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, on the homebuyers' right to file insolvency petitions against defaulting builders. A Bench of Justices R. F. Nariman, Navin Sinha and K. M. Joseph heard arguments advanced by Additional...

Your free access to Live Law has expired
To read the article, get a premium account.
    Your Subscription Supports Independent Journalism
Subscription starts from
599+GST
(For 6 Months)
Premium account gives you:
  • Unlimited access to Live Law Archives, Weekly/Monthly Digest, Exclusive Notifications, Comments.
  • Reading experience of Ad Free Version, Petition Copies, Judgement/Order Copies.
Already a subscriber?

The Supreme Court on Thursday heard the Centre in a batch of petitions challenging the constitutional validity of conditions introduced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, on the homebuyers' right to file insolvency petitions against defaulting builders. 

A Bench of Justices R. F. Nariman, Navin Sinha and K. M. Joseph heard arguments advanced by Additional Solicitor General Madhavi Diwan.

The petitions challenge 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, whichever is lesser, to maintain an insolvency petition in respect of a real estate project. The amendment also states that the application of Section 3 of the amendment Act shall be retrospective, affecting pending applications. Also, the threshold limit for initiating insolvency proceedings has been increased from INR 1 Lakh to INR 1 Crore

"The concept of 'going solo' has been long diluted by Your Lordships in Pioneer(decision). To iron out the creases, Your Lordships had held that 51% votes in favour of a plan would go as 100%. So this principle of 10% homebuyers or 100 is an extension of the same logic. We introduced this measure to facilitate the process, to prevent unnecessary delay and to do away with the clogging before the COC or the adjudicating authority", submitted the ASG.

"The joint-filing is an extension of the principle of the act of one binding all. The homebuyers at that stage had not objected and had in fact supported it. It was the developers who were opposing it as they didn't want the resolution process to go smoothly", she argued.

"Joint-filing was inherent in section 7, even as it stood originally. Even then it read that a financial creditor, either by itself or jointly with the other financial creditors, may file an application for the initiation of the resolution process. Now it has just been made mandatory", she explained.

"By virtue of a notification dated 27.2.2019, even a Guardian, executor or trustee can file such an application. In case of debenture holders, there may be a representative, a debenture trustee, at the first instance also. In case of home buyers, you can't have a trustee at the outset itself- 10% or 100 are needed- though you may appoint an authorised representative later", she continued.

"Joint filing is needed as this is an in-rem concept. A single person can file an application even on the basis of somebody else's debt, even if it is not your own. That is why it is an in-rem concept...the 10% or the 100 can also file for a third party, say, a bank. So the concept of in-rem is sown deep...it is superficial to say that such in-rem concept can be brought in only at the stage of the COC and not at the initiation. The Legislature can enforce the 10% requirement at even the initiation, particularly when the process which is triggered is unstoppable. It may be for resolution but it may go out of the control of the individuals...so it is necessary to apply your mind and get at least some people on board for the sake of your own compatriots...we cannot allow a lone-ranger, on a frolic of his own, to set in motion an unstoppable process...where a single home buyer wants to move the NCLT, there may be a 100 others who want to go to RERA, they want that builder! So it is important to put your heads together a little bit, get at least the minimal number of people together in the interest of your brethren and then go ahead, as otherwise there is a moratorium...and 10% is not logistically difficult. It is important for balancing the interests of the small home-buyers and the debenture-holders", she elaborated.

Intelligible differentia linked to the larger object of the Code

Next, she expounded the characteristics of the classes for whom these conditions have been introduced- the intelligible differentia linked to the larger object the Code. "The numerosity- the sheer number of these persons; the heterogeneity; and the individual decisions...Pioneer also said that these home-buyers are not experts. We are guided by robust common sense, that these people either want their flat or compensation...but here, there is an individuality involved rather than institutional decision-making as in the case of banks. You are not in the domain of a public utility so the approach of the adjudicating authority is different", she continued.

Discussing the larger object of the Code, she narrated that prior to the introduction of the IBC, the framework for corporate bankruptcy and insolvency was inadequate and resulted in undue delays in resolution. So the IBC was introduced to consolidate and amend the laws to provide for a timb-bound procedure which maximises the value of assets and balances interests of stakeholders. with a view to promote entrepreneurship and investment, she submitted in the light of the Statements of Objects and Reasons and the Preamble.

"So, one, there is a need to balance the interests of the stake-holders, the other debenture-holders, the home-buyers, the banks and financial institutions, and the other operational creditors, and two, maximise the value of assets...in Standard Chartered, your Lordships recognised that the passage of time is inversely proportional to the value of assets...the Sick Industries Act was a miserable failure because it allowed the promoters to continue in the management, the debtors to continue possessing the assets. The matter used to go on for years before the BIFR and there was absolutely nothing but dead wood that remained at the end...so time is absolutely of the essence in such proceedings, and hence, we needed a tight schedule and a concerted, solid plan for getting the company running or even in liquidation, to keep intact the value of assets. Even liquidation is not bad, at least the stake-holders get something", submitted the ASG.

"Your Lordships had ruled that 51% is 100, as you noted that creditors tend to haggle, some may not even show up, and hence, a lot of time would otherwise go. Similarly here, there may be 100 people who want to go to the NCLT, and when the first is admitted, the rest are taken care of. But for that one to be admitted, the 100 need to be listed time and again- there are replies, rejoinders, there may be adjournments. Your Lordships had even said that the 14 day period in section 7 is directory and not mandatory...even for a matter against one company, you are choking up the docket not only for that company but also for the others as the same NCLT is to also decide the other matters...for the small home-buyers, it is better and cost-effective to have their matter so coordinated. Also, the corporate debtor is being dragged in because of a default- if they had to defend 100 proceedings, file 100 replies, with the money-clock ticking, the corporate debtor would bleed further. So it is also in his interest to have one consolidated petition rather than 100 different", explained the ASG.

She assured the bench that the government is also working towards augmenting the infrastructure at the NCLTs and the NCLAT- "the number of members have been increased. I have the numbers and will file the affidavit in the Pioneer matter pending before Your Lordships. We are working on that front too...but we are trying to declutter the process, considering the number and the types of claims involved"

"What if the claims are not all the same? What if, out of 100, 50 are barred by limitation?", asked Justice Nariman.

"All the 100 don't need to show default in each case. It need not even be their own claim, they may even come for someone else. Just one case of default is needed, which is genuine and not time-barred...even the threshold of one crore was introduced so that companies are not destabilised for no fault of their own amidst the pandemic", replied Ms. Diwan.

"Part III of the code deals with individuals and firms without limited liability...In Part III, if a creditor in the shoes of a home-buyer files such an application against a real-estate firm, he doesn't need 100 persons..there are no such restrictions in Part III for individuals and firms without limited liability", asked Justice K. M. Joseph.

"That portion has not been brought into force yet", responded Ms. Diwan.

"Even then, there was no constitutional embargo on making the law?", pressed Justice Joseph.

"Real estate companies have multiple projects. If one is only a proprietor, he won't be destabilising so many project.s The threshold requirement has been introduced so that the other home-buyers, creditors are not hurt and there is an application of mind by the critical mass of people in going ahead...the corporate debtor in such cases is a larger set-up than a proprietor or a firm", replied Ms. Diwan.

She continued to submit that after the 2019 Ordinance, there was a lull of 130 cases, while prior to November, 2019, there were more than 2200 cases. "So the huge spurt in cases has been controlled by this amendment. It is important for the economy and for the working of the code that small investors feel confident in the market. For doing business, we can't have the NCLT choked up with cases and matters stuck before the COC", she advanced.

"What percentage of the GDP is spent on the judiciary?", asked Justice Nariman.

When Ms. Diwan replied that she is not aware, Justice Nariman told her that is less than 0.5%. "I cannot go into that. But as far as the NCLTs are concerned, there are 42 members now and several benches across India, even in smaller places...the NCLAT have also been augmented", she replied.

"The claims of all for justice must overwhelm your claims that you are stressed for funds. You have to find the funds. The needs of the home-buyers have to be met", noted Justice Nariman.

"But this regime is also cost-effective for the home-buyers and the corporate debtor. 10% is very proportionate, it is only a foot in the door", argued Ms. Diwan.

INFORMATION SYMMETRY OF RERA

The ASG drew the bench's attention to certain provisions of the RERA Act- section 4(1) requiring every promoter to make an application for registration of a real estate project; section 5(1) on the grant of registration; section 5(1)(a) requiring the creation of web-page and section 11 enumerating the information to be displayed on the website- the list, number and the type of apartments/plots booked ("This is to determine whether the requirement of 100 or 10% is met. You will immediately get to know", explained the ASG)

She took the bench through section 11(3)(e) which places a mandate on the builder to enable the formation of an association/cooperative society of the allottees; section 19(9) on the rights and duties of the allottees, where a similar obligation is placed on them for the formation of an association.

"So the identity of the allottees is also known, for one wanting to move the NCLT to be able to approach them", added the ASG.

"In practicality, this doesn't work. No association is formed till the allotment is made, till the builder hands the flat to them", observed Justice Sinha.

"This is a new regime which places an obligation on the allottee to cooperate in the formation of an association. Even before, the associations were working informally", replied the ASG.

"Where do you get the exact details of the allotment and the allottees?", asked Justice Nariman.

"Section 11(1)(b) (of the RERA Act) speaks of quarterly up-to-date list of number and types of apartments or plots booked. 11(1)(b) gives you the number so you can calculate 10% or 100...the moment you become an allottee, it is your obligation to cooperate and form an association. The builder is also mandated to help in the formation", she replied.

"But there are so many overseas people, people from all over the globe. If a person in India needs to file an application, how does he get the contact of persons whose identity he doesn't know?", asked Justice Nariman.

"One, you need to know the number of persons on board, as this is not a representative proceeding in the nature of Order 1 Rule 8 of the CPC. And two, you need to procure the contact details of these people. You can go to the association which always has a directory of the concerned persons. Even if the people are abroad, you can get in touch through WhatsApp chats. The builder has to help form the association, otherwise there are strict liabilities on him", responded the SG.

"WhatsApp chats are so dangerous...only if you are a judge, not an allottee", remarked Justice Nariman in a lighter vein.

Then, Justice Nariman indicated section 7 of the RERA Act, on revocation of registration for default on the part of the builder, and section 8(1) providing that Upon lapse of the registration or on revocation of the registration, the RERA Authority, may consult the appropriate Government to take such action as it may deem fit including the carrying out of the remaining development works by competent authority or by the association of allottees or in any other manner. "How far, how frequently, how effectively are these being used? Is the same object as under the IBC being achieved under the RERA?", he asked.

"The authorities are set up by the states and the states have to file affidavits on how far the Act is being implemented. Now, it is on an All India basis and there are stringent penalties", replied the ASG.

"Does section 8(1) extend to the actual construction of the structure if it's incomplete? The terminology appears to be very wide", asked Justice Nariman.

"The Act was meant to be a deterrent to the builders, to demand liability, transparency and accountability from them, to instill fear in them and to demand they pull up their socks, otherwise money was being funnelled all over the place", responded the ASG.

Next, Justice Nariman indicated the Explanation appended to sections 14 and 15 of the Act- "the allottees, irrespective of the number of apartments or plots, as the case may be, booked by him or booked in the name of his family, or in the case of other persons such as companies or firms or any association of individuals, etc., by whatever name called, booked in its name or booked in the name of its associated entities or related enterprises, shall be considered as one allottee only." "As regards joint-holdings, the allottees are deemed as one, but only for the purpose of sections 14 and 15. So if a man with his family members satisfies the requirement of 10%, can they file an application under the IBC?", asked Justice Nariman.

"If there are joint-owners, then common sense dictates that they would be deemed to be one allottee as the allotment is qua one apartment...but let the NCLT decide this when a case comes up", replied the ASG.

"Since when has common sense been the law? We've had common law, not common sense", remarked Justice Nariman in good humour.

CLASS ACTIONS

Ms. Diwan drew the bench's attention to the 1952 Bhabha committee report on Company Law. As regards Minority interests and the Court's powers in case of oppression by majority or gross mismanagement, she pointed out that the committee recommended a departure from the regular provision of the English Act: that the power to present petitions to the Court, which is given to a single shareholder under section 210 of the English Act, should, in the circumstances of this country, be given to a specified number or percentage of shareholders, ordinarily not less than fifty in number or those holding not less than one-tenth of the issued share capital of a company on which calls and other sums due have been paid or not less than one-fifth in number of members in case of companies not having a share capital. These provisions were considered necessary to discourage the presentation of frivolous petitions by one or more disgruntled shareholders The difference between the prescribed members competent to commence proceedings under the proposed sections was deemed to be justified by the nature of the relief provided.

"Minority action is an exception to corporate democracy. To prevent frivolous petitions at the instance of a lone-ranger, we have the threshold, which can be waived. But in our case, the consequences are much more unstoppable.The genie can't be put back into the bottle, unless the petition is withdrawn and settled.", explained the ASG.

"We are not saying that the financial creditors can't file an application and take the company through the insolvency resolution process but they must be mindful of the interests of their own compatriots...here it is not just about frivolous litigation, but multiplicity of litigation, pressure on infrastructure, added costs on the corporate debtor. What you do impacts others so there must be a check at the initiation stage itself", she said.

"The developers, in Pioneer, argued that if you allow one home-buyer to approach the NCLT, it will lead to a flood of litigation. Your Lordships said that one is not arbitrary. So, since single-person filing is not arbitrary, 10% or 100 cannot be said to be manifestly arbitrary!", she argued.

The bench asked if other than the Companies Act, there are similar provisions in any other statutes.

"The Consumer Protection Act...In Pioneer also it was argued that if home-buyers are recognised as financial creditors, a condition of 25% be imposed for approaching the NCLT...we were privy to all arguments and considered 10% to be perfectly reasonable", continued the ASG.

She indicated the findings of the committee report in this context- "undue pressure on the corporate debtor...potential to jeopardise interests of the class not in favour of moving the NCLT...pressure on the adjudicating authority to hear the objections...antithetical to the value of a time-bound procedure"

"Suppose there are 100 allotments, then 10% comes to 10. The threshold is 1 crore. Now, if 2 have an agreement of 2020, and the others are of 2021, then? What if the dates of agreements are different? Is it sufficient if 2 or 3 comply with the requirement of 1 crore but not the others because the default in their case is to be in the future?, asked Justice Nariman.

"There has to be just one default and it has to be of 1 crore. It is not even necessary that it should in the case of the applicants. Only numerical strength is needed. For the monetary threshold, it may be of somebody else also. That is the beauty of section 7", explained the ASG.

"To achieve the numerical strength, someone who is not immediately prejudiced because the default is to happen in the future can also be included?', asked Justice Nariman.

"Section 7 says that a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor...I just need to show that I am not a busy body but financial creditor of the company...of course, it will be harder to prove default in case of a third party...I may be a home-buyer, but if there is a bank from which a loan taken by the corporate debtor has now been defaulted, I can maintain my petition. I just need the numbers", replied the ASG.

"You say they (the applicants) can come back after mustering the requisite number? What about limitation then?", asked Justice Nariman.

Ms. Diwan replied that as of now there is a stay by the Supreme Court on account of the pandemic situation, so the provisions operate in the applicants' favour and the period is excluded. But section 14 of the Limitation Act would apply to them, she added.

"The IBC has had fantastic results in enhancing the ease of doing business. We are also learning and becoming wiser with the process, Your Lordships have also pushed this process...Your Lordships said the petitioner must come with a clean slate. It is new person who is coming into the company in distress...for the code to work, he must know what he is getting into..it can't be a shot into the darkness...the property must remain within the company for the stakeholders...there are already banks, financial institutions and other creditors...if there is clambering criminal liability, sprouting like hydrae heads all over the place, there will not be many takers..." she concluded

Read the report of first day's hearing here

Next Story
Share it