Locating The Position Of Real Estate Allottee In Light Of Section 7 Of The IBC

Section 7 of the Insolvency and Bankruptcy provides that an insolvency resolution process can be initiated against a corporate debtor by a financial creditor. When the adjudicating authority is satisfied that a default has occurred and the application is complete it may admit such application by order. Section 7(5) of the code has come up for consideration several times in several notable and landmark cases. In the landmark case of Innoventive Industries Ltd v ICIC, Swiss Ribbons Ltd vs Unionof India, and ES Krishnamurthy v. Bharath Hi Tecch builders, etc the apex court has interpreted the ambit of section 7(5) of the code and held that NCLT (herein the adjudicating authority has only to satisfy that a debt has been occurred for admitting an application under section 7 of the code. It was also held that the debt can even be in dispute, as long as it is due and a default has occurred, the application must be admitted by the NCLT under section 7 of the code. Later, in the case of Vidarbha industries power ltd. v Axis Bank Ltd, the apex court gave an interpretation of section 7(5) of the code and held that since the provision used the term “may”, it was apparent that the legislature intends to give discretionary. In the later judgments, it was clarified by the courts that the decision of Vidarbha was based on peculiar facts and cannot be read as provisions of the statute. In the case of M. Suresh Kumar Reddy, the court again maintained its view that the Vidarbha judgment cannot be understood contrary to Innoventive Industries and ES Krishnamurthy. On a close analysis of these judgments, it is established that once the debt and default are established under section 7 of the code, then the NCLT must admit the application if it fulfills the procedural requirements otherwise. In exceptional cases wherein a corporate debtor can make out a case that it is a viable entity, then there exists a possibility that the application can be kept in abeyance or can even rejected. However, for the real estate allottees, the code provides for special arrangements by way of its 2018 and 2022 amendments.

POSITION OF REAL ESTATE ALLOTTEES UNDER IBC

The debate related to the status of real estate allotee traces its roots back to the famous case of Jaypee Infratech Limited (herein JIL), which was a real estate giant. The default occurred in the JIL and it created a hue and cry amongst the buyers as earlier there was no provision to safeguard their rights and extract the invested money from the real estate companies if they failed. The distressed homebuyers of JIL approached the apex court in the case of Chitra Sharma vs Union of India because the amount paid by the as advance to the JIL was higher than what was due to the banks and as per the then legal framework the banks were in an advantageous position as they were recognized as financial creditors and not the homebuyers. Providing an interim relief, the court in the case of Chitra Sharma, ordered the appointment of representatives to represent the homebuyers in the Committee of Creditors (COC) meeting.

Following the judgment, the amendment was brought by the legislature, in 2018. In the 2018 amendment ordinance, the homebuyers for the first time were given the status of the financial creditors. The allottees were also given the status of financial creditors by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (“2018 Amendment”). An explanation was also incorporated under the definition of financial debt under section 5(8)(F) of the code which stated that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of borrowing. Hence, the statutory recognisation of the outstanding debt owed to the allotees in the real estate project was made and now it was recognized as a financial debt and the allotees were made financial creditors.

The constitutional validity of the amendment was upheld by the Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited and Another v.Union of India and others. Moreover, the court held that protecting the rights of homebuyers is of paramount importance.

Further, the legislature introduced the Insolvency and Bankruptcy Code Amendment 2020, which amended section 7 of the code and introduced a minimum threshold to file an application under section 7 of the code against a corporate debtor to protect a financially viable real estate company from unwarranted resolution. Now, the CIRP proceedings can be initiated jointly, by not less than 100 allottees or not less than 10% of allottees under the same real estate project, whichever is less. The constitutional validity was challenged in the case of Manish Kumar vs Union of India, wherein the court upheld it.

Real estate allottee as a decree holder

In the present case, while delivering the judgment the court highlighted an important fact that the status of a real estate allotee cannot be changed as a decree holder. Following the law laid down in the Vishal Chelani case the court held that there can be no further classification of the creditor. In Vishal's case, the court opined that the homebuyers who are the decree-holders would be recognized as financial creditors only and their status cannot be changed as creditors any further. The question is whether the homebuyers who are beneficiaries of the decree are any different from the homebuyers who are not settled by the court in this case. However, an exception was provided by NCLT in the case of Sh Sushil Ansal vs Ashok Tiwari, wherein it was held that the homebuyers who are decree holders under the Real Estate (Regulation and Development) Act, RERA 2016, do not fall under the category of financial creditors and they cannot initiate a CIRP proceeding under IBC to execute the decree.

The decision of the Sushil Ansal case was overruled by the court in the present case as the court stated that section 238 of the IBC is a non-obstante clause giving an overriding effect to RERA and its provisions. The distinction made by the resolution professional was artificial amounting to “hyper-classification” which contravened Article 14 of the constitution of India. Thus, the court reaffirmed with decision of Vishal Chelani, wherein the court clarified that once an allottee seeks remedies under the RERA Act and opts for a money refund they are still homebuyers and can seek remedies under RERA. The distinction between the one who opts for a refund and those who don't is considered inequitable.

The Insolvency and Bankruptcy Code does not provide for a definition of a decree-holder. For the definition, we have to refer to Section 2(3) of the Code of Civil Procedure, 1908 (“CPC”) wherein it is prescribed that a decree-holder means “any person in whose favor a decree has passed. Furthermore, in the case of SriSubhankar Bhowmik vs Union of India and another, the high court observed that by moratorium under section 14(1)(a) of the code the right of the decree-holder to execute a decree against the corporate debtor freezes. The court observed that the financial creditor as a separate class of creditor is rightly recognized by the code. The code is a beneficial legislature enacted for the revival of the corporate debtor and giving the status of financial creditor to a homebuyer who holds a decree against the corporate debtor adversarial proceeding defeats the purpose of the code. And the court upheld the distinction between the homebuyers as a separate class of creditors. However, after the PioneerUrban Land and Infrastructure Limited and Another v. Union of India and Others
judgment, it was clarified by the court that the amount raised by the homebuyers is done with a profit-making motive and thus has a commercial effect and should be included under the head of financial debt envisioned under section 5(8)(f) of the code.

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