Increased Threshold: Magical Figure For Allottees Under The Insolvency And Bankruptcy Code, 2016

This journey of homebuyers perhaps reached a destination with the latest judgment of Manish Kumar versus Union of India wherein the three-judge bench of the Supreme Court upheld that amendment to Section 7(1) of the code which prescribed a certain threshold for allottees.

Background

On 28.12.2019, The Govt. of India promogulated the ordinance to insert three provisos to Section 7(1) of the code which prescribed that an application by an allottee of real estate project shall be filed jointly by 100 allottees or 10% of the total allottees whichever is less. It further provided that in case of pending application by the allottees, the same shall comply with the requisite threshold within a period of thirty days. This ordinance was later replaced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020. Various allottees filed writ petition before the Supreme Court under Article 32 of the Constitution of India challenging the vires of the amendment.

Though the Supreme Court upheld the increased threshold for homebuyers one can see the efforts of the Apex court to strike balance between the rights of the homebuyers and the real estate sector. The amendment was interpreted by the Supreme Court in such a manner to make it workable for allottees to initiate CIRP against the developer in cases where the homebuyers have completely lost faith in the developer. The Supreme Court has assuaged the concerns of the Home Buyers to some extent by clarifying the manner in which the Amendment to section 7 ought to be implemented. This exercise is salutary as it gives a ray of hope to the Homebuyers who were otherwise at the mercy of the Developers.

Inclination towards Constitutionality of IBC

The Supreme Court upheld the amendment by showing strong inclination towards the nature of economic reform brought in by the implementation of IBC and states that the legislature shall be given ample freedom to make the code workable. The Court observed that;

"Since, the Code undoubtedly bears the brand of an economic measure upon its face, and in true spirit, being one of the most significant and dynamic economic experiments indulged in by the Law Giver, not by becoming servile to Parliament, but by way of time hallowed deference to the sovereign body experimenting in such matters, this Court will lean heavily in favour of such a law. …and we intend lay bare how the law can indeed be worked, even with the extra burden which is cast on the persons covered by the provisos" (Para 134)

However, various doubts were looming writ large with regard to the workability of these provisos to Section 7(1) of the code which could be a matter of great concern for the homebuyers to reach the requisite threshold. Supreme Court tried to put those doubts to rest by offering workable interpretation of these proviso which is the primary focus of the authors in this article.

Total Number of the Allottees of a Real Estate Project

Second Proviso to Section 7(1) states that the application shall be jointly filed by either 100 allottees or ten percent of total allottees of a single real estate project whichever is less. There were two confusions with regard to this i.e., i) how to count the total numbers of allottees of a real estate project and ii) whether the person with multiple allotments will be counted as one allottee or otherwise. Supreme Court cleared both these doubts and held that;

"…What is required is allotment and not promised flats as per a brochure. It is also not the total constructed unit. …It is the number of units allotted. Now, the allotment and the agreement to sell are not irreconcilable with each other and may signify the same." (Para 123)

Therefore, the total allottees will count on the basis of allotment letters and not the numbers of apartments/flats/plots/shops/units constructed or proposed to be constructed by the developer. This reading down of the proviso by the Supreme Court will be beneficial for the allottees and have reduced the hardship of allottees to meet the required threshold to a great extent.

For e.g., If there are 100 proposed units in a real estate project but only 50 units are booked or allotted, then the total allottees will be 50 and not 100.

So far as the second doubt is concerned, the Supreme Court referred to proviso to Section 14 & Section 15 of the Real Estate (Regulation and Development) Act, 2016 (RERA) & held that the if one particular individual or company has ten allotments (hypothical figure) in its favor then it will be considered as ten allottees and not as one single allottee. Supreme Court held that;

"…Therefore, it does not matter whether a person has one or more allotments in his name or in the name of his family members. As long as there are independent allotments made to him or his family members, all of them would qualify as separate allottees and they would count both in the calculation of the total allotments, as also in reckoning the figure of hundred allottees or one-tenth of the allottees, whichever is less" (Para 146)

Information of Allottees of a Real Estate Project

Another pertinent issue which looms over the proviso to Section 7(1) is that from where a particular allottee will collect information with respect to other allottees so as to meet the requisite threshold under the code. There was no whisper about this neither in the amendment nor in the relevant rules and regulations.

Supreme Court again provided a workable interpretation by referring to Section 11(1)(b) of the RERA which states that promoter (builder/developer) has to provide information with regard to the booking (equated to allotment by the Court) on webpage and the allottee can collect information from there. The Supreme Court also quoted the example of Rule 4 of the Haryana Real Estate Regulatory Authority, Gurugram (Quarterly Progress Report) Regulations 2018 which states that a promoter has to quarterly upload the information of allottees on a webpage and therefore, updated information can also be collected by the allottees to meet the requisite threshold.

Supreme Court further emphasized that under Section 17 of RERA, the promoter is bound to form an association of allottees in order to transfer the common area. Therefore, when an association will be formed by the developer, all the information will be automatically available to the allottees to meet the requisite threshold under the code. (Para 163).The Supreme Court has further emphasized that theses compliances have to follow stringently in order to enable the homebuyers to meet the requisite threshold.

Amount of Default and Limitation concerning Allottees

The Petitioner challenged the amendment on the ground that there is a vagueness in a proviso as there may be cases amongst allottees who didn't met the threshold of default i.e., INR One Crore under Section 4 of the Code and also their claim may be time barred as well. The Supreme Court found this ground untenable as it observed that the Adjudicating Authority has to ascertain that a default of One Crore or more exist in totality and not with respect to individual allottee. Supreme Court further noted that this is the situation which existed prior with regard to the joint application by financial creditors. Therefore, there is no vagueness in the amendment.

So far as limitation is concerned, it was contended that there may be different allotment dates to different allottees and it can be possibility that in a joint application, some of them may be barred by the provision of limitation act. The Court negated this contention and held that;

"…Taking a cue from the Explanation to Section 7(1), all that would be required is, to plead the default, no doubt, in the sum of Rs. 1 crore, which is not barred as the cause of action.,…or even one who have moved jointly, fulfill the requirement of default, both in terms of the sum and it not being barred, the application would still lie"(para 138)

Limitation is a pertinent defense for a corporate debtor under Section 7 of the Code. However, by the abovementioned interpretation, the Supreme Court has done a great favor to the allottees and now all they require is the default to the extent of one crore and the Petition should not be barred by limitation.

Breathing Time of Two Months

The Third proviso to Section 7(1) states that the allottees of the pending application shall met the requisite threshold within a period of one month form the date of amendment. The Supreme Court by invoking its power under Article 142 of the Constitution of India increased the said time to a period of two months from the date of pronouncement of judgment i.e., 19.01.2021 and held that;

"We make it clear that the time limit of two months is fixed only for conferring the benefits of exemption from court fees and for condonation of the delay caused by the applications pending before the Adjudicating Authority…." (Para 372 (iii))

In totality, the Supreme Court tried to cure each and every foreseeable ambiguity in the amendment which could be used by the Developers against the allottees before the Adjudicating Authority. It has offered a solution/interpretation to all the concerns of the allottees and not everything is gloomy for the allottees under the code.

This judgment puts itself in the league of other judgments wherein the constitutional validity of various provision of IBC were challenged but, on each occasion, they were being upheld by the Supreme Court apart from the COC, Essar Steel's Case wherein the court read down Section 12 of the Code. This pattern explicitly conveys inclination of the Supreme Court towards the constitutionality of an economic legislation. In the instant judgment, the court on numerous occasions emphasized the fact that how the amendment is workable which further implies that Supreme Court was equally concerned about the rights of the allottees

The judgment is indeed a big relief to the real estate sector of the country and impact of the increased is implicit from stark difference in the number of petitions against the real estate sector prior and after the amendment (2201 prior to amendment &253 after the amendment (Para 352)). As the court noted, increased threshold is a magical number (para 119) and in practicality, it won't be less than a wonder, if allottees will reach that magical number.

Views are personal.

(The authors are Delhi based advocates)