The Homebuyer Amendment: No Home,No Hall Of Justice

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.