SC Issues Notice On Pleas Against Conditions Introduced By IBC Ordinance 2019 For Homebuyers' Insolvency Petitions [Read Order]

The Supreme Court on Monday issued notice on petitions which challenge the constitutional validity of the conditions introduced by Insolvency and Bankruptcy Code (Amendment) Ordinance 2019 on the homebuyers' right to file insolvency petition against defaulting builders.

A bench comprising Justices R F Nariman and Ravindra Bhat has also ordered status quo on the homebuyers' petitions pending in NCLTs.

The petitions were filed by Manish Kumar, Association of Karvy Investors,Mohnish Kapoor, Tarun Ahuja, Sanjib Kumar etc.

The petitioners challenge Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 (Ordinance). The said provision, which adds certain provisos to Section 7 of the Insolvency and Bankruptcy Code (IBC) and purports to set out new conditions for real estate allottees to approach the NCLT, is alleged to be ultra vires the Constitution of India and in violation of Articles 14 and 21.

As per the Ordinance, 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 petitioners, homebuyers who have approached the NCLT under S.7 of IBC, state that their cases will be adversely affected by the new changes. Petitions which do not comply with the new conditions will be deemed to be dismissed on January 28, 2020 as per the Ordinance. The SC has granted interim relief with respect to this by ordering status quo.

According to the petitions, "Financial Creditors" are already a recognised "class" under the category of "Creditors" under the IBC and the "Ordinance dissects Financial Creditor further and imposes a condition on that newly created class. This condition hinders them from reaping the benefits available to others under the Code." The Code is a beneficial piece of legislation, according to the petitioner, who argues that it amounts to the creation of a "class within a class" which is "unconstitutional and manifestly arbitrary". In light of this submission it is urged that the "object of the Ordinance ought to be made clearer. It appears that the present Ordinance may have been brought to prevent home buyers from misusing the Code."

Referring to the case of Shayara Bano v Union of India, the petitioners state that the Ordinance is in violation of the test on manifest arbitrariness as laid down thus:

"Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary", one of the petitioners argued.

 Another ground raised that, on the face of it, there appears to be no intelligible differentia in the Ordinance, without any reasonable nexus to the object sought to be achieved.

Calling the desire to have a home for a family a basic human yearning, it has been urged that the top court recognised the same as a part of one's right to life. "The present Ordinance when denies homebuyers their right of approaching NCLT, actually denies them accessing their Fundamental Rights", submits one of the petitions.

Finally, the petitioners argue that the Ordinance has been given retrospective effect, which adversely affects allottees. They have lost their money, home and the right to move NCLT, for which they have paid ₹25,000 as court fee. "Even those whose cases are listed for the final arguments before the NCLT, will have to comply with this condition within one month or else their cases will be considered as withdrawn."

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.

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