Minimum Threshold For Homebuyers' Insolvency Process Against Builder Shields Frivolous & Avoidable Applications : Supreme Court

The Supreme Court has upheld the threshold limit on homebuyers - introduced by way of Insolvency and Bankruptcy Code(Amendment) Act 2020 - as an attempt to "shield the corporate debtor(builder) from avoidable and frivolous applications".

A bench comprising Justices R F Nariman, Navin Sinha and KM Joseph upheld Section 3 of the IBC(Amendment) Act 2020 which introduced provisos to Section 7 of the Insolvency and Bankruptcy Code 2016 to mandate that 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 judgment authored by Justice Joseph rejected the petitioners' contentions that such conditions on homebuyers amounted to hostile discrimination violating the equality principle under Article 14 of the Constitution. The Court held that a homebuyer, though treated as an unsecured creditor as per the judgment in Pioneer case, stands on a different footing from other creditors.

"When an allottee invests money in a real estate project, his primary and principal concern is that the project is completed and he gets possession of the apartment or the flat. The problem really arises as there are many stakeholders whose interests are affected", the Court observed.

On homebuyer's application can affect the entire project

The Court noted that an action under Section 7 of the Code is an action in rem. The recovery of the amounts paid is not what is primarily contemplated under the Code.The consequences of the insolvency application would be that it may land the applicant and also all the stakeholders, in liquidation of the corporate debtor. Therefore, the court said that public interest would include safeguarding the interests of all the stakeholders.

"This may necessarily include the corporate debtor as a stakeholder, being protected from applications, which are perceived as frivolous or not representing a critical mass", the Court observed.

The Court also noted that the homebuyer has remedies under the RERA Act and the Consumer Protection Act against the builder for non-delivery of the apartment.

Supreme Court Upholds Sections 3, 4 & 10 Of IBC Amendment Act 2020

The Court also said that the amendment has sought to strike a balance between completely taking away an allottees right to initiate insolvency and "giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage".

"If the Legislature felt that having regard to the consequences of an application under the Code, when such a large group of persons, pull at each other, an additional threshold be erected for exercising the right under Section 7, certainly, it cannot suffer a constitutional veto at the hands of Court exercising judicial review of legislation", the judgment stated.

"It is to be noted also that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application under Section  of the Code and giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under the Code which must certainly pass inexorably within a stipulated period of time should circumstances exists under Section 33 into corporate death with the unavoidable consequence of all allottees and not merely the applicant under Section 7 being visited with payment out of the liquidation value, the amounts which are only due to the unsecured creditor".

The apex court observed that the legislature in its wisdom has felt that "greater good lies in conditioning an absolute right which existed in favour of an allottee by requirements which would ensure some certain element of consensus among the allottees".

"It must be remembered that the requirement is a mere one-tenth of the allottees. This is a number which goes to policy and lies exclusively within the wisdom of the Legislature. Hence, we have no hesitation in repelling the contentions in this regard".

Imposing threshold will halt indiscriminate litigation

The SC observed :

"Insisting on a threshold in regard to these categories of creditors would lead to the halt to indiscriminate litigation which would result in an uncontrollable docket explosion as far as the authorities which work the Code are concerned. The debtor who is apparently stressed is relieved of the last straw on the camel's back, as it were, by halting individual creditors whose views are not shared even by a reasonable number of its peers rushing in with applications. Again, as in the case of the allottees, this is not a situation where while treating them as financial creditors they are totally deprived of the right to apply under Section 7 as part of the legislative scheme. The legislative policy reflects an attempt at shielding the corporate debtor from what it considers would be either for frivolous or avoidable applications.

What we mean by avoidable applications is a decision which would not be taken by similarly placed creditors keeping in mind the consequences that would ensue not only in regard to persons falling in the same category but also the generality of creditors and other stakeholders. All that the amendment is likely to ensure is that the filing of the application is preceded by a consensus at least by a minuscule percentage of similarly placed creditors that the time has come for undertaking a legal odyssey which is beset with perils for the applicants themselves apart from others. As far as the percentage of applicants contemplated under the proviso it is clear that it cannot be dubbed as an arbitrary or capricious figure. The legislature is not wanting in similar requirements under other laws. The provisions of the Companies Act, 2013 and its predecessors contained similar provisions. Allowing what is described as 'lone Ranger' applications beset with extremely serious ramifications which are at cross purposes with the objects of the code. This is apart from it in particular spelling avoidable doom for the interest of the creditors falling in the same categories. The object of speed in deciding CIRP proceedings would also be achieved by applying the threshold to debenture holders and security holders. The dividing line between wisdom or policy of the legislature and limitation placed by the Constitution must not be overlooked"(paragraph 220)

'Malice' Is Not A Ground To Challenge A Law Made By Legislature : Supreme Court

While agreeing that the homebuyers had a "vested right" to move the application without conditions before the amendment, the Court said that such a "vested right" can also be taken away by the legislature.

"We cannot also lose sight of the fact that the Legislature has power to impair and take away vested rights", the SC observed.

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