India – Supreme Court Upholds The Amendment To The Insolvency And Bankruptcy Code, 2016 And Confirms That Home Buyers Fall Under The Definition Of “financial Creditors”.

The Supreme Court of India, in its recent judgment dated August 9, 2019 in the matter titled as “Pioneer Urban Land Infrastructure Limited & Anr. vs. Union of India & Ors. (W.P. No. 43 of 2019)” has held that the home buyers fall under the definition of “Financial Creditors” as provided under the Insolvency and Bankruptcy Code, 2016 (“Code”).

 

Supreme Court, while considering a batch of writ petitions, challenging the recent amendment made to the Code pursuant to the report of the Insolvency Law Committee dated March 26, 2018. In light of the said amendment, the allottees of real estate projects would be deemed to be “financial creditors” so that they may trigger the insolvency proceedings under Section 7 of the Code, against the real estate developer. This will also make the home buyers entitled to be represented in the Committee of Creditors by their authorized representatives.

 

The Supreme Court considered the report of the Insolvency Law Committee which found that the delay in completion of flats/apartments has become a common phenomenon, and that amounts raised from home buyers contributes significantly to the financing of the construction of the flats/apartments. This being the case, it was important, therefore, to clarify that home buyers are treated as “financial creditors”, so that they can trigger the Code under Section 7 and have their rightful place on the Committee of Creditors when it comes to making important decisions as to the future of the building construction company.

 

The Supreme Court also observed that the provisions of RERA are in addition to and not in derogation of the provisions of any other law for the time being in force, which makes it clear that the remedies under RERA to allottees were intended to be additional and not exclusive remedies. The Supreme Court also clarified that RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code.

 

The Supreme Court proceeded to consider the definition of “financial debt” as defined under Section 5(8) of the Code and observed that the definition goes on to state that a “debt” must be “disbursed” against the consideration for time value of money. In the present context, it is clear that the expression “disburse” would refer to the payment of instalments by the allottee to the real estate developer for the particular purpose of funding the real estate project in which the allottee is to be allotted a flat/apartment. The expression “disbursed” refers to money which has been paid against consideration for the “time value of money”. In short, the “disbursal” of money must be against consideration for the “time value of money”, meaning thereby, that such money is now no longer with the lender, but with the borrower, who then utilizes the money. It is clear that an allottee “disburses” money in the form of advance payments made towards construction of the real estate project. The Supreme Court also held that Section 5(8((f) of Code is a residuary provision and that home buyers would fall under the provisions of Section 5(8)

(f). In conclusion, the Supreme Court has held as follows:

 

i. The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

 

ii. The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict, that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.

 

iii. Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it, allottees of flats/apartments.

 

Accordingly, all the writ petitions were disposed of by the Supreme Court.