Chitra Sharma and Ors. vs Union of India and Ors.

Disposing of the petitions, the Court

HELD: This Court is conscious of the fact that the claim of the home buyers who seek a refund of monies deserves to be considered with empathy. Yet, after due consideration to the plea and on the balance, this Court is not inclined to accede to it for more than one reason. Firstly, during the pendency of the Corporate Insolvency Resolution Process (CIRP), it would as a matter of law, be impermissible for the Court to direct a preferential payment being made to a particular class of financial creditors, whether secured or unsecured. For the present, question as to whether the home buyers are unsecured creditors or secured creditors is left open. Directing disbursement of the amount of Rs 750 crores to the home buyers who seek refund would be manifestly improper and cause injustice to the secured creditors since it would amount to a preferential disbursement to a class of creditors. Once recourse to the discipline of the Insolvency and Bankruptcy Code, 2016 (IBC) is taken, it is necessary that its statutory provisions be followed to facilitate the conclusion of the resolution process. Secondly, the figures made available presently, indicate that 8% of the home buyers have sought a refund of their monies while 92% would evidently prefer possession of the homes which they have purchased. This Court cannot be unmindful of the interests of 92% of the home buyers many of whom would also have obtained loans to secure a home. They would have a legitimate grievance if the corpus of Rs 750 crores (together with accrued interest) is distributed to the home buyers who seek a refund. The purpose of the process envisaged by the IBC for the evaluation and approval of a resolution plan is to form a composite approach to deal with the financial situation of the corporate debtor. Allowing a refund to one class of financial creditors will not be in the overall interest of a composite plan being formulated under the provisions of the IBC. Thirdly during the course of the hearing, the Court has been apprised of the concerns of the secured creditors, chief among them being the IDBI bank limited. In its submissions before this Court, IDBI bank has emphasised that one of the major reasons for the enactment of the IBC was to protect the interest of lenders. The debt owing to the banks and financial institutions has been secured by the assets of JIL, to protect their interests. This debt originates in the public deposits of the banks and financial institutions, who are answerable to their stakeholders. Fourthly, the RBI has moved this Court for permission to initiate an insolvency resolution process. Parliament enacted the Banking Regulation (Amendment) Act 2017 by introducing Section 35 AA and Section 35 AB into the Banking Regulation Act 1949. The amendment empowers the Central government to authorise RBI to issue directions to any banking company to initiate an insolvency resolution process in respect of a default as understood under the IBC. Such an order was issued by the Central government. The RBI constituted an Internal Advisory Committee (IAC) consisting primarily of its independent directors. The IAC took up for consideration accounts which were classified either partly or wholly nonperforming from amongst the top 500 exposures in the banking system. As a first step, the IAC recommended all such nonperforming asset accounts with fund and non-fund based outstandings exceeding Rs 5,000 crores. The IAC has initially taken up twelve accounts involving total exposure of Rs1,79,769 crores. JIL was one of the twelve accounts in respect of which directions have been issued to banks for initiating insolvency resolution. Subsequently, the IAC recommended that in respect of those accounts where 60% or more had been classified as NPAs, banks may be directed to implement a viable resolution plan, failing which the accounts may be directed for a reference under the IBC. JAL was one such entity. No viable resolution plan could be found as a result of which it is also required to be referred for CIRP. RBI has carried out this exercise as a matter of economic policy in its capacity as the prime banking institution in the country, entrusted with a supervisory role, and the power to issue binding directions. [Para 40] [1081-C-H; 1082-A-H]

2. JAL was classified under the SMA – II category (demands overdue for more than 60 days) by banks and as an NPA. RBI is right that any further delay in resolution would adversely impact a viable resolution being found for JAL and JIL. The facts which have emerged before the Court from the application filed by the RBI clearly indicate the financial distress of JAL and JIL. The apprehensions of the home-buyers in regard to their financial incapacity is borne out by RBI, as a responsible institution has urged before the Court. The IBC has been enacted in the form of a comprehensive bankruptcy law and with a specific legislative intent. With the amendment brought about by the Ordinance promulgated in June 2018, the interests of the home buyers have been sought to be safeguarded. Accordingly, the request made on behalf of the RBI to allow it to follow the recommendations of the IAC to initiate a CIRP against JAL under the IBC is accepted. [Para 41] [1083-B-D]

M/s. Shantistar Builders v. Narayan Khimalal Totame (1990) 1 SCC 520 ; R. K. Garg v Union of India (1981) 4 SCC 675 : [1982] 1 SCR 947 ; Peerless General Finance and Investment Co. Ltd. v RBI (1992) 2 SCC 343 : [1992] 1 SCR 406 ; TN Generation and Distribution Corpn. Ltd. v CSEPDI-Trishe

Consortium (2017) 4 SCC 318 : [2016] 7 SCR 495 – referred to.