Pioneer Urban Land and Infrastructure Limited & Anr. vs Union of India & Ors.

Insolvency and Bankruptcy Code vis-à-vis Real Estate (Regulation and Development) Act (RERA) – Held: Real Estate (Regulation and Development) Act is to be read harmoniously with the Code, as amended by the Amendment Act – In case of conflict, the Code will prevail over RERA – It cannot be said that RERA is a special enactment which deals with real estate development projects and must, thus, be given precedence over the Code, which is only a general enactment dealing with insolvency generally – Parliament was aware of RERA, and applied some of its definition provisions so that they could apply when the Code is to be interpreted – RERA is in addition to and not in derogation of the provisions of any other law for the time being in force – Also the remedies under RERA to allottees were intended to be additional and not exclusive remedies – Code and RERA operate in completely different spheres – Code deals with a proceeding in rem in which the focus is the rehabilitation of the corporate debtor by means of a resolution plan which puts the same or another management in the saddle, subject to the provisions of the Code, whereas, RERA protects the interests of the individual investor in real estate projects by requiring the promoter to strictly adhere to its provisions – Real Estate (Regulation and Development) Act, 2016.

ss. 5(7), 5(8) and 5(21) – Financial Creditors and Operational Creditors – Explanation of – Held: Financial creditor is defined u/s. 5(7) as a person to whom a financial debt is owed and a financial debt is defined in s. 5(8) to mean a debt which is disbursed against consideration for the time value of money – An operational creditor means a person to whom an operational debt is owed and an operational debt u/s. 5(21) means a claim in respect of provision of goods or services – Financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when “default” occurs. ss. 5(8)(f), 21(6A)(b), 25A – Plea that treating home buyers/allottees to be financial creditor is violative of Arts. 14, 19(1)(g) and Art. 300-A; that the amendment is discriminatory inasmuch as it treats unequals equally, and equals unequally, having no intelligible differentia; and that there is no nexus with the objects sought to be achieved by the Code – Held: Amendment Act to the Code does not infringe Arts 14, 19(1)(g) rw Art. 19(6), or 300-A – Home buyers/allottees give advance to the real estate developer and thereby finance the real estate project at hand, are really financial creditors – Objects of the Code are sub-served by treating allottees as financial creditors – Code is, thus a beneficial legislation which can be invoked by unsecured creditors like allottees against the corporate debtor so that a replaced management may then carry out the real estate project as originally envisaged – It cannot be said that Art. 19(1)(g) has been infracted and not saved by Art. 19(6) as the Amendment Act is made in public interest – There is no unreasonable restriction on the petitioner’s fundamental right u/Art. 19(1)(g) – Also, there is no infraction of Art. 300-A as no person is deprived of its property without authority of a constitutionally valid law – Furthermore, it cannot be said that classifying real estate developers is not founded upon an intelligible differentia which distinguishes them from other operational creditors – Allottees, being individual financial creditors like debenture holders and fixed deposit holders and classified as such, show that they within the larger class of financial creditors, there being no infraction of Art. 14 – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 – Constitution of India – Arts 14, 19(1)(g) rw Art 19(6), or 300-A.

s. 7 – Application u/s. 7 by allottee/home buyer – Effect of – Held: Code is not meant to be a debt recovery mechanism – It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it – Thus, any allottee/home buyer who prefers an application u/s. 7 takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer – Under the Code, he may never get a refund of the entire principal, let alone interest – After the petition is admitted u/s. 7, a resolution plan is taken up, usually by another developer, who has to pass muster under the Code and must further go through challenges before NCLT and NCLAT before the new management can take over and either complete construction, or pay out or refund amounts – Thus, given the bona fides of the allottee who moves an application u/s. 7, it is only such allottee who has completely lost faith in the management of the real estate developer who would come before NCLT under the Code.

ss. 21(6A) and 25A – Committee of creditors – Rights and duties of authorized representatives of financial creditors – Challenge to ss. 21(6A) and 25A – Held: Allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors, either to approve or to disapprove of a proposed resolution plan – Under s. 25A(3A) the authorised representative now casts his vote on behalf of all financial creditors that he represents – If a decision taken by a vote of more than 50% of the voting share of the financial creditors that he represents is that a particular plan be either accepted or rejected, it is clear that the minority of those who vote, and all others, will now be bound by this decision – Legislature must be given freedom to experiment – Thus, any challenge to machinery provisions contained in ss. 21(6A) and 25A cannot be accepted. s. 5(8)(f) – Interpretation of – Plea that s. 5(8)(f), as it originally stood, is an exhaustive provision which must be read noscitur a sociis, and if so read, sub-clause (f) must take colour from the other clauses of the provision; that an allottee under a real estate project cannot fall within s. 5(8)(f), as it originally stood and the explanation must then be read prospectively; that since s. 5(8) is a “means and includes” definition clause, it is exhaustive , thus, to then introduce by way of amendment something extra by means of a deeming fiction is not permissible – Held: Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments – Explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law that had arisen as to whether home buyers/allottees were subsumed within s. 5(8)(f) – Explanation added to s. 5(8)(f) does not in fact enlarge the scope of the original Section – Thus, the allottees/home buyers were included in s. 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen. s. 5(8)(f) explanation – Effect of a deeming fiction – Held: Deeming fiction that is used by the explanation is to put beyond doubt the fact that allottees are to be regarded as financial creditors within the enacting part contained in s. 5(8)(f) – Under the explanation added to s. 5(8)(f), any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing – Although a deeming provision is to deem what is not there in reality, thereby requiring the subject matter to be treated as if it were real, yet several authorities and judgments show that a deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain.

Real Estate (Regulation and Development) Act, 2016: ss. 2,

20 to 39, 41 to 58, 71 to 78 and 81 to 92 – Impact of the RERA on the real estate sector – Stated.

Doctrines/Principles: Doctrine of ‘Reading Down’ – Application of – Matter pertaining to constitutional validity of the Insolvency Code (Second Amendment) Act – Plea that if the constitutional validity of the impugned provisions is to be upheld, then the amendment to the Insolvency and Bankruptcy Code needs to be read-down so as to make it conform with Art. 14 and 19(1)(g) and 300-A – Held: In application u/s. 7 made by an allottee, the NCLT’s ‘satisfaction’ will be with both eyes open – NCLT will not ignore a legitimate defences by a real estate developer – Furthermore, the Amendment Act has been held to be constitutionally valid, and considering that its language is clear and unambiguous, there is no necessity to read into or read down any of these provisions – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 – Insolvency and Bankruptcy Code, 2016.

Legislation: Economic legislation-Insolvency Code – Legislature’s right to experiment in economic matters – Held: Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole – While dealing with economic legislation, the legislature must be given liberty – Legislative judgment in economic choices must be given a certain degree of deference by the courts – Insolvency and Bankruptcy Code, 2016.

Disposing of the Writ Petitions and Civil Appeals, the Court HELD: Provisions of Insolvency And Bankruptcy Code, 2016 being challenged

1. It is declared that the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 is constitutionally valid. [Para 88] [529-F]

2. (i) The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 to the Insolvency and Bankruptcy Code, 2016 does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

ii The Real Estate (Regulation and Development) Act, 2016 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. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law. [Para 86] [528-G-H; 529-A-C] The Legislature’s right to experiment in economic matters

3. Legislature must be given free play in the joints when it comes to economic legislation. Apart from the presumption of constitutionality which arises in such cases, the legislative judgment in economic choices must be given a certain degree of deference by the courts. [Para 15] [429-E-F]

Raison d’être for the Insolvency Code (Second Amendment) Act of 2018

4. The Insolvency Committee Report is of importance in understanding why the legislature thought it fit to categorise home buyers as financial creditors under the Code. The Insolvency Law Committee found that 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 such flats/apartments. This being the case, it was important, thus, to clarify that home buyers are treated as financial creditors so that they can trigger the Code u/s.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, which is the execution of the real estate project in which such home buyers are ultimately to be housed. [Para 16, 18] [430-D; 434-H; 435-A-B] Real Estate (Regulation and Development) Act, 2016 (RERA) and its impact on the real estate sector

5. Perusal of the provisions of the Real Estate (Regulation and Development) Act, 2016 would show that, on and from the coming into force of the RERA, all real estate projects (as defined) would first have to be registered with the Real Estate Regulatory Authority, which, before registering such projects, would look into all relevant details, including delay in completion of other projects by the developer. Importantly, the promoter is now to make a declaration supported by an affidavit, that he undertakes to complete the project within a certain time period, and that 70% of the amounts realised for the project from allottees, from time to time, shall be deposited in a separate account, which would be spent only to defray the cost of construction and land cost for that particular project. Registration is granted by the authority only when it is satisfied that the promoter is a bona fide promoter who is likely to perform his part of the bargain satisfactorily. Registration of the project enures only for a certain period and can only be extended due to force majeure events for a maximum period of one year by the authority, on being satisfied that such events have, in fact, taken place. Registration once granted, may be revoked if it is found that the promoter defaults in complying with the various statutory requirements or indulges in unfair practices or irregularities. Upon revocation of registration, the authority is to facilitate the remaining development work, which can then be carried out either by the “competent authority” as defined by the RERA or by the association of allottees or otherwise. The promoter at the time of booking and issue of allotment letters has to make available to the allottees information, inter alia, as to the stage-wise time schedule of completion of the project. Deposits or advances beyond 10% of the estimated cost as advance payment cannot be taken without first entering into an agreement for sale. The agreement for sale will now no longer be a one-sided contract of adhesion, but in such form as may be prescribed, which balances the rights and obligations of both the promoter and the allottees. Under Section 18, if the promoter fails to complete or is unable to give possession of an apartment, plot or building in accordance with the terms of the agreement for sale, he must return the amount received by him in respect of such apartment etc. with such interest as may be prescribed and must, in addition, compensate the allottee in case of any loss caused to him. Under Section 19, the allottee shall be entitled to claim possession of the apartment, plot or building, as the case may be, or refund of amount paid along with interest in accordance with the terms of the agreement for sale. In addition, all allottees are to be responsible for making necessary payments in instalments within the time specified in the agreement for sale and shall be liable to pay interest at such rate as may be prescribed for any delay in such payment. Under Section 31, any aggrieved person may file a complaint with the authority or the adjudicating officers set up by such authority against any promoter, allottee or real estate agent, as the case may be, for violation or contravention of the RERA, and rules and regulations made thereunder. Also, if after adjudication a promoter, allottee or real estate agent fails to pay interest, penalty or compensation imposed on him by the authorities under the RERA, the same shall be recoverable as arrears of land revenue. Appeals may be filed to the Real Estate Appellate Tribunal against decisions or orders of the authority or the adjudicating officer. From orders of the Appellate Tribunal, appeals may thereafter be filed to the High Court. Stiff penalties are to be awarded for breach and/or contravention of the provisions of the RERA. Importantly, under Section 72, the adjudicating officer must first determine that the complainant has established “default” on the part of the respondent, after which consequential orders may then follow. Under Section 88, the provisions of RERA are in addition to and not in derogation of the provisions of any other law for time being in force and under Section 89, RERA is to have effect notwithstanding anything inconsistent contained in any other law for the time being in force. [Para 22] [459-C-H; 460-A-G] Insolvency and Bankruptcy Code, 2016 vis-à-vis the Real Estate (Regulation and Development) Act, 2016

6.1 There is no provision similar to that of Section 88 of RERA in the Code, which is meant to be a complete and exhaustive statement of the law insofar as its subject matter is concerned. Also, the non-obstante clause of RERA came into force on 1st May, 2016, as opposed to the non-obstante clause of the Code which came into force on 1st December, 2016. Further, the concerned amendment came into force only on 6th June, 2018. Given these circumstances, it cannot be said that RERA is a special enactment which deals with real estate development projects and must, therefore, be given precedence over the Code, which is only a general enactment dealing with insolvency generally. From the introduction of the explanation to Section 5(8)(f) of the Code, it is clear that Parliament was aware of RERA, and applied some of its definition provisions so that they could apply when the Code is to be interpreted. The fact that RERA is in addition to and not in derogation of the provisions of any other law for the time being in force, also makes it clear that the remedies under RERA to allottees were intended to be additional and not exclusive remedies. Also, as the authorities under RERA were to be set up within one year from 1st May, 2016, remedies before those authorities would come into effect only on and from 1st May, 2017 making it clear that the provisions of the Code, which came into force on 1 st December, 2016, would apply in addition to the RERA. The Code as amended, is both later in point of time than RERA, and must be given precedence over RERA, given Section 88 of RERA. Thus, even by a process of harmonious construction, 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. [Para 24, 26, 28] [461-B-F; 464-D; 465-B-C]

KSL & Industries Ltd. v. Arihant Threads Ltd. (2015) 1 SCC 166 ; Bank of India v. Ketan Parekh (2008) 8 SCC 148 : [2008] 9 SCR 346 – referred to.

6.2 The Code and RERA operate in completely different spheres. The Code deals with a proceeding in rem in which the focus is the rehabilitation of the corporate debtor. This is to take place by replacing the management of the corporate debtor by means of a resolution plan which must be accepted by 66% of the Committee of Creditors, which is now put at the helm of affairs, in deciding the fate of the corporate debtor. Such resolution plan then puts the same or another management in the saddle, subject to the provisions of the Code, so that the corporate debtor may be pulled out of the woods and may continue as a going concern, thus benefitting all stakeholders involved. It is only as a last resort that winding up of the corporate debtor is resorted to, so that its assets may be liquidated and paid out in the manner provided by Section 53 of the Code. On the other hand, RERA protects the interests of the individual investor in real estate projects by requiring the promoter to strictly adhere to its provisions. The object of RERA is to see that real estate projects come to fruition within the stated period and to see that allottees of such projects are not left in the lurch and are finally able to realise their dream of a home, or be paid compensation if such dream is shattered, or at least get back monies that they had advanced towards the project with interest. At the same time, recalcitrant allottees are not to be tolerated, as they must also perform their part of the bargain, namely, to pay instalments as and when they become due and payable. Given the different spheres within which these two enactments operate, different parallel remedies are given to allottees-under RERA to see that their flat/apartment is constructed and delivered to them in time, barring which compensation for the same and/or refund of amounts paid together with interest at the very least comes their way. If, however, the allottee wants that the corporate debtor’s management itself be removed and replaced, so that the corporate debtor can be rehabilitated, he may prefer a Section 7 application under the Code. That another parallel remedy is available is recognised by RERA itself in the proviso to Section 71(1), by which an allottee may continue with an application already filed before the Consumer Protection fora, he being given the choice to withdraw such complaint and file an application before the adjudicating officer under RERA read with Section 88. [Para 29] [465-C-H; 466-A-B]

Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited (2019) 3 SCC 620 : [2019] 1 SCR 682 – referred to.

Financial and Operational Creditors

7. A financial creditor has been defined under Section 5(7) of the Code as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21) means a claim in respect of provision of goods or services. Financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when a “default” occurs. [Para 30, 31] [466-H; 467-A; 469-C]

Innoventive Industries v. ICICI Bank & Anr. (2018) 1 SCC 407 ; Swiss Ribbons v. Union of India (2019) 4 SCC 17 : [2019] 3 SCR 535 – relied on.

Article 14 Challenge (I): Discrimination

8.1 The principle contained in Swiss Ribbons’s case, that far greater deference is accorded to economic legislation, as the legislature is given free play in the joints and is at liberty to conduct economic experiments in public interest, applies on all fours in the instant case. [Para 38] [482-A-B]

8.2 The Code is not meant to be a debt recovery mechanism. It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it. Thus, any allottee/home buyer who prefers an application under Section 7 of the Code takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer. Under the Code, he may never get a refund of the entire principal, let alone interest. This is because, the moment a petition is admitted under Section 7, the resolution professional must first advertise for and find a resolution plan by somebody, usually another developer, which has then to pass muster under the Code, i.e. that it must be approved by at least 66% of the Committee of Creditors and must further go through challenges before NCLT and NCLAT before the new management can take over and either complete construction, or pay out or refund amounts. Depending on the kind of resolution plan that is approved, such home buyer/allottee may have to wait for a very long period for the successful completion of the project. He may never get his full money back together with interest in the event that no suitable resolution plan is forthcoming, in which case, winding up of the corporate debtor alone would ensue. On the other hand, if such allottee were to approach the Real Estate Regulatory Authority under RERA, it is more than likely that the project would be completed early by the persons mentioned therein, and/or full amount of refund and interest together with compensation and penalty, if any, would be awarded. Thus, given the bona fides of the allottee who moves an application under Section 7 of the Code, it is only such allottee who has completely lost faith in the management of the real estate developer who would come before the NCLT under the Code hoping that some other developer takes over and completes the project, while always taking the risk that if no one were to come forward, corporate death must ensue and the allottee must then stand in line to receive whatever is given to him in winding up. Given the reasons of the Insolvency Committee Report, which show that experience of the real estate sector in this country has not been encouraging, in that huge amounts are advanced by ordinary people to finance housing projects which end up in massive delays on the part of the developer or even worse, i.e. failure of the project itself, and given the state of facts which was existing at the time of the legislation, as adverted to by the Insolvency Committee Report, it is clear that any alleged discrimination has to meet the tests laid down in Ram Krishna Dalmia’s case, V.C. Shukla’s case, Shri Ambica Mills’s case, Venkateshwara Theatre’s case, and Mardia Chemicals’s case. [Para 39] [482-B-H; 483-A-B]

Ram Krishna Dalmia v. Justice S.R. Tendolkar (1959) SCR 279 ; State of Bihar v. Shree Baidyanath Ayurved Bhawan (P) Ltd. (2005) 2 SCC 762 : [2005] 1 SCR

334 ; Karnataka Live Band Restaurants Assn. v. State of Karnataka (2018) 4 SCC 372 : [2018] 1 SCR 533; State of Gujarat and Anr. v. Shri Ambica Mills Ltd., Ahmedabad, etc. (1974) 4 SCC 656 : [1974] 3 SCR

760 ; Swiss Ribbons v. Union of India (2019) 4 SCC

17 : [2019] 3 SCR 535 ; V.C. Shukla v. State (Delhi Administration) (1980) Suppl. SCC 249 : [1980] SCR

500 ; Venkateshwara Theatre v. State of A.P. (1993) 3 SCC 677 : [1993] 3 SCR 616 ; Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311 : [2004] 3 SCR

982 - relied on.

8.3 It is impossible to say that classifying real estate developers is not founded upon an intelligible differentia which distinguishes them from other operational creditors, nor is it possible to say that such classification is palpably arbitrary having no rational relation to the objects of the Code. It was submitted that if at all real estate developers were to be brought within the clutches of the Code, being like operational debtors, at best they could have been brought in under this rubric and not as financial debtors. In operational debts generally, when a person supplies goods and services, such person is the creditor and the person who has to pay for such goods and services is the debtor. In the case of real estate developers, the developer who is the supplier of the flat/apartment is the debtor inasmuch as the home buyer/allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found. Another vital difference between operational debts and allottees of real estate projects is that an operational creditor has no interest in or stake in the corporate debtor, unlike the case of an allottee of a real estate project, who is vitally concerned with the financial health of the corporate debtor, for otherwise, the real estate project may not be brought to fruition. Also, in such event, no compensation, nor refund together with interest, which is the other option, will be recoverable from the corporate debtor. One other important distinction is that in an operational debt, there is no consideration for the time value of money – the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor. Payments made in advance for goods and services are not made to fund manufacture of such goods or provision of such services. In real estate projects, money is raised from the allottee, being raised against consideration for the time value of money. Even the total consideration agreed at a time when the flat/apartment is non-existent or incomplete, is significantly less than the price the buyer would have to pay for a ready/complete flat/apartment, and therefore, he gains the time value of money. Likewise, the developer who benefits from the amounts disbursed also gains from the time value of money. The fact that the allottee makes such payments in instalments which are co-terminus with phases of completion of the real estate project does not any the less make such payments as payments involving “exchange”, i.e. advances paid only in order to obtain a flat/apartment. What is predominant, insofar as the real estate developer is concerned, is the fact that such instalment payments are used as a means of finance qua the real estate project. One other vital difference with operational debts is the fact that the documentary evidence for amounts being due and payable by the real estate developer is there in the form of the information provided by the real estate developer compulsorily under RERA. This information, like the information from information utilities under the Code, makes it easy for home buyers/allottees to approach the NCLT under Section 7 of the Code to trigger the Code on the real estate developer’s own information given on its webpage as to delay in construction, etc. It is these fundamental differences between the real estate developer and the supplier of goods and services that the legislature has focused upon and included real estate developers as financial debtors. This being the case, it is clear that there cannot be said to be any infraction of equal protection of the laws. [Para 40] [483-C-H; 484-A-F]

8.4 Real estate developers are, in substance, persons who avail finance from allottees who then fund the real estate development project. The object of dividing debts into two categories under the Code, namely, financial and operational debts, is broadly to sub-divide debts into those in which money is lent and those where debts are incurred on account of goods being sold or services being rendered. There is no doubt that real estate developers fall squarely within the object of the Code as originally enacted insofar as they are financial debtors and not operational debtors. So far as unequals being treated as equals is concerned, home buyers/allottees can be assimilated with other individual financial creditors like debenture holders and fixed deposit holders, who have advanced certain amounts to the corporate debtor. For example, fixed deposit holders, though financial creditors, would be like real estate allottees in that they are unsecured creditors. Financial contracts in the case of these individuals need not involve large sums of money. Debenture holders and fixed deposit holders, unlike real estate holders, are involved in seeing that they recover the amounts that are lent and are thus not directly involved or interested in assessing the viability of the corporate debtors. Though not having the expertise or information to be in a position to evaluate feasibility and viability of resolution plans, such individuals, by virtue of being financial creditors, have a right to be on the Committee of Creditors to safeguard their interest. Also, the question that is to be asked when a debenture holder or fixed deposit holder prefers a Section 7 application under the Code will be asked in the case of allottees of real estate developers – is a debt due in fact or in law? Thus, allottees, being individual financial creditors like debenture holders and fixed deposit holders and classified as such, show that they within the larger class of financial creditors, there being no infraction of Article 14 on this score. [Para 41] [484-H; 485-A-F]

Nagpur Improvement Trust and Anr. v. Vithal Rao and Ors. (1973) 1 SCC 500 : [1973] 3 SCR 39 ;

Subramanian Swamy v. Director, Central Bureau of Investigation and Anr. (2014) 8 SCC 682 : [2014] 6 SCR 873 – referred to.

8.5 The presumption that the legislature has understood and correctly appreciated the need of its people and that the amendment to the Code is directed to problems made manifest by experience, as was pointed out by the Insolvency Law Committee findings, demonstrates that the presumption of constitutionality that attaches to the Amendment Act has not been displaced by the Petitioners. [Para 42] [485-G]

8.6 Home buyers/allottees give advances to the real estate developer and thereby finance the real estate project at hand, are really financial creditors. The plea that homebuyers would really fall within “other creditors” as a residuary class, who would have to stand in line with their claims which would be made to the resolution professional once the Code is triggered, cannot be accepted. [Para 43] [485-H; 486-A, E-F]

Article 14 Challenge (II): Manifest arbitrariness; Article 19(1)(g) and Article 300-A

9.1 A reading of the paragraphs in Swiss Ribbons’s case will show these very objects are sub-served by treating allottees as financial creditors. The Code is thus a beneficial legislation which can be triggered to put the corporate debtor back on its feet in the interest of unsecured creditors like allottees, who are vitally interested in the financial health of the corporate debtor, so that a replaced management may then carry out the real estate project as originally envisaged and deliver the flat/apartment as soon as possible and/or pay compensation in the event of late delivery, or non-delivery, or refund amounts advanced together with interest. Thus, applying the Shayara Bano case test, it cannot be said that a square peg has been forcibly fixed into a round hole so as to render Section 5(8)(f) manifestly arbitrary i.e. excessive, disproportionate or without adequate determining principle. For the same reason, it cannot be said that Article 19(1)(g) has been infracted and not saved by Article 19(6) as the Amendment Act is made in public interest, and it cannot be said to be an unreasonable restriction on the Petitioner’s fundamental right under Article 19(1)(g). Also, there is no infraction of Article 300-A as no person is deprived of its property without authority of a constitutionally valid law.[Para 45] [494-D-G]

Swiss Ribbons v. Union of India (2019) 4 SCC 17 : [2019] 3 SCR 535 ; Shayara Bano v. Union of India (2017) 9 SCC 1 – relied on.

9.2 Real estate allottees are really in the nature of financial creditors, and thus the UNCITRAL Legislative Guide has been followed, and not breached. Since allottees of real estate projects have always been subsumed within Section 5(8)(f), no new rights or claims have been created. Allottees, like individual financial creditors who are already on the Committee of Creditors, are to have a voice in determining the corporate debtor and their own future. [Para 46] [495-B-D]

9.3 All the allottees of the project in question can either join together under the explanation to Section 7(1) of the Code, or file their own individual petitions after the Code gets triggered by a single allottee, stating that in addition to the construction of their flat/apartment, they are also entitled to compensation under RERA and/or under the general law, and would thus be persons who have a “claim”, i.e. a right to remedy for breach of contract which gives rise to a right to compensation, whether or not such right is reduced to judgment, and would therefore be persons to whom a liability or obligation in respect of a “claim” is due. Such persons would, therefore, have a voice in the Committee of Creditors as to future plans for completion of the project, and compensation for late delivery of the flat/apartment. [Para 47] [495-G-H; 496-A-B]

9.4 If a Section 7 application is admitted in favour of an allottee, and if the management of the corporate debtor is in fact a strong and stable one, nothing debars the same erstwhile management from offering a resolution plan, subject to Section 29A of the Code, which may well be accepted by the Committee of Creditors in which home buyers now have a voice. Equally, to assume that the moment the insolvency resolution process starts, corporate death must ensue is wholly incorrect. If the real estate project is otherwise viable, resolution plans from others may well be accepted and the best of these would then work in order to maximise the value of the assets of the corporate debtor. Corporate death, is the last resort under the Code after all other available options have failed. [Para 48] [496-C-D]

Swiss Ribbons v. Union of India (2019) 4 SCC 17 : [2019] 3 SCR 535 – relied on.

9.5 Under paragraph 3 of the Statement of Objects and Reasons of RERA, one of the important reasons for enacting the RERA is to “establish symmetry of information between the promoter and purchaser”. This is achieved through Section 4, where every promoter in its application to the authority for registration under sub-clause (2)(b), has to include the current status of the project, any delay in its completion, details of cases pending, payments pending etc. Equally, under sub-clause (g), the proforma of the allotment letter, agreement for sale and conveyance deed proposed to be signed with the allottee are all to be furnished. Also, under sub-clause (l)(C), the time period within which he undertakes to complete the project is also to be stated. Above all, under Section 4(3) read with Section 11, the authority is to operationalise a web-based online system in which the promoter shall, upon receiving his Login Id and password, create a webpage on the website of the authority to enter all details as required by Section 4(2), including quarterly update of the status of the project and the stage-wise time schedule of completion of the project. Also, under Section 7, the Authority may revoke registration for various reasons, and under Section 7(4)(a) shall debar the promoter from accessing its website in relation to that project, and thereafter specify its name in the list of defaulters and display its photograph on the website and inform other Real Estate Regulatory Authorities in other States and Union Territories about such revocation. Equally, under Section 13(2), the prescribed agreement for sale, which is to be entered into between the promoter and allottee, must clearly state the date on which possession of the apartment, plot or building is to be handed over, the rates of interest payable by the promoter to the allottee in the case of default and such other particulars, as may be prescribed. [Para 50] [496-H; 497-A-E]

9.6 It can be seen that just as information utilities provide the kind of information as to default that banks and financial institutions are provided under Sections 214 to 216 of the Code read with Regulations 25 and 27 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, allottees of real estate projects can come armed with the same kind of information, this time provided by the promoter or real estate developer itself, on the basis of which, prima facie at least, a “default” relating to amounts due and payable to the allottee is made out in an application under Section 7 of the Code. Once this prima facie case is made out, the burden shifts on the promoter/real estate developer to point out in their reply and in the hearing before the NCLT, that the allottee is himself a defaulter and would, therefore, on a reading of the agreement and the applicable RERA Rules and Regulations, not be entitled to any relief including payment of compensation and/or refund, entailing a dismissal of the said application. Under Section 65 of the Code, the real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency. This the real estate developer may do by pointing out, for example, that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment. They can also point out that in a real estate market which is falling, the allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it. Given the above, it is clear that it is very difficult to accede to the Petitioners’ contention that a wholly one-sided and futile hearing will take place before the NCLT by trigger-happy allottees who would be able to ignite the process of removal of the management of the real estate project and/or lead the corporate debtor to its death. [Para 50] [499-B-G]

9.7 The period of 14 days given to the NCLT for decision under Section 7(4) would be directory. Under Section 64(1) of the Code, the NCLT President or the Chairperson of the NCLAT may, after taking into account reasons by the NCLT or NCLAT for exceeding the period mentioned by statute, extend the period of 14 days by a period not exceeding 10 days. Even this provision is directory, in that no consequence is provided either if the period is not extended, or after the extension expires. This is also for the good reason that an act of the court cannot harm the litigant before it. 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. [Para 52] [500-C-E]

Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and Ors. (2017) 16 SCC 143 : [2017] 9 SCR 743 – relied on.

State of Bihar v. Bihar Rajya Bhumi Vikas Bank Samiti (2018) 9 SCC 472 : [2018] 7 SCR 1147 - referred to.

Challenge to Section 21(6A) and 25A of the Code

10.1 Like other financial creditors, be they banks and financial institutions, or other individuals, all persons who have advanced monies to the corporate debtor should have the right to be on the Committee of Creditors. True, allottees are unsecured creditors, but they have a vital interest in amounts that are advanced for completion of the project, maybe to the extent of 100% of the project being funded by them alone. Under the proviso to Section 21(8) of the Code if the corporate debtor has no financial creditors, then under Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, up to 18 operational creditors then become the Committee of Creditors or, if there are more than 18 operational creditors, the highest in order of debt owed to operational creditors to the extent of the first 18 are then represented on the Committee of Creditors together, with a representative of the workers. If allottees who have funded a real estate project of the corporate debtor to the extent of 100% are neither financial creditors nor operational creditors, the mechanism of the Committee of Creditors, who is now to take decisions after the Code is triggered as to the future of the corporate debtor, will be non-existent in a case where there are no operational creditors and no secured creditors, because 100% of the project is funded by the allottees. Even otherwise, it would in fact be manifestly arbitrary to omit allottees from the Committee of Creditors when they are vitally interested in the future of the corporate debtor as they have funded anywhere from 50% to 100% of the project in most cases. [Para 54] [502-C-G]

10.2 Given the fact that allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors-either to approve or to disapprove of a proposed resolution plan. Sub-section (3A) goes a long way to ironing out any creases that may have been felt in the working of Section 25A in that the authorised representative now casts his vote on behalf of all financial creditors that he represents. If a decision taken by a vote of more than 50% of the voting share of the financial creditors that he represents is that a particular plan be either accepted or rejected, it is clear that the minority of those who vote, and all others, will now be bound by this decision. The legislature must be given free play in the joints to experiment. Minor hiccups that may arise in implementation can always be sorted out later. Thus, any challenge to the machinery provisions contained in Sections 21(6A) and 25A must be repelled. [Para 55] [503-D-F]

Swiss Ribbons v. Union of India (2019) 4 SCC 17 : [2019] 3 SCR 535 – relied on.

Competition Commission of India v. Bharti Airtel Limited and Ors.(2019) 2 SCC 521 ; Cellular Operators Association of India v. TRAI (2016) 7 SCC 703 : [2016] 9 SCR 1 – referred to.

Doctrine of ‘Reading Down’

11. Given the fact that the Amendment Act has been held to be constitutionally valid, and considering that its language is clear and unambiguous, it is not possible to read down the clear provisions of the Amendment Act in the manner suggested. [Para 57] [507-C]

Interpretation of Section 5(8)(f) of the Code

12.1 A financial debt is defined as meaning a “debt”. “Debt” is defined by Section 3(11) of the Code and “claim” in Section 3(6) and “default” in Section 3(12) of the Code. Thus, in order to be a “debt”, there ought to be a liability or obligation in respect of a “claim” which is due from any person. “Claim” then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense”, and includes repayment. The definition of “financial debt” in Section 5(8) then goes on to state that a “debt” must be “disbursed” against the consideration for time value of money. [Para 59, 60, 61] [507-G; 508-B, E-F; 509-A-D]

Union of India v. Raman Iron Foundry (1974) 2 SCC

231 : [1974] 3 SCR 556 ; Himachal Pradesh Housing and Urban Development Authority and Anr. v. Ranjit Singh Rana (2012) 4 SCC 505 : [2012] 2 SCR 427 – referred to.

Webster’s Comprehensive Dictionary (International Edn.) Vol. 2 ; Law Lexicon by P. Ramanatha Aiyar 2nd Edn., Reprint; Black’s Law Dictionary 10th Edn. – referred to.

12.2 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” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money. Thus far, it is clear that an allottee “disburses” money in the form of advance payments made towards construction of the real estate project. That this is against consideration for the time value of money is also clear as the money that is “disbursed” is no longer with the allottee, but, is with the real estate developer who is legally obliged to give money’s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment). [Para 61] [509-E-G; 510-B-C]

‘Dictionary of Banking Terms’ by Thomas P. Fitch Second Edn; ACT Borrower’s Guide to the LMA’s Investment Grade Agreements by Slaughter and May Fifth Edn, 2017 – referred to.

12.3 When compared with Section 5(8), it is clear that Section 5(8) seems to owe its genesis to the definition of “financial indebtedness” that is contained for the purposes of Investment Grade Agreements. It was submitted that even insofar as derivative transactions are concerned, it is clear that money alone is given against consideration for time value of money and a transaction which is a pure sale agreement between “borrowers” and “lender” cannot possibly be said to fit within any of the categories mentioned in Section 5(8). It is clear from the submission that a wide range of transactions are subsumed by paragraph (f) and that the precise scope of paragraph (f) is uncertain. Equally, paragraph (f) seems to be a “catch all” provision which is really residuary in nature, and which would subsume within it transactions which do not, in fact, fall under any of the other sub-clauses of Section 5(8). And now to the precise language of Section 5(8)(f). First and foremost, the sub-clause does appear to be a residuary provision which is “catch all” in nature. This is clear from the words “any amount” and “any other transaction” which means that amounts that are “raised” under “transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing. The expression ‘transaction’ is defined by Section 3(33). The expression “any other transaction” would include an arrangement in writing for the transfer of funds to the corporate debtor and would thus clearly include the kind of financing arrangement by allottees to real estate developers when they pay instalments at various stages of construction, so that they themselves then fund the project either partially or completely. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan transactions, so long as they have the commercial effect of a borrowing. [Para 63-66] [511-E-F; 512-C-H; 513-A] ACT Borrower’s Guide to the LMA’s Investment Grade Agreements by Slaughter and May Fifth Edn, 2017; Collins English Dictionary & Thesaurus Second Edn. 2000 – referred to.

12.4 A perusal of these definitions would show that even though the Petitioners may be right in stating that a “borrowing” is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression “borrow” is wide enough to include an advance given by the home buyers to a real estate developer for “temporary use” i.e. for use in the construction project so long as it is intended by the agreement to give “something equivalent” to money back to the home buyers. The “something equivalent” in these matters is obviously the flat/apartment. Also of importance is the expression “commercial effect”. “Commercial” would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is “raised” under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8)(f) as the sale agreement between developer and home buyer would have the “commercial effect” of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have “commercial” interests in the same – the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would, in fact, be subsumed within Section 5(8)(f) even without adverting to the explanation introduced by the Amendment Act. [Para 67] [513-E-H; 514-A]

12.5 The report of the Bankruptcy Law Reforms Committee of November, 2015 and in particular paragraph 3 of ‘Box 5.2 – Trigger for IRP’, which led to the enactment of the Code, is an important guide in understanding the provisions of the Code. However, where the provisions of the Code, as construed in the light of the objects of the Code, are clear, the fact that from a huge report one word is picked up to indicate that all financial creditors must have debtors who owe money “solely” from financial transactions cannot possibly have the effect of negating the plain language of Section 5(8)(f) of the Code. In fact, what is important is that the threshold limit to trigger the Code is purposely kept low – at only one lakh rupees – making it clear that small individuals may also trigger the Code as financial creditors (as financial creditors include debenture holders and bond holders), along with banks and financial institutions to whom crores of money may be due. [Para 68] [514-B-D]

12.6 That this amendment is in fact clarificatory is also made clear by the Insolvency Committee Report, which expressly uses the word “clarify”, indicating that the Insolvency Law Committee also thought that since there were differing judgments and doubts raised on whether home buyers would or would not be included within Section 5(8)(f), it was best to set these doubts at rest by explicitly stating that they would be so covered by adding an explanation to Section 5(8)(f). Incidentally, the Insolvency Law Committee itself had no doubt that given the ‘financing’ of the project by the allottees, they would fall within Section 5(8)(f) of the Code as originally enacted. [Para 69] [514-E-F] Krishi Utpadan Mandi Samiti v. Shankar Industries (1993) 3 Suppl. SCC 361 : [1993] 1 SCR 1037 – Held not a good law.

P. Kasilingam and Ors. v. P.S.G. College of Technology and Ors. (1995) 2 Suppl. SCC 348 : [1995] 2 SCR 1061; Jagir Singh & Ors. v. State of Bihar & Anr. (1976) 2 SCC 942 : [1976] 2 SCR 809 ; Mahalakshmi Oil Mills v. State of Andhra Pradesh & Ors. (1989) 1 SCC 164 : [1988] 2 Suppl. SCR 1088; Bharat Coop. Bank (Mumbai) Ltd. v. Coop. Bank Employees Union (2007) 4 SCC 685 : [2007] 4 SCR 347; State of West Bengal and Ors. v. Associated Contractors (2015) 1 SCC 32 : [2014] 10 SCR 426 – referred to.

12.7 The legislature is not precluded by way of amendment from inserting words into what may even be an exhaustive definition. What is an exhaustive definition is exhaustive for purposes of interpretation of a statute by the Courts, which cannot bind the legislature when it adds something to the statute by way of amendment. [Para 73] [518-D]

12.8 The submission that Section 5(8)(f) must be construed noscitur a sociis with sub-clauses (a) to (e) and (g) to (i), and so construed would only refer to loans or other financial transactions which would involve money at both ends, cannot be accepted since Section 5(8)(f) is clearly a residuary “catch all” provision, taking within it matters which are not subsumed within the other sub-clauses. Furthermore, noscitur a sociis being a mere rule of construction cannot be applied in the present case as it is clear that wider words have been deliberately used in a residuary provision, to make the scope of the definition of “financial debt” subsume matters which are not found in the other sub-clauses of Section 5(8). [Para 74-75] [518-E-F; 522-F]

Controller of Estate Duty v. Kantilal Trikamlal (1976) 4 SCC 643 : [1977] 1 SCR 9 ; Subramanian Swamy v. Union of India (2016) 7 SCC 221 : [2016] 3 SCR 865 – referred to.

12.9 As regards, the effect of a deeming fiction, under the explanation added to Section 5(8)(f), any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing. Although a deeming provision is to deem what is not there in reality, thereby requiring the subject matter to be treated as if it were real, yet several authorities and judgments show that a deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain. It is clear that the deeming fiction that is used by the explanation is to put beyond doubt the fact that allottees are to be regarded as financial creditors within the enacting part contained in Section 5(8)(f) of the Code. [Paras 76, 83, 84] [522-G; 525-B-C; 528-A]

M. Venugopal v. Divisional Manager, LIC (1994) 2 SCC

323 : [1994] 1 SCR 433; Commissioner of Income Tax, Bombay v. Bombay Trust Corporation AIR 1930 PC 54; K. Kamaraja Nadar v. Kunju Thevar and Ors. AIR 1958 SC 687 : [1959] SCR 583 ; Delhi Cloth & General Mills Co. Ltd. and Anr. v. State of Rajasthan and Ors. (1996) 2 SCC 449 : [1996] 1 SCR 518 ; Daiichi Sankyo Company Limited v. Jayaram

Chigurupati and Ors. (2010) 7 SCC 449 : [2010] 8 SCR 251 ; Shri Prithvi Cotton Mills Ltd. & Anr. v. Broach Borough Municipality & Ors. (1969) 2 SCC

283 : [1970] 1 SCR 388 ; Hindustan Cooperative Housing Building Society Limited v. Registrar, Cooperative Societies and Anr. (2009) 14 SCC 302 : [2009] 2 SCR 331 – referred to.

East End Dwellings Co. Ltd. v. Finsbury Borough Council (1952) Appeal Cases 109 - referred to.

Stroud’s Judicial Dictionary of Words and Phrases Seventh Edn. 2008 – referred to.

12.10 The explanation was added by the Amendment Act only to clarify doubts that had arisen as to whether home buyers/allottees were subsumed within Section 5(8)(f). The explanation added to Section 5(8)(f) of the Code by the Amendment Act does not in fact enlarge the scope of the original Section as home buyers/allottees would be subsumed within Section 5(8)(f) as it originally stood. As a matter of statutory interpretation, that interpretation, which accords with the objects of the statute in question, particularly when a beneficial legislation is dealt with, is always the better interpretation or the “creative interpretation” which is the modern trend of authority. Thus, the allottees/home buyers were included in Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen. [Para 85-86] [528-C-F] Hiralal Ratanlal Etc. v. State of U.P and Anr. Etc. (1973) 1 SCC 216 : [1973] 2 SCR 502 ; Eera (through Dr. Manjula Krippendorf) v. State (NCT of Delhi) and Anr. (2017) 15 SCC 133 : [2017] 7 SCR 924 ;

S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC

591 : [1985] 2 SCR 643 – referred to.

13. In the States and Union Territories where only interim or no adjudicating officer/Real Estate Regulatory Authority and/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within the stipulated period. Given the declaration of the constitutional validity of the Amendment Act, it is absolutely necessary that the NCLT and the NCLAT are manned with sufficient members to deal with litigation that may arise under the Code generally, and from the real estate sector in particular. For this purpose, Union of India to take steps in this behalf. [Paras 87, 88] [529-E-G]

Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd. (Company Appeal (AT) (Insolvency) No. 07 of 2017) ; Chitra Sharma & Ors. v. Union of India 2018

(9) SCALE 490 ; Bikram Chatterji v. Union of India 2018 (11) SCALE 129 – referred to.