On August 9, the Supreme Court delivered landmark judgment in the Insolvency & Bankruptcy Code (IBC) case reaffirming the rights of homebuyers which was challenged by a consortium of builders. The writ petition was filed by builder companies challenging the second amendment made to the IBC whereby the homebuyers are given the right to be considered as financial creditors.
The lead matter was filed by Pioneer Urban Land and Infra Structure Ltd against Union of India and home buyers.
The Supreme Court of India delivered its landmark judgment while upholding the constitutional validity of the Section 5(8) (f) of the IBC Code which gives right to the homebuyers to approach the National Company Law Tribunal (NCLT) under the IBC.
“It is a victory for homebuyers,” said the law firm representing the homebuyers. Edited excerpts:
How tough was it winning this case considering you had a powerful lobby of builders and hi-profile lawyers on the other side?
Pretty tough, I’d say. Looking at the lobby of the builders and the representation of many senior lawyers from the side of the builder it was quite difficult, but we did our best. At that time what was important was to bring justice to the aggrieved homebuyers facing mental agony and financial losses after investing in projects of some developers. It was time for a change in law, looking at the increasing number of delayed projects by the builders and the one sided agreements which leave homebuyers helpless.
How many builders were there except for Pioneer Urban Land?
There were more than 170 builders who filed writ petitions in the Supreme Court challenging the constitutionality of the amendments made to the Insolvency and Bankruptcy Code, 2016. But the major builders in this petition were Pioneer Urban Land & Infrastructure Ltd, Emaar, Ireo Pvt Ltd, Puri Construction, Supertech Ltd, Varali Properties Ltd, Horizon Concept Pvt. Ltd, Vardhman Buildtech Pvt. Ltd, Ansal, Wave, Parsavnath.
What was the key argument on the other side?
Their argument were that the homebuyer does not have the expertise to manage the functions of the financial creditors and that there is no commercial effect of borrowing in the investment made by the homebuyer in the real estate project of the developer and the money paid by the homebuyer cannot be called a “debt”. They claimed that NCLT cannot get into the technicalities of the definition of default in each and every case and it would be unfair to the builder as he is left with no choice than to settle with the homebuyer and in many cases the homebuyers themselves have defaulted the payment. Hence they should approach other forums, which are specifically made for the homebuyers like RERA and Consumer and then approach IBC, as RERA is the specialist adjudicator in the current matter. They said the homebuyer’s intention is often to pressurise the builder and use this provision as a recovery mechanism and not for the insolvency of the company. In fact they said that this violates article 14 of the Constitution of India as it creates inequality for the other category of Financial Creditors apart from the homebuyers.
How much time did it take for judgement to come?
It took around three weeks of arguments from both the sides and two more weeks for the judgement. The issue was pending before the Hon’ble Court since builders first challenged the proceedings in Jan 2019.
What do you think went in the favour of homebuyers eventually?
The very thing, which went in our favour, was the fact that before this amendment, the homebuyers were seen nowhere if the builder goes into insolvency even though homebuyers are major contributor in any project. This was the basis for this amendment to come in the first place. The homebuyers are the ones financially contributing to the real estate project and there is every reason for them to be considered as a financial creditor.
We argued that RERA has not been established in most of the states and does not have power to adjudicate the matters where the homebuyer wants refund of his money. In most of the states we do not have such Adjudicating officers. We also said that homebuyer’s intention is not to use this Amendment as the recovery mechanism- If the IRP (Insolvency Resolution Professional) is appointed by the NCLT there are high chances of getting the possession of the property, as the good management will replace the bad management of the company. There are various cases where the whole project is been funded by the homebuyers and there are no other category of financial creditor involved with the project. Does that mean the builder will keep on defaulting as there is no one who can file for the insolvency of the company.