IBC Amendment Ordinance: Supreme Court provides partial relief to homebuyers

The apex court has partially stayed Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2019, and will decide on its legal and constitutional validity after hearing homebuyers and the Government

The Supreme Court (SC) has granted a partial stay on Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 aka Ordinance, which requires a minimum of 100 ALLOTTEES or 10 per cent of the total number of ALLOTTEES of a real estate project, whichever is less, to approach the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against a defaulting realtor.

The Supreme Court (SC) bench of Justice ROHINTON NARIMAN and Justice RAVINDRA BHAT has issued notices to the Union Ministries of Finance, Law and Corporate Affairs on a multiple Writ Petition filed by homebuyers and the Association of KARVY INVESTORS, challenging Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance.

Under the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance, all cases against defaulting developers already listed with the NCLT have to comply with the criteria set out by the Ordinance within a period of 30 days else they stand automatically dismissed. The SC, however, has stayed the retrospective application of the Ordinance, and directed the NCLT to maintain status quo with respect to all applications already filed by homebuyers and financial creditors against defaulting developers. Most importantly, the SC will decide on the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance only after hearing the Writ Petition filed by the homebuyers and the Association of KARVY INVESTORS and the Government of India's response to it.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance

The Government of India in December 2019 amended the Insolvency and Bankruptcy Code (IBC), 2016 or Code by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance. Under the Ordinance, homebuyers looking to drag a defaulting developer to the NCLT would need to have at least 100 or 10 per cent of the total ALLOTTEES of a project (whichever is less) as part of the joint petition against the builder.

Further, all applications of financial creditors, including homebuyers, pending with the NCLT would need to comply with the regulations set out by the Ordinance within 30 days of its passing else they would stand automatically dismissed. Prior to passing of the Ordinance, even a single financial creditor, including a homebuyer, with claims of at least RS 1 LAKH, could move the NCLT against a defaulting developer.

Writ Petition

The homebuyers and the Association of KARVY INVESTORS, in their Writ Petition, contended that Section 3 of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 or Ordinance deprives homebuyers, who are financial creditors, of remedy and subjects them to discrimination in the form of the precondition of requirement of a minimum number of ALLOTTEES of a project to file an application for the initiation of insolvency resolution process (IRP) under Section 7 of the Code.

The petitioners said that financial creditors already constitute a class within creditors under the Code, while debt owed to them constitutes a class under Section 5(8) of the Code. The Ordinance further divides financial creditors and foists a condition on the newly-formed class, keeping them from reaping the benefits available to others under the Code. The petitioners argued that this amounts to creating "a class within a class" and is unconstitutional and manifestly arbitrary in violation of Article 14 (equality before the law) of the Constitution. Counsel AISHWARYA SINHA, on behalf of the Association, reportedly said, "That a conjoint reading of Section 3 of the Ordinance, along with other IBC provisions, makes it clear that even though no difference exists between different classes of financial creditors, the Ordinance seeks to differentiate between creditors… without any substantial difference existing in the law. As a consequence, the Ordinance is in violation of Article 14 of the Constitution of India and is liable to be struck down."

The petitioners recalled that when the Insolvency and Bankruptcy Code, 2018 Amendment (Amendment) granted homebuyers the status of financial creditors and the SC, in the Pioneer Urban Land and Infrastructure Ltd. and others versus Union of India and others case, rejected over 200 petitions filed by real estate developers against this Amendment, hundreds of thousands of homebuyers felt both relieved and empowered. However, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 aka Ordinance seems to have been introduced to prevent homebuyers from misusing the Code, they said.

Raising concerns over the retrospective application of the Ordinance, the petitioners said that this will result in the existing ALLOTTEES of projects losing their money and homes. The petitioners claimed that the Ordinance is arbitrary and discriminatory and demanded striking it down. The homebuyers were represented by Advocates PIYUSH SINGH and ADITYA PAROLIA of PSP Legal, Advocates and Solicitors.