Segregation of Homebuyers: An Unreasonable Classification Under the IBC

INTRODUCTION

Recently, the Supreme Court has issued notice to the Central Government in lieu of petition challenging the amendment made in the Insolvency and Bankruptcy Code (IBC), 2016, with regard to the minimum threshold for homebuyers for the filing of insolvency against the Corporate Debtor. The petition has been filed by Manish Kumar and Association of Karvy Investors (herein referred to as homebuyers) in which they have challenged the amendments in the IBC on the grounds that the introduction of such minimum threshold is arbitrary and unreasonable.

In this article we shall be discussing upon the following topics:

· The amendments made in the IBC, 2016

· The grounds on which the amendments have been challenged

· Analysis as to why the minimum threshold for the homebuyers to file for insolvency is unconstitutional

· Conclusion

AMENDMENT MADE IN THE IBC

On 28th December 2019, the IBC (Amendment) Ordinance, 2019 was signed by the Hon’ble President of India. The intent behind bringing up of such ordinance was to fill up certain critical gaps in the IBC. One of the important aspects of the ordinance was to bring in amendment in the minimum threshold for homebuyers to apply for insolvency under the IBC. The section 3 of the IBC (Amendment) Ordinance, 2019, provided for the amendment in the section 7(1) of the IBC which reads as follows : “Provided that for the financial creditors, referred to in clauses (a) and (b) of subsection (6A) of section 21, an application for initiation corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent of the total number of such creditors in the same class, whichever is less: Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less: Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first or second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission.”

REASONS WHY THE AMENDMENT IN IBC HAS BEEN CHALLENGED

The homebuyers have challenged the amendment made in the section 7 of IBC under article 32 of the Indian Constitution on the following grounds:

1. First ground of challenge was that the ordinance created a “class within a class”, which is violative of article 14 of the Indian Constitution and which is unconstitutional and arbitrary.

2. Further, the ordinance has been challenged on the ground that there is no intelligible differentia nor there is any reasonable nexus with the object that is being sought to be achieved.

3. It has also been contended that the ordinance is vague and creates further confusion.

4. Lastly, it has been contended that the ordinance has given retrospective effect, thus affecting the claimants adversely who have filed for the initiation of Corporate Insolvency Resolution Process (CIRP) before the commencement of such ordinance, but has not been admitted by the adjudicating authority i.e. the National Company Law Tribunal (NCLT).

ANALYSIS

With regard to the first issue, it is important to understand that under Article 14 of the Indian Constitution, which deals with principle of equality, it is important to show that the law in question must pass the test of reasonable classification. For reasonable classification, the law needs to pass the following tests:

1. It should not be arbitrary, artificial or evasive. It should be based on an intelligible differentia, some real and substantial distinction, which distinguishes persons or things grouped together in the class from others left out of it.

2. The differentia adopted as the basis of classification must have a rational or reasonable nexus with the object sought to be achieved by the statute in question.It has been stated in the case of Dr.Subramanian Swamy vs Director, Cbi & Anr, that “ There needs to be proper explanation for the rational classification for any object of classification which is discriminatory in nature.” Therefore, when there is no reasonable basis for the classification, such classification may be declared discriminatory. The petitioners have also relied upon the case of Shayara Bano v. Union of India,in which it was stated that “Manifest arbitrariness, therefore, must be something done by the legislature capriciously, irrationally and/or without adequate determining principle. Also, when something is done which is excessive and disproportionate, such legislation would be manifestly arbitrary.”

It is felt that the legislators have failed to provide a proper explanation for treating the homebuyers differently. The legislators have failed to understand the case of Pioneer Urban Land and Infrastructure Ltd. and Ors. v/s Union of India and Ors.,in which the Hon’ble Supreme Court had treated the homebuyers as unsecured debenture holders and therefore they should be treated as financial creditors under Section 7 of the IBC. The Hon’ble Supreme Court had stated that “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.” Therefore, the amendment through the ordinance has taken away the benefits which the Code wanted to provide to the homebuyers.

It has been contended by the petitioners that the homebuyers have been affected adversely by the retrospective application as the ordinance states that pending CIRP applications which have not been admitted by the adjudicating authority shall be amended according to the new amendments. It has been stated in the case of Commissioner of Income Tax, Orissa v. Dhadi Sahu, that "it was true that no litigant had any vested right in the matter of procedural law, but where the question is of the change of 'forum', it ceases to be a question of procedure only, with reference to pending matter". But, in the case of Videocon International Limited v. Securities and Exchange Board of India, it was held that in matters already pending before the court are not affected by the change in the forum unless and until such intentions have been clearly communicated by the statute by incorporating a provision of change-over proceedings from the court where they are pending in the court which now has the jurisdiction to try such cases. But it is not to be forgotten that the change in forum is a matter of substantive right and not a procedural matter. Therefore, such application of change in forum comes with restrictions. The Hon’ble Supreme Court in the case of Securities and Exchange Board of India v. Classic Credit has reiterated the fact that amended provisions will not be having retrospective applicability in cases where the claim or substantive right has already been filed by the claimant. By applying the case laws to the present scenario, it is seen that there is complete injustice to the homebuyers who have filed for the CIRP process against the Corporate Debtor before the amendments came into force as they are being denied the benefit that the IBC is providing to them. It is also to be noted that such homebuyers, instead of going through the CIRP process have to file criminal proceedings against the Real Estate Companies for fraud which will make the process time consuming and ineffective against the defaulters. Therefore, such adverse retrospective application of change in forum must be declared unconstitutional by the Hon’ble Supreme Court.

CONCLUSION

It is felt that the IBC (Amendment) Ordinance, 2019 has been passed hurriedly and without proper consultation. It needs to be understood that if a creditor whose due amount is more than Rs. 1 lakh is allowed to file CIRP against the Corporate Debtor, then why are the homebuyers are being segregated from availing this benefit. There have been several apprehensions that many big builders or real estate developers had been lobbying with the government for enacting provisions for minimum threshold for homebuyers to approach the adjudicating authority, thus denying the homebuyers to get easy access to be remedied and get back their rightful dues. After looking at several cases and analyzing the provisions, it can be rightfully said that the IBC (Amendment) Ordinance, 2019 violates article 14 of the Indian Constitution as it wrongfully takes the right of the homebuyers and deny the equality of right to the allottees of real estate project for pursuing their remedy under IBC. Currently, the Supreme Court has provided partial relief to the Homebuyers by stating that the application of the proviso 3 of section 3 of the IBC amendment shall not be applicable on the petitions that have already been filed before the incorporation of the amendment.