‘Tests for non-arbitrariness have to be passed by the 2019 Ordinance.’


New Delhi: In a petition filed by 11 homebuyers of 11 different projects, the Supreme Court intervened by issuing notice to the government against the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 which amends Section 7 of the Insolvency and Bankruptcy Code, 2016 for homebuyers whereby homebuyers and other class of creditors can initiate an action against a defaulter or corporate debtor and approach the National Company Law Tribunal (NCLT) for liquidation process only if they are either 100 in number or 10% of the total allottees under that project (whichever is lesser). These amendments were to apply retrospectively. The matter was heard by Justice Rohinton Nariman and Justice S. Ravindar Bhat.

A portion of the plea reads: “The said Ordinance is completely against the fundamental rights guaranteed to the Homebuyers (Financial Creditors) under Article 14 and 21 of the Constitution of India. The Union of India has brought the Ordinance with absolute discrimination by putting a precondition/threshold in the form of minimum number of allottees of a particular project required for filing an application for triggering the code under Section 7 of the IBC, which is not applicable to other financial creditors under IBC.”

A couple of Constitution experts called the Ordinance a “travesty of justice” for homebuyers. Speaking to The Sunday Guardian, Vivek Narayan Sharma, Joint Secretary of Supreme Court Advocates on Record Association, said, “Though the Supreme Court has put an umbrella over the application of this amendment for the time being, the matter is still sub-judice and requires consideration. Legally speaking, the government can bring any legislation, but the same must pass the tests of non-arbitrariness and intelligent differentia. The amendment to Section 7 of IBC by way of recent introduction of provisos providing qualification to homebuyers shall have to pass muster of these tests.”

The Ordinance is contrary to the well-settled principle as laid down in the Pioneer Urban Land and Infrastructure Limited & Anr. vs Union of India (W.P.(C) No. 43 of 2019 decided on 09.08.2019) and has rendered the said judgment ineffective, the plea added. Further, the retrospective effect of the Ordinance has made all the petitions infructuous as in absence of any public data being available, such a threshold is almost impossible to meet.

Comparing the situation arising in Pioneers Urban Land case with the situation at hand, it seems that the Ordinance is contrary to the principle laid down in the Pioneer case. And yet, the tests for non-arbitrariness and intelligible differentia shall have to be passed by the 2019 Ordinance. “The Pioneer Urban Land case decided by a three-judge Bench headed by Justice RF Nariman was a beautiful depiction of the law as it should be. In short, if I have to say, this was a case where the challenge was brought by a builder, developer against the amendment of the IBC, 2016 whereby an explanation was added in Section 5(8)(f) to clarify that allottees i.e. homebuyers, are included within the ambit of the said section. It was declared by the Supreme Court that such an amendment was only clarificatory and allottees were included in the said section from the very beginning itself. The three-judge Bench in the Pioneer Judgement also held that Real Estate (Regulation and Development) Act (RERA) is to be read harmoniously with the IBC, and in the situation of conflict between these two legislations, IBC would prevail over RERA. This judgment also held that remedies under Consumer Act, RERA and IBC are concurrent,” added the Constitution expert. 

Following the hearing, the Supreme Court maintained that till further hearing, the NCLT cannot reject the applications of the homebuyers for non-compliance of the new amendment brought in by the government, introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code, 2016.

Speaking to The Sunday Guardian, Aditya Parolia, partner at PSP Legal, Advocates & Solicitors, said, “Under the Ordinance, there was a clause which says all matters will be dismissed automatically within 30 days if they don’t meet the criteria. This has also been put on hold. Now the NCLT has to maintain status quo with respect to pending applications of the
homebuyers and investors filed against defaulting developers.”

“It is sad that instead of trying to save the homebuyers, the government has come up with something which will protect the defaulters. The consumer courts are not working, even the National Consumer Commission has choked up now; it gives dates after months, years…IBC itself is a very defective piece of legislation. It does not really solve anything, it only aggravates the problem. Suppose a person approaches the NCLT for liquidation and the NCLT orders for liquidation, what is it that the person is going to get? Huge fees are cornered by the insolvency professionals, liquidators and lawyers and on top of that, the builders siphon a lot of funds to other projects. IBC, RERA all are providing post facto relief which is not comprehensive in nature,” Amit Khemka, a senior lawyer said.

“How can a person gather 100 people to approach the NCLT? In a project of 100 flats, gathering even 10 allottees to appoint the same lawyer and follow the same strategy is absolutely ridiculous. I am happy that the Supreme Court has intervened and issued notice, but should also hurry up and decide quickly. Unfortunately, our law permits, but unfinished properties should not be sold to the buyers. It is like building castles in the air,” Khemka added. Parolia mentioned that the next date of hearing is on 28 February.