SC Upholds IBC Amendment Requiring Minimum 10% Home-buyers To Initiate Insolvency against Builder
After holding home-buyers as financial creditors as per the Insolvency and Bankruptcy Code (IBC), the Supreme Court on Tuesday accepted an amendment in the IBC as constitutionally valid, which requires no less than 100 or 10% home-buyers to initiate insolvency against builder or developer. Under the IBC amendment passed by the Parliament in March 2020, a single home-buyer is barred to approach the National Company Law Tribunal (NCLT) under Section 7 of the IBC.
There were petitions in SC challenging Section 3 of IBC which has placed differential conditions on home-buyers to initiate corporate insolvency and resolution process (CIRP) against builders. The amendment and subsequent ruling by the apex court limits the avenues for redress available to aggrieved home-buyers and also defeats the purpose of including home-buyers as financial creditors under IBC.
In its order the apex court says, "Sheer numbers of applications that would proliferate, combined with the likely results, cannot be brushed aside."
Section 3 of IBC allows home-buyers to seek CIRP process against builder only when 100 allottees or at least 10% of allottees make a joint application.
This means, home-buyers are now required to approach the NCLT with a joint application of at least 10% or 100 of the total home-buyers of a project. If the numbers of home-buyers are less than that, NCLT will dismiss their application ipso facto.
In other words, home-buyers can approach the NCLT against a builder or developer only with a joint application, similar to the provisions in the Companies Act, where certain actions against a company can be activated only by members representing not less than 100 members or members holding not less than 10% of the share capital.
According to a January 2020 report from the Mint
, a group of home-buyers have filed multiple writ petitions with the Supreme Court challenging the amendment in the IBC that placed a minimum threshold on the number of home-buyers. The writ petition has been filed on behalf of 11 home-buyers from Noida and Gurgaon. Another writ petition has been filed by Centrik Legalistic on behalf of five home-buyers.
Quoting Piyush Singh, partner at PSP Legal, a Delhi-based law firm, the newspaper says, “Bringing a threshold just for home-buyers is arbitrary while there is no threshold for any other financial or operational creditors. Even a single financial or operational creditor (other than home-buyer) can file an application against the company with NCLT for starting of the liquidation process."
Last year in March, the Insolvency and Bankruptcy Code (Amendment) Bill, 2020 was passed by the Parliament. At that time, Union finance minister (FM) Nirmala Sitharaman pointed out that government understands the difficulties being faced by the home-buyers. "We have shown clear, pro-active initiatives to sort out the cases which are lying incomplete. We are giving last-mile completion related funding through single window mechanism," she had said.
The minister had also said that the number of cases pertaining to concerns of home-buyers filed since inception (NCLT) was 2,454. "We are taking care of the interests of home-buyers," the minister had mentioned.
Later while announcing relief packages for COVID-19 pandemic, the FM increased the threshold for defaulting companies under the IBC to Rs1 crore from Rs1 lakh earlier.
Before the Supreme Court ruling in August 2019, home-buyers were treated as other creditors and they were not regarded as 'financial creditors' or as 'operational creditors', which restricted their ability to initiate insolvency proceedings under the IBC against a defaulting builder or developer.
In its August 2019 order, the apex court had upheld the government decision to grant home-buyers the status of financial creditors. The court had also upheld the IBC Amendment with certain safeguards.
The SC had also asked the government to adequately man the Real Estate (Regulation and Development) Act, 2016 (RERA) and National Company Law Tribunal (NCLT) saying, "IBC provisions should be read harmoniously with RERA. Every application pending before NCLT will be decided on their own merit with respect to this apex court judgement."