IBC Amendments, 2020: Detrimental to the Interests of Homebuyers

The Author is Aakash Kumar pursuing B.A. LL.B. (Hons.) from Dr. Ram Manohar Lohiya National Law University, Lucknow. He is currently in 4th year of study and have keen interest in researching.

Since its enactment, Insolvency and Bankruptcy Code, 2016 has gone through many amendments. Before, the Code was enacted, Homebuyers came under the ambit of Consumers under the Consumer Protection Act, 1986. They had to approach Consumer Forum for seeking redressal to their grievances due to which they had to go through long lasting litigation. But the Government in order to provide robust mechanism for addressing the homebuyers’ grievances introduced Real Estate (Regulation and Regulation) Act, 2016 on 25th March, 2016 which aims to regulate and promote real estate sector and safeguards the interests of Homebuyers.

Later, on 28th May, 2016 Insolvency and Bankruptcy Code was passed with the aim of reducing the NPAs in India and time bound restructure of Companies. Previously, homebuyers were entitled the status of Operational Creditors due to which they were not allowed representation in Committee of Creditors and during the liquidation of Corporate Debtor, they were last in the hierarchy of realisation of Debt. But this problem was resolved after the Ordinance was issued on 6th June 2018, by President Ramnath Kovind, providing the status of Financial Creditors to homebuyers under the Code.

The ordinance was then challenged in Supreme Court in the matter of Pioneer Urban Land and Infrastructure Limited and Anr. v. Union of India & Ors. on the ground that since RERA provides mechanism for solving the problem faced by homebuyers then there was no need for such an ordinance as this will be violative of Article 14 since, unequals are treated equally. But Hon’ble Apex Court upheld the validity of the ordinance held that Ordinance does not violate Article 14 and said that whenever, RERA and IBC will conflict then by virtue of Section 238 IBC will Prevail over RERA.

Government introduced IBC amendment Bill, 2020 in house on 12th December 2019, that is passed by the Lok Sabha on 6th March, 2020 and Rajya Sabha on 12th March, 2020 with the objective of preventing abuse of the code. Government amended Section 7 that provides for procedure of Initiation of Corporate Insolvency Resolution Process by Financial Creditor. Post Amendment, three provisions have been added to Section 7(1). The Proviso to the section states that application for CIRP has to be filed jointly by financial creditors who are real estate allottees not less than one hundred of such creditors or not less than 10 percent of the total number of such allottees under the same real estate project. This amendment by setting a threshold for homebuyers to approach NCLT is going to detriment the interest of the homebuyers, as it is not practically possible that jointly, different persons seek the same relief against a real estate company for e.g. some may seek the relief of refund while the other person may seek the relief of possession. This will result into treating unequals equally which is unconstitutional. The Amendment allows other class of financial creditors to file application for CIRP by itself or jointly thereby violating Article 14 of the Constitution. By setting this threshold homebuyers and Operational Creditors are placed on equal footing.

Also, the third proviso to Section 7 states that applications that were initiated before the implementation of the Amended Code should be modified as per the New Code within thirty days else the application will be withdrawn which is unjust and unreasonable as it is against interest of homebuyers. The amendment is clearly violating the principles of natural justice as for seeking the relief, joint application is to be filed and no individual can approach the NCLT which is severe blow to right to exercise justice under article 14. Also, the Amended Code has been given the retrospective effect, so for modifying the application for initiating CIRP the real estate allottee have to pass the minimum threshold which is not practical in the light that no information of Real Estate allottees is available in the public domain as it will then lead to violation of  Article 21. The Amendment clearly is against the word and spirit of the Code.

For initiation of CIRP by small individuals, the threshold limit to trigger the code is purposely kept low[i] i.e. only One Lakh Rupees because it is an undenied fact that homebuyers invest their lifetime money for purchasing home from real estate companies, therefore, the real estate business for its survival in India has to be answerable to the public and has necessarily to uphold the trust reposed in builders/promoters.[ii]

Concluding Remarks:
Author is of the opinion that a long road is yet to be walked by our nation for attaining the goal of becoming one of the finest Insolvency Regimes, as IBC since its enactment has gone through many amendments. The Code is hastily drafted and lacks proper teething due to which recently the Bill has been amended for the fourth time and still many areas of Insolvency law are untouched. Also, Government rather than working on the Development and Infrastructure of NCLTs which has been a very old problem in India has introduced amendment that will outcast the right of Homebuyers.

The objective of this amendment is to prevent the abuse of the Code but the amendment is most likely to increase abuse of the Code as there are chances that Homebuyers get suppressed by Real Estate Companies/Builders.

[i] Sarika Somvanshi v. R.S. Stones Private Limited MANU/NC/4687/2019
[ii] Vipras Adz and Ors. v. Sundaresan Nagarjan P Dot G Constructions Pvt. Ltd. And Others. MANU/NC/13317/2019