Homebuyers move SC against introduction of minimum threshold for initiation of insolvency proceedings against real-estate developers

The petitions are expected to come for hearing in the coming days.
Supreme Court
Supreme Court

A batch of petitions have been filed before the Supreme Court challenging the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 insofar as it amends Section 7 of the Insolvency and Bankruptcy Code, 2016 for homebuyers.

The Ordinance, which was promulgated on December 28, 2019, had introduced a minimum threshold of at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less, for moving a joint plea seeking initiation of corporate insolvency resolution process against a real-estate developer.

The petitions by several homebuyers have thus claimed that the Ordinance is in violation of Article 14 and Article 21 of the Constitution of India.

The petitioners have also contended that the Ordinance is in contravention of the Supreme Court's judgement in Pioneer Urban Land and Infrastructure Ltd vs Union of India &Ors (2019) which upheld the right of the allottees to initiate Corporate Insolvency Resolution Process in terms of Section 7 IBC read with Section 5(8)(f) of IBC.

The petitioners have also challenged the retrospective application of the Ordinance with respect to homebuyers' plea before the Tribunals.

The petitioner have, broadly, raised the following concerns:

Sumita Saxena vs UOI & Ors

The petition filed through Advocate Misha Rohatgi Mohta has challenged the insertion of the second and the third proviso to Section 7 IBC.

The petition submits that the Ordinance is arbitrary, malafide and only deprives the Petitioner of his statutory rights under IBC. It is stated that the Ordinance is an attempt to overreach the judgment of the Supreme Court in Pioneer Urban Land and Infrastructure.

The petitioner has feared that the due to the "unreasonable ceiling" introduced in the form of second and third proviso of Section 7, there would be further delays in grant of possession of units and the homebuyers would be left to the mercy of others to find similarly situated persons to vindicate their individual right under IBC.

The petition reads,

"The Amendment Ordinance is arbitrary inasmuch as by requiring a minimum of 100 allotees or 10 per cent of total allotees in a real estate project to jointly file a petition, it places unequals as equals in that even amongst the allotees, different parties may seek different reliefs i.e some may seek refund while others may seek possession. Thus, those seeking refund may not want to initiate IBC at all since their remedy would lie under the provisions of RERA. On the other hand, allotees seeking possession who may be fewer in number would not be able to initiate an application under Section 7 IBC after the Amendment Ordinance since they may not meet the threshold criterion."

The Petitioner has also challenged the retrospective application of the threshold on pending applications under IBC, terming it as manifestly arbitrary, unjust and unfair.

"..That as the third proviso to Section 7 of the Amendment Ordinance mandates the Petitioner and similarly situated individual real estate buyers who have filed an application/ petition under Section 7 of the Code to comply with the Amendment Ordinance within a period of 30 days lest it would be deemed to be withdrawn it is manifestly arbitrary, unjust and unfair."

Atul Sharma & Ors vs UOI & Ors

In the petition filed through Advocate Mayank Pandey, it is contended that the Ordinance is manifestly arbitrary, disproportionate, and unreasonable.

"The State through the Ordinance has denied equality of right to the allottees of real estate project for pursuing their remedy under IBC. While any other financial creditor can either by itself or jointly file an application for initiating corporate insolvency resolution process under the IBC, the allottees of a real estate project can only file a joint application..The Ordinance treats equals unequally without any reasonable basis."

It is added that the Ordinance, in the most arbitrary and unfair manner, has reduced the allottees of real estate project to a status lower than that of an operational creditor under IBC.

The petitioners thus assert that the Ordinance manifestly harms the interest of the home-buyers as it provides for an extremely cumbersome and tedious process for filing an application for initiating corporate insolvency resolution process by allottees of real estate project.

".. such an unreasonable and irrational restriction as per the ordinance over aggrieved litigants to approach Court is purely against the principle of Natural Justice and is a severe blow to the Fundamental of transparency and right to Exercise Justice as enshrined under article 14 of Constitution of India. That in short the ordinance has changed the meaning of justice for the home buyers across the country."

Tarun Ahuja & Ors vs UOI & Ors

In the petition filed through Advocate Gaurav Goel, real estate allottees of 11 different projects have contended that promulgation of the Ordinance, specifically Section 3 which amends Section 7 IBC, was manifestly arbitrary, patently illegal and a result of absolute colorable exercise of the powers vested with the Executive.

It is further contended that Ordinance effectively renders the Real Estate Allottees, who are Financial Creditors under Section 5(8) IBC, remediless. It is added that the due to the Ordinance which is not applicable to other financial creditors under IBC, the petitioners and other homebuyers would now be subjected to "absolute discrimination".

Raising concerns of law of privacy under Article 21, the petitioners have claimed that the requirement of minimum number of allottees for Section 7 IBC application is "almost impossible and impractical".

"..the details of the allottees are never published on any website or public domain as the same is impermissible under the law to publish the details of the allottees in such public domain as the same would result in violation of their Right to Privacy as guaranteed under Article 21 of the Constitution of India. In the light of no availability of such information of all the allottees, information of all the allottees, the minimum number of allottees required to pass the threshold for filing an application under Section 7 of IBC is almost impossible and impractical."

The petitioners have added that the retrospective effect of the Ordinance is "totally against the spirit of IBC and public interest".

It is also asserted that the Ordinance goes against the purpose behind the Second Amendment to IBC which declared a Real Estate Allottee as a Financial Creditor under IBC.

The petitioners are being represented by Advocate Aditya Parolia, Piyush Singh and PSP Legal.

Manish Kumar vs UOI & Ors

The petition drafted by Advocate Akash Vajpai and filed through Advocate Vaibhav Manu Srivastav claims that IBC is a beneficial piece of Legislation and dissection of Financial Creditor by introduction of minimum threshold for homebuyers would hinder them from reaping the benefits available to others.

"This amounts to creation of a “class within a class” and is unconstitutional and manifestly arbitrary, violating Art. 14 of the Constitution... creation of a class within a class was unconstitutional and arbitrary, thus making it ultra vires the Constitution.", the petition reads.

It is added that the Ordinance was "brought in such a hurried manner" and "there appears to be a sinister move to over-turn a law" laid down by the Supreme Court.

The petitions are expected to come for hearing in the coming days.

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