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SC issues notice in Homebuyers' plea against minimum threshold for initiation of insolvency proceedings against developers
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SC issues notice in Homebuyers' plea against minimum threshold for initiation of insolvency proceedings against developers

Bar & Bench

The Supreme Court today issued notice in petitions 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.

Notice was issued to the Union of India by a Bench of Justice Rohinton Nariman and Justice Ravindra Bhat while also directing to maintain status quo in all pending applications before NCLT.

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 the corporate insolvency resolution process against a real estate developer.

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

The petitioners have also contended that the Ordinance is in contravention of the Supreme Court's judgment in Pioneer Urban Land and Infrastructure Ltd vs Union of India & Ors, which upheld the right of the allottees to initiate the 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 the homebuyers' plea before the Tribunals.

The petitioner have broadly raised the following concerns:

Manish Kumar vs UOI & Ors

The petition drafted by Advocate Akash Vajpai and filed through Advocate Vaibhav Manu Srivastav claims that the 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 overturn a law" laid down by the Supreme Court.

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 colourable 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 regarding the right to 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 the IBC which declared a Real Estate Allottee as a Financial Creditor under IBC.

The petitioners are being represented by Advocates Aditya Parolia and Piyush Singh of PSP Legal, Advocates & Solicitors.

Read Order

IBC Ordinance Notice Order.pdf