THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2019- A SET BACK TO HOME BUYERS

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The Ordinance amends the Insolvency and Bankruptcy Code, 2016. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt. The Code provides a time-bound process for resolving insolvency.
With regard to corporate debtors, the Code defines two types of creditors: (i) financial creditors, who have extended a loan or financial credit to the debtor, and (ii) operational creditors, who have provided goods or services to the debtor, the payment for which is due. Financial creditors could be secured or unsecured. Secured creditors are those whose loans are backed by collateral (security).

BACKGROUND

THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT), 2018

The Insolvency Law Committee (2017) had noted that the amount paid by allottees under a real estate project is a means of raising finance for the project, and hence would classify as financial debt. It had also noted that, in certain cases, allottees provide more money towards a real estate project than banks. The Ordinance provided that the amount raised from allottees during the sale of a real estate project would have the commercial effect of a borrowing, and therefore be considered as a financial debt for the real estate company (or the debtor).

So, the Code defined a financial creditor as anyone who has extended any kind of loan or financial credit to the debtor.
The Ordinance clarified that an allottee under a real estate project (a buyer of an under-construction residential or commercial property) will be considered as a financial creditor, as the amount raised from allottees for financing a real estate project has the commercial effect of a borrowing.
Hence, in clause (8) of Section 5, in sub-clause (f), the following Explanation was inserted, namely: —
“Explanation.—For the purposes of this sub-clause,—(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and(zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016;”
Section 5(8) defines ‘financial debt’ as a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes
(f) any amount raised under any other transaction, including any forwardsale or purchase agreement, having the commercial effect of a borrowing

Landmark judgment of Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors. [WP (C) No. 43/2019]
A huge challenge was mounted by the developers vide several writ petitions against the amendments brought about to the Code vide the Insolvency and Bankruptcy Code (Second Amendment), 2018 by virtue of which allottees of real estate projects were deemed to be ‘Financial Creditors under’ the IBC.
The Court while dismissing the writ petitions filed by the developers upheld the constitutional validity of the amendment by virtue of which ‘Allottees’ were brought within the ambit of Financial Creditors and further held as under:
1. The amendment act does not infringe Articles 14, 19(1)(g) read with Article 19(6) or 300-A of the Constitution of India.
2. Remedies to the Allottees under various statutes such as the RERA, the Consumer protection act, and the IBA are concurrent.
3. In case of conflict between the RERA and the IBC, the IBC would prevail.
4. Allottees were always subsumed within the definition of section 5(8)(f) and the explanation and deeming fiction added by the Amendment act was only clarificatory in nature.
Hence, a number of petitions were admitted against the developer’s initiating the Corporate Insolvency process against them. In some cases, otherwise fairly well functioning real estate companies were pulled into insolvency proceedings by single homebuyers who wanted to claim refund. Thus, creating an unhealthy environment for potential buyers and real estate market.
To counter measure the same Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated thereby creating a minimum threshold for initiating resolution process against developers of real estate project.
Now under the Code, a financial creditor (either by itself or jointly with other financial creditors) may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. The Ordinance amends this to provide minimum thresholds for certain classes of financial creditors for initiating the insolvency resolution process.
In case of real estate projects, if an allottee (person to whom a plot, apartment, or building has been allotted or sold) wants to initiate the resolution process, the application should be filed jointly by at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less.
For other financial creditors, where the debt owed is either: (i) in the form of securities or deposits, or (ii) to a class of creditors, the application should be filed jointly by at least 100 creditors in the same class, or 10% of the total number of such creditors in the same class, whichever is less.
In addition, it has also been provided as far as the creditors whose applications for initiating resolution process against the developers have still not been admitted would be provided a period of 30 days to amend their petition to as per the current amendment otherwise, after the lapse of the said period the applications would be deemed to be withdrawn before admission.
Thus, bringing a substantial change to the advantage provided to the homebuyers vide the previous amendments. This Ordinance is a serious set back to the home buyers while it gives an unfair advantage to already defaulting builder. Undoubtedly, situation prior to amendment was that a single buyer could initiate the process of insolvency of a builder but the legislature must also consider several thousands of home buyers have booked apartments and have undertaken huge loan to fund the same. The buyer is suffering double jeopardy firstly it is not getting the booked flat at all, secondly, it has to repay loans for an amount which it never utilized for his benefit.