- Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) [1] has, since its inception, been surrounded by controversies, clarifications and amendments. One such controversy that arose is whether the home-buyers could be included as financial creditors for the purpose of the code. The home-buyers issue was first raised in the cases of Jaypee-Infratech and Amrapali [2]. In March 2018, the Court pronounced in Chitra Sharma v. Union of India[3] that the homebuyers were financial creditors with respect to the Act. In June 2018, the Government enacted The Second Amendment Act, 2018 [4] to the Code to clarify the position of law with regard to homebuyers by expressly including homebuyers under the purview of financial creditors under Section 3 sub-clause (ii). [5] The amendment led to an addition of an explanation clause to Section 5(8) (defines financial debt). The explanation, in effect, added to the definition of financial debt; any amount raised from an “allottees” for “real estate projects” [as defined in Real Estate (Regulation and Development) Act, 2016]to have the commercial effect of borrowing. Secondly, the above-mentioned amendment allowed appointing a representative in the Committee of Creditors (hereinafter COC) under Section 21(6A) in order to represent the class of homebuyers. [6] The above-mentioned representative was granted voting powers by virtue of Section 25A. [7] In 2019, the Amendment Act was challenged by a large group of builders in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. [8], in which the apex Court upheld the Amendment Act of the Government. The latest amendment to the Code has, vide section 3, refused to entertain individual claims. The law now requires that 10% or 100 homebuyers, whichever is less, from the same real estate project must be present for an application to the Company Courts.[9]
In this article, the author analyses the anomalies of including homebuyers as financial creditors through Article 14 of the Constitution.
A legislative measure to pass the judicial test of Article 14 must pass the following judicial tests:
- Reasonable Classification by Intelligible Differentia
- Rational Nexus to the object of the act
- Non-Arbitrariness
The three tests have been analysed hereinafter under the following heads:
- Conflicting Interests of Home-Buyers
Firstly, the judgment in Pioneer Urban Land (supra) assumes the fact that all home-buyers want the same remedy i.e. a refund of money. It is human-nature to want separate things from a property, which is why a home-buyer cannot constitute a homogenous class in itself represented by a single representative. It is argued that not every home-buyer wants refund of their money. Firstly, there is a class of home-buyers that want possession from the builder(s) of their home and secondly there may be homebuyers that are currently under litigation in either the Consumer Forum or the RERA Courts, irrespective of a consensus of 10% or 100 homebuyers, whichever is less, is achieved (as per the Amendment Act, 2019).
Read the full article on Manipal Law Review.