2019 (8) TMI 532 - SC - IBC

Insolvency and Bankruptcy Code amendments upheld, real estate allottees recognized as financial creditors with concurrent remedies

The SC upheld constitutional validity of amendments to the Insolvency and Bankruptcy Code, 2016, deeming real estate project allottees as financial ... Deeming fiction - financial creditor - financial debt - commercial effect of a borrowing - authorised representative on the Committee of Creditors - concurrent remedies (RERA and IBC) - harmonious construction of statutes - presumption of constitutionality of economic legislationDeeming fiction - financial creditor - financial debt - commercial effect of a borrowing - Whether amounts paid by allottees under real estate projects are subsumed within the definition of 'financial debt' and whether the Explanation to Section 5(8)(f) is constitutionally valid or merely clarificatory - HELD THAT: - The Court held that Section 5(8)(f) is a residuary, 'catch-all' provision capable of covering transactions that have the commercial effect of a borrowing. Payments by allottees - instalments/advances made for construction of a future asset, used to finance the project and entailing consideration for the time value of money - fall within the ordinary meaning of amounts 'raised' under transactions having the commercial effect of a borrowing. The Explanation inserted by the Amendment Act, deeming amounts raised from an allottee under a real estate project to have the commercial effect of a borrowing, was therefore declaratory/clarificatory of a position that already obtained under the main provision and does not create a new legal species; the deeming fiction serves to put beyond doubt the legal position. The Court rejected arguments based on strict noscitur a sociis/eiusdem generis readings and on the contention that an explanation cannot enlarge the main provision, observing that the legislature may amend and clarify definitions and that residuary language was deliberately wide. The Amendment Act does not offend Articles 14, 19(1)(g) or 300 A. [Paras 67, 69, 84, 85, 86]Allottees/home buyers are financial creditors; the Explanation to Section 5(8)(f) is clarificatory and constitutionally valid.Authorised representative on the Committee of Creditors - collegiality of creditors - representation of numerous creditors - Constitutional validity and working of the amendments providing for authorised representatives (Section 21(6A) and Section 25A) to represent classes of financial creditors and the attendant voting mechanism - HELD THAT: - The Court upheld the machinery provisions for appointing authorised representatives for classes of financial creditors exceeding a threshold, and the duties/rights and voting arrangements contained in Section 25A and related Regulations. It accepted the legislative rationale - efficient representation of numerous small creditors (e.g., debenture-holders, fixed deposit-holders, allottees) and protection of the Committee of Creditors' functioning - and noted that implementation issues can be and are being addressed by regulations and subsequent legislative amendments (including the Amendment Bill provisions further clarifying voting by authorised representatives). The Court rejected contentions that heterogeneity of allottees or potential conflicting instructions renders the scheme arbitrary, observing that the statute and regulations provide mechanisms (and further parliamentary amendment) to aggregate voting instructions and that minor implementation difficulties do not render the provisions unconstitutional. [Paras 47, 48, 54, 55, 86]Sections 21(6A) and 25A and the corresponding regulations are constitutionally valid and fit for purpose; implementation issues do not invalidate the provisions.Concurrent remedies (RERA and IBC) - harmonious construction of statutes - presumption of constitutionality of economic legislation - Whether RERA, as a special enactment governing real estate, excludes or prevails over the Code (as amended) in disputes between allottees and developers - HELD THAT: - The Court held that RERA and the Code operate in different spheres and provide concurrent remedies. RERA grants project-specific, statutory protections and enforcement mechanisms for allottees; the Code provides an in-rem collective insolvency resolution mechanism focused on rehabilitation of the corporate debtor. Given Section 238 of the Code and the temporal sequence of enactment, the Court held that the Code (as amended) will prevail to the extent of any inconsistency, but that remedies under RERA remain available and are additional, not exclusive. The Court emphasised harmonious construction and noted that resolution plans under the Code must comply with applicable laws including RERA, so that the two regimes can co-exist and complement each other. [Paras 23, 24, 28, 29, 86]RERA and the Code are concurrent; in case of conflict the Code (as amended) prevails, but RERA remedies remain available and resolution plans must comply with RERA.Presumption of constitutionality of economic legislation - reading down - Whether the Amendment Act should be read down, given asserted risks of misuse, retrospective effect, summary admission and threat to management rights and fundamental freedoms - HELD THAT: - Applying settled principles of deference in economic legislation and considering the Insolvency Law Committee's factual findings about the real estate sector, the Court refused to read down the Amendment Act. It held that timelines for admission are directory rather than mandatory and that safeguards in the Code (including the ability of the corporate debtor to raise defences, the adjudicating authority's scrutiny, Section 65 for fraudulent invocation, and requirements that resolution plans comply with law) mitigate asserted risks. The Court found the legislative scheme rationally related to its objects and not manifestly arbitrary; the arguments for prospective application or thresholds were unnecessary given the statutory safeguards and the clear, unambiguous language of the amendments. Where implementation difficulties arise, they should be addressed by the legislature/regulator rather than by judicially rewriting unambiguous statutory text. [Paras 31, 50, 52, 56, 86]No reading down or prospective limitation is warranted; the Amendment Act as enacted is to be applied as valid law.Final Conclusion: The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 - including the Explanation to Section 5(8)(f) deeming amounts received from allottees to have the commercial effect of a borrowing, and the provisions for authorised representatives and their voting - is constitutionally valid. Allottees of real estate projects are financial creditors (a position clarified but not created by the explanation), RERA and the Code provide concurrent remedies with the Code prevailing in conflict, and implementation or administrative concerns do not invalidate the amendments. Directions were given for administrative compliance by States/Union Territories and for staffing of tribunals. Issues Involved:1. Constitutional validity of amendments to the Insolvency and Bankruptcy Code, 2016.2. Classification of allottees of real estate projects as financial creditors.3. Interpretation of Section 5(8)(f) of the Code.4. Harmonious construction of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Insolvency and Bankruptcy Code, 2016.5. Procedural aspects and machinery provisions under Sections 21(6A) and 25A of the Code.Issue-wise Detailed Analysis:1. Constitutional Validity of Amendments to the Insolvency and Bankruptcy Code, 2016:The amendments to the Code, which classify allottees of real estate projects as financial creditors, were challenged on the grounds of violating Articles 14, 19(1)(g), and 300-A of the Constitution. The court upheld the amendments, stating that the classification is based on intelligible differentia and has a rational nexus with the object sought to be achieved by the Code. The court emphasized that the legislature is allowed to experiment in economic matters and that the amendments aim to protect the interests of home buyers who finance real estate projects. The court also noted that the amendments are not arbitrary and do not infringe upon the fundamental rights of real estate developers.2. Classification of Allottees of Real Estate Projects as Financial Creditors:The court held that the classification of allottees as financial creditors is valid. It reasoned that allottees finance real estate projects by making advance payments, which have the commercial effect of a borrowing. The court distinguished between operational creditors and financial creditors, noting that operational creditors supply goods and services, whereas financial creditors provide finance. The court found that allottees are more akin to financial creditors as they are vitally concerned with the financial health of the corporate debtor to ensure the completion of the project.3. Interpretation of Section 5(8)(f) of the Code:The court interpreted Section 5(8)(f) of the Code, which defines 'financial debt,' to include amounts raised under any transaction having the commercial effect of a borrowing. The court held that the explanation added by the Amendment Act, which deems amounts raised from allottees as financial debt, is clarificatory in nature. It clarified that even without the explanation, amounts raised from allottees would fall within the definition of financial debt under Section 5(8)(f). The court emphasized that the definition of financial debt is broad and includes various forms of financial transactions, not limited to traditional loans.4. Harmonious Construction of RERA and the Insolvency and Bankruptcy Code, 2016:The court held that RERA and the Code operate in different spheres and provide concurrent remedies to allottees. While RERA aims to protect the interests of home buyers and ensure the timely completion of real estate projects, the Code focuses on the resolution of insolvency and financial distress of corporate debtors. The court stated that in case of a conflict, the Code will prevail over RERA. The remedies under RERA are additional and not exclusive, allowing allottees to seek relief under both statutes.5. Procedural Aspects and Machinery Provisions under Sections 21(6A) and 25A of the Code:The court addressed the procedural challenges to Sections 21(6A) and 25A, which provide for the representation of financial creditors, including allottees, in the Committee of Creditors (CoC). The court upheld these provisions, stating that they ensure adequate representation of allottees in the decision-making process. The court noted that the recent amendment to Section 25A, which allows the authorized representative to vote on behalf of all financial creditors based on the majority decision, addresses concerns about the practical implementation of these provisions. The court emphasized that the legislature is allowed to experiment and make necessary adjustments to the procedural aspects of the Code.Conclusion:The court concluded that the amendments to the Insolvency and Bankruptcy Code, 2016, are constitutionally valid and do not infringe upon the fundamental rights of real estate developers. The classification of allottees as financial creditors is justified, and the interpretation of Section 5(8)(f) includes amounts raised from allottees. The court also held that RERA and the Code provide concurrent remedies, and the procedural provisions under Sections 21(6A) and 25A ensure adequate representation of allottees in the CoC. The judgment directs states and union territories to establish the necessary authorities under RERA and emphasizes the need for sufficient members in the NCLT and NCLAT to handle the increased litigation.