Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors

The Supreme Court of India, in the case of Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors., has upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. This amendment, which deems "allottees" as "financial creditors" under Section 5(8)(f) of the Code, marks a significant milestone.

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By answering the following questions:

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a)Whether the allottee would be considered a financial creditor or an operational creditor

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b) Will the RERA Act 2016 supersede the Insolvency Bankruptcy Code 2016?

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Background:

Several builders, developers, and real estate companies had challenged the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. This amendment introduced crucial changes, including two explanations in Clause (8)(f) of Section 5 of the Code.

According to the first explanation, any funds received from a buyer in a real estate project, known as an 'allottee', are considered borrowed funds. Consequently, the buyer is recognized as a financial creditor under Section 7 of the IBC.

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Impact:

This provision empowers financial creditors to initiate the corporate insolvency resolution process by filing an application in the National Company Law Tribunal (NCLT) against defaulting companies. Additionally, the amendment grants homebuyers, now classified as financial creditors, the right to representation in the Committee of Creditors through an authorized representative and to exercise voting rights.

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In essence, the Supreme Court's verdict affirms the legitimacy of including allottees as financial creditors under the Insolvency and Bankruptcy Code, providing them with substantial rights and avenues for redressal within the insolvency framework.

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Contentions The real estate companies argued against the classification of homebuyers as financial creditors primarily on the following grounds:

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1. Unreasonable Classification: They contended that treating homebuyers as financial creditors is an unreasonable classification, as it treats unequals equally and equals unequally. They argued that there is no intelligible differentia justifying this classification, thus violating Article 14 of the Constitution.

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2. Contrary to IBC Objectives: The companies claimed that such an amendment goes against the objectives of the Insolvency and Bankruptcy Code (IBC). They expressed concerns that the inclusion of homebuyers as financial creditors could potentially disrupt housing projects if a few disgruntled homebuyers trigger insolvency proceedings.

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3. Duplication of Remedies: They pointed out that homebuyers already have recourse to remedies under the Real Estate (Regulation and Development) Act (RERA) and consumer protection laws. They argued that allowing homebuyers to pursue remedies under the IBC would lead to duplication of proceedings and unnecessary complexity.

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4. Advance Payments not Financial Lending: The real estate companies contested the characterization of advance payments made by homebuyers as 'financial lending'. They argued that such payments are part of the property purchase process and should not be equated with financial transactions typically covered under the IBC.

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HELD

The Supreme Court examined the constitutional validity of an amendment related to real estate developers and homebuyers under the Insolvency and Bankruptcy Code (IBC). It emphasized the legislature's discretion in economic matters and considered recommendations from the Insolvency Committee Report, which highlighted the common occurrence of delays in real estate projects and the significant financial contributions made by homebuyers.

The Court clarified that homebuyers should be treated as financial creditors under the IBC, distinct from operational creditors, due to their vested interest in the financial health of the corporate debtor. It noted fundamental differences between homebuyers and operational creditors, emphasizing the legislative focus on including real estate developers as financial debtors.

Furthermore, the Court affirmed the objective of categorizing debts into financial and operational categories under the IBC, asserting that real estate developers fit within the original intent of the Code as financial debtors. It equated homebuyers with other individual financial creditors like debenture holders and fixed deposit holders, reinforcing their right to be on the Committee of Creditors to safeguard their interests.

The Hon'ble Supreme Court concluded its judgment with the following key points:

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i. The Amendment Act to the Insolvency and Bankruptcy Code (IBC) does not violate Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

ii. The Real Estate (Regulation and Development) Act (RERA) is to be interpreted in harmony with the IBC, as amended by the Amendment Act. In case of a conflict, the IBC will prevail over RERA. Remedies available to allottees of flats/apartments are therefore concurrent, allowing them to seek recourse under the Consumer Protection Act, RERA, and the IBC.

iii. Section 5(8)(f) of the IBC, along with the explanation and deeming fiction added by the Amendment Act, clarifies that allottees of flats/apartments are covered under the definition of financial creditors.

In summary, this landmark judgment serves as a significant deterrent against fraudulent builders. The Supreme Court's validation of the constitutional validity of the IBC amendment provides relief to aggrieved homebuyers, allowing them to pursue remedies under the Code more efficiently. This decision also implies that proceedings stayed in the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) will resume, offering hope for homebuyers awaiting resolution of their disputes and delayed possessions.

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