# CHITRA SHARMA AND ORS v. UNION OF INDIA AND ORS

- **Citation:** [2018] 12 S.C.R. 1044
- **Court:** Supreme Court of India
- **Decided:** 2018-08-09
- **Bench:** Dipak Misra, A. M. Khanwilkar, Dr. D. Y. Chandrachud
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/chitra-sharma-and-ors-v-union-of-india-and-ors-32442
- **Pages:** 41

## Headnote

Insolvency and Bankruptcy Code, 2016 - ss.3(30), 3(31), 5(7),
5(8), 7, 17, 18, 20, 21(6) and 21(6A)(b) - JIL, a high-tech township
developer defaulted in repayment of its dues to IDBI bank - Bank
sought the initiation of a Corporate Insolvency Resolution Process
(CIRP) against JIL - For submission of claims, JIL separated home
buyers from financial and operational creditors - Writ Petition by
home buyers who pleaded that their interest was getting ignored as
only financial and operational creditors were recognized by CIRP
- They further pleaded for pro-rata disbursement of the amount
deposited by the JIL among buyers who sought a refund - Held:
Plea cannot be accepted - Firstly, during the pendency of the CIRP,
as a matter of law, it was impermissible for the Court to direct a
preferential payment to be made to a particular class of financial
creditors, whether secured or unsecured - Directing disbursement
of amount to home buyers who seek refund would be manifestly
improper and cause injustice to the secured creditors since it would
amount to a preferential disbursement to a class of creditors -
Secondly, only 8% of the home buyers have sought refund of their
monies, while 92% preferred possession of the homes which they
have purchased - Allowing a refund to one class of financial
creditors would not be in the overall interest of a composite plan
formulated under the provisions of the IBC - Thirdly, one of the
major reasons for the enactment of the IBC was to protect the interest
of lenders i.e. banks and financial institutions, who are answerable
to their stakeholders - Fourthly, the RBI constituted an Internal
Advisory Committee (IAC), which recommended to also initiate a
CIRP against JAL (the holding company of JIL) under the IBC -
Banking Regulation Act, 1949 - ss. 35AA and 35AB (enacted by
amendment 2017) - Constitution of India - Art.32.
 [2018] 12 S.C.R. 1044
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JIL, a high-tech township developer defaulted in
repayment of its dues to IDBI bank. Bank sought the initiation
of a Corporate Insolvency Resolution Process (CIRP) against
JIL. Pursuant thereto, a petition u/s.7 of the Act was filed against
the JIL by the bank before the National Company Law Tribunal
(NCLT). JIL called for submission of claims by creditors and
released a press note clarifying that home buyers were required
to fill a separate form as they could not be treated at par with
financial and operational creditors. Thereafter, proceedings
u/Art.32 were initiated to protect the interest of the home buyers.
Petitioners pleaded that CIRP was ignoring the interest of the
home buyers and was only recognizing financial and operational
creditors. The Court had directed JAL, the holding company of
JIL to deposit a sum of Rs.2,000/- crores. However, only Rs.750
crores were deposited. Home buyers sought interim directions
to facilitate a pro-rata disbursement of this amount among buyers
who sought a refund.
Disposing of the petitions, the Court
HELD: This Court is conscious of the fact that the claim of
the home buyers who seek a refund of monies deserves to be
considered with empathy. Yet, after due consideration to the plea
and on the balance, this Court is not inclined to accede to it for
more than one reason. Firstly, during the pendency of the
Corporate Insolvency Resolution Process (CIRP), it would as a
matter of law, be impermissible for the Court to direct a
preferential payment being made to a particular class of financial
creditors, whether secured or unsecured. For the present,
question as to whether the home buyers are unsecured creditors
or secured creditors is left open. Directing disbursement of the
amount of Rs 750 crores to the home buyers who seek refund
would be manifestly improper and cause injustice to the secured
creditors since it would amount to a preferential disbursement
to a class of creditors. Once recourse to the discipline of the
Insolvency and Bankruptcy Code, 2016 (IBC) is taken, it is
necessary

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[2018] 12 S.C.R.
CHITRA SHARMA AND ORS.
v.
UNION OF INDIA AND ORS.
(Writ Petition (Civil) No.744 of 2017)
AUGUST 09, 2018
[DIPAK MISRA, CJI, A. M. KHANWILKAR AND
 DR. D. Y. CHANDRACHUD, JJ.]
Insolvency and Bankruptcy Code, 2016 - ss.3(30), 3(31), 5(7),
5(8), 7, 17, 18, 20, 21(6) and 21(6A)(b) - JIL, a high-tech township
developer defaulted in repayment of its dues to IDBI bank - Bank
sought the initiation of a Corporate Insolvency Resolution Process
(CIRP) against JIL - For submission of claims, JIL separated home
buyers from financial and operational creditors - Writ Petition by
home buyers who pleaded that their interest was getting ignored as
only financial and operational creditors were recognized by CIRP
- They further pleaded for pro-rata disbursement of the amount
deposited by the JIL among buyers who sought a refund - Held:
Plea cannot be accepted - Firstly, during the pendency of the CIRP,
as a matter of law, it was impermissible for the Court to direct a
preferential payment to be made to a particular class of financial
creditors, whether secured or unsecured - Directing disbursement
of amount to home buyers who seek refund would be manifestly
improper and cause injustice to the secured creditors since it would
amount to a preferential disbursement to a class of creditors -
Secondly, only 8% of the home buyers have sought refund of their
monies, while 92% preferred possession of the homes which they
have purchased - Allowing a refund to one class of financial
creditors would not be in the overall interest of a composite plan
formulated under the provisions of the IBC - Thirdly, one of the
major reasons for the enactment of the IBC was to protect the interest
of lenders i.e. banks and financial institutions, who are answerable
to their stakeholders - Fourthly, the RBI constituted an Internal
Advisory Committee (IAC), which recommended to also initiate a
CIRP against JAL (the holding company of JIL) under the IBC -
Banking Regulation Act, 1949 - ss. 35AA and 35AB (enacted by
amendment 2017) - Constitution of India - Art.32.
 [2018] 12 S.C.R. 1044
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JIL, a high-tech township developer defaulted in
repayment of its dues to IDBI bank. Bank sought the initiation
of a Corporate Insolvency Resolution Process (CIRP) against
JIL. Pursuant thereto, a petition u/s.7 of the Act was filed against
the JIL by the bank before the National Company Law Tribunal
(NCLT). JIL called for submission of claims by creditors and
released a press note clarifying that home buyers were required
to fill a separate form as they could not be treated at par with
financial and operational creditors. Thereafter, proceedings
u/Art.32 were initiated to protect the interest of the home buyers.
Petitioners pleaded that CIRP was ignoring the interest of the
home buyers and was only recognizing financial and operational
creditors. The Court had directed JAL, the holding company of
JIL to deposit a sum of Rs.2,000/- crores. However, only Rs.750
crores were deposited. Home buyers sought interim directions
to facilitate a pro-rata disbursement of this amount among buyers
who sought a refund.
Disposing of the petitions, the Court
HELD: This Court is conscious of the fact that the claim of
the home buyers who seek a refund of monies deserves to be
considered with empathy. Yet, after due consideration to the plea
and on the balance, this Court is not inclined to accede to it for
more than one reason. Firstly, during the pendency of the
Corporate Insolvency Resolution Process (CIRP), it would as a
matter of law, be impermissible for the Court to direct a
preferential payment being made to a particular class of financial
creditors, whether secured or unsecured. For the present,
question as to whether the home buyers are unsecured creditors
or secured creditors is left open. Directing disbursement of the
amount of Rs 750 crores to the home buyers who seek refund
would be manifestly improper and cause injustice to the secured
creditors since it would amount to a preferential disbursement
to a class of creditors. Once recourse to the discipline of the
Insolvency and Bankruptcy Code, 2016 (IBC) is taken, it is
necessary that its statutory provisions be followed to facilitate
the conclusion of the resolution process. Secondly, the figures
made available presently, indicate that 8% of the home buyers
have sought a refund of their monies while 92% would evidently
CHITRA SHARMA AND ORS. v. UNION OF INDIA AND ORS.
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prefer possession of the homes which they have purchased. This
Court cannot be unmindful of the interests of 92% of the home
buyers many of whom would also have obtained loans to secure a
home. They would have a legitimate grievance if the corpus of
Rs 750 crores (together with accrued interest) is distributed to
the home buyers who seek a refund. The purpose of the process
envisaged by the IBC for the evaluation and approval of a
resolution plan is to form a composite approach to deal with the
financial situation of the corporate debtor. Allowing a refund to
one class of financial creditors will not be in the overall interest
of a composite plan being formulated under the provisions of the
IBC. Thirdly during the course of the hearing, the Court has
been apprised of the concerns of the secured creditors, chief
among them being the IDBI bank limited. In its submissions
before this Court, IDBI bank has emphasised that one of the
major reasons for the enactment of the IBC was to protect the
interest of lenders. The debt owing to the banks and financial
institutions has been secured by the assets of JIL, to protect
their interests. This debt originates in the public deposits of the
banks and financial institutions, who are answerable to their
stakeholders. Fourthly, the RBI has moved this Court for
permission to initiate an insolvency resolution process.
Parliament enacted the Banking Regulation (Amendment) Act
2017 by introducing Section 35 AA and Section 35 AB into the
Banking Regulation Act 1949. The amendment empowers the
Central government to authorise RBI to issue directions to any
banking company to initiate an insolvency resolution process in
respect of a default as understood under the IBC. Such an order
was issued by the Central government. The RBI constituted an
Internal Advisory Committee (IAC) consisting primarily of its
independent directors. The IAC took up for consideration
accounts which were classified either partly or wholly nonperforming from amongst the top 500 exposures in the banking
system. As a first step, the IAC recommended all such nonperforming asset accounts with fund and non-fund based
outstandings exceeding Rs 5,000 crores. The IAC has initially
taken up twelve accounts involving total exposure of Rs1,79,769
crores. JIL was one of the twelve accounts in respect of which
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directions have been issued to banks for initiating insolvency
resolution. Subsequently, the IAC recommended that in respect
of those accounts where 60% or more had been classified as
NPAs, banks may be directed to implement a viable resolution
plan, failing which the accounts may be directed for a reference
under the IBC. JAL was one such entity. No viable resolution
plan could be found as a result of which it is also required to be
referred for CIRP. RBI has carried out this exercise as a matter
of economic policy in its capacity as the prime banking institution
in the country, entrusted with a supervisory role, and the power
to issue binding directions. [Para 40] [1081-C-H; 1082-A-H]
2. JAL was classified under the SMA - II category
(demands overdue for more than 60 days) by banks and as an
NPA. RBI is right that any further delay in resolution would
adversely impact a viable resolution being found for JAL and
JIL. The facts which have emerged before the Court from the
application filed by the RBI clearly indicate the financial distress
of JAL and JIL. The apprehensions of the home-buyers in regard
to their financial incapacity is borne out by RBI, as a responsible
institution has urged before the Court. The IBC has been enacted
in the form of a comprehensive bankruptcy law and with a specific
legislative intent. With the amendment brought about by the
Ordinance promulgated in June 2018, the interests of the home
buyers have been sought to be safeguarded. Accordingly, the
request made on behalf of the RBI to allow it to follow the
recommendations of the IAC to initiate a CIRP against JAL under
the IBC is accepted. [Para 41] [1083-B-D]
M/s. Shantistar Builders v. Narayan Khimalal Totame
(1990) 1 SCC 520 ; R. K. Garg v Union of India
(1981) 4 SCC 675 : [1982] 1 SCR 947 ; Peerless
General Finance and Investment Co. Ltd. v RBI
(1992) 2 SCC 343 : [1992] 1 SCR 406 ; TN Generation
and Distribution Corpn. Ltd. v CSEPDI-Trishe
Consortium (2017) 4 SCC 318 : [2016] 7 SCR 495
- referred to.
CHITRA SHARMA AND ORS. v. UNION OF INDIA AND ORS.
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Case Law Reference
(1990) 1 SCC 520
 referred to
Para 25
[1982] 1 SCR 947
 referred to
Para 40
[1992] 1 SCR 406
 referred to
Para 40
[2016] 7 SCR 495
 referred to
Para 40
CIVIL ORIGINAL/APPELLATE JURISDICTION: Writ Petition
(Civil) No. 744 of 2017.
Under Article 32 of the Constitution of India
WITH
Writ Petition (Civil) Nos.782 and 783 of 2017, Special Leave
Petition (Civil) No. 24001 of 2017, Writ Petition (Civil) Nos. 803 and 805
of 2017, Special Leave Petition (Civil) No. 24002 of 2017, Writ Petition
(Civil) Nos.950 and 860 of 2017, Special Leave Petition (Civil) No. 36396
of 2017, Special Leave Petition (Civil) D. No. 33267 of 2017 and Writ
Petition (Civil) No. 511 of 2018.
Tushar Mehta, ASG, Ajit Kumar Sinha, Fali S. Nariman,
S. B. Upadhyay, Ms. Madhavi Divan, C. A. Sundaram, Colin Gonsalves,
Sidharth Luthra, Anand Grover, V. Giri, Ms. V. Mohana, Parag P. Tripathi,
Jayant Bhushan, Sr. Advs., Pawanshree Agrawal, (AC), S. K. Gokula
Krishnan, Karri Ventata Reddy, Ms. Revathy Raghava, Manoj Goel,
Shuvodeep Roy, Fuzail Ahmad Ayyub, Ashwarya Sinha, Ms. Priyanka
Sinha, Ms. Mohini Priya, Arun Monga, Ms. Divya Sharma, Suryajyoti
Singh Paul, Gopal Jha, Mehul M. Gupta, R. P. Gupta, Ms. Mohna,
Ms. Geetali Talukdar, Samarendra Nath Verma, Karunakar Mahalik,
Shovan Mishra, Kaushik Choudhury, Shantanu Sagar, Ms. Sujeeta
Srivastava, Ashok Kumar Jain, Pankaj Jain, Bijoy Kumar Jain, Bishwajit
Dubey, Ms. Srideepa Bhattacharyya, Manpreet Lamba (for M/s. Cyril
Amarchand Mangaldas), Sandeep Devashish Das, Anupam Lal Das,
Vishal Gupta, Anirudh Singh, Krishanu Barua, Subhash Sharma, Abhishek
Raj, Sumeet Sharma, Paras Chaudhary, Kabir Singh, Sidharth Agarwal,
Ms. Adishree, Ms. Swarupama Chaturvedi, B. N. Dubey, Sarvjit Pratap
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Singh, Karan Bhariok, Ratik Sharma, Akash Tyagi, M/s. Unuc Legal
Llp, Ajit Sharma, Bijoy Kumar Jain, Varinder Kumar Sharma, Syed Shahid
Rizvi, Harish V. Shankar, Mrs. Anil Katiyar, Mrs. Taruna Singh Gohil,
Amit Sharma, Naveen Kumar, Vishnu Sharma, Ms. Anupama Sharma,
Ms. Sonali Negi, Mohit Rai, Akhileshwar Jha, Mangaljit Mukherjee,
Mrs. Debarpita Basu Mukherjee, B. P. Yadav, Mrs. Sarla Chandra, Arun
K. Sinha, Ms. Prerna Mehta, Rohit Singh, Sachin Patil, Partha Sil,
Ms. Kavita Jha, Vaibhav Kulkarni, Udit Naresh, M. A. Krishna Moorthy,
K. K. Mohan, Raj Kishor Choudhary, Rajiv K. Virmani, Atul Malhotra,
Gaurav Jain, Yadav Narender Singh, Abhishek Singh, Mukesh Kumar
Verma, Ashok Mathur, R. Sudhindra, Saumya Mehrotra, Rabin Majumder,
Ms. Shashi Kiran, Satish Chandra, Manoj Jain, Sanjay Maurya, Anup
Jain, Abhishek Baid, Praneet Das, Sarthak Guru, Kedar Nath Tripathy,
T. Harish Kumar, Talha Abdul Rahman, Abhijat P. Medh, Ms. Sanya
Talwar, Rajat Navet, Pradeep Kumar Bakshi, Mukesh Kumar Maroria,
Ravindra Kumar, Pawan Upadhyay, Nishant Kumar, Ratik Sharma,
Ms. Sharmila Upadhyay, Ms. Madhusmita Bora, Pawan Kishore Singh,
Ram Krishna, Sandeep Bisht, Ranjan Kumar Pandey, Hitesh Kumar
Sharma, S. K. Rajora, Praveen Swarup, Shekhar Kumar, Ms. Supriya
Juneja, Bharat Monga, Balaji Srinivasan, Rajeev Kumar Bansal, Abhishek
Yadav, Amarjit Singh Bedi, Dr. Lalit Bhasin, Ms. Palak Chadha,
Ms. Shireen Shukla, Mudit Sharma, Raghavendra Mohan Bajaj,
Ms. Garima Bajaj, Nakul Dewan, Ejaz Maqbool, Kunwar Aditya Singh,
P. V. Dinesh, Ramakant Rai, Ms. Mehak Suri, Arjun Garg, Sarvam Ritam
Khare, Ms. Vrinda Kapoor, Md. Rashid Saeed, Ms. Manjeet Chawla,
Ms. Liz Mathew, Ms. Sujeeta Srivastava, Apoorv Shukla, Kunal Cheema,
Sudhir Naagar, Mrs. Gargi Khanna, Arun Aggarwal, Gaurav Agarwal,
Anindya Prasad Kumar, Ms. Tishampati Sen, Ms. Rashmi Nandakumar,
Pukhrambam Ramesh Kumar, Ms. Praveena Gautam, Neeraj Kumar
Gupta, Himanshu Shekhar, Dharmendra Kumar Sinha, Ms. Aparna Bhat,
Ms. Anne Mathew, Ms. Anannya Ghosh, Amit Pawan, Ambhoj Kumar
Sinha, Alok Shukla, Wajeeh Shafiq, Vikas Upadhyay, Vidit Monga, Jasbir
Singh Malik, Ms. Usha Nandini, Sushil Kumar Singh, Ms. Tasneem
Ahmadi, Sudhir Kumar Gupta, Abhinav Gupta, Ms. Mahima Rathi,
Subodh S. Patil, Umakant Mishra, Sibo Sankar Mishra, Shiv Sagar Tiwari,
Shishir Pinaki, Ms. Shashi Kiran, Ms. Priya Sharma, Prathvi Raj Chauhan,
Arjun Sain, Sanjay Kumar Dubey, Yunus Malik, Ms. Renu Verma, Anish
CHITRA SHARMA AND ORS. v. UNION OF INDIA AND ORS.
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Maheshwari, Ms. Farha Malik, Samir Malik, Ms. Ruchi Kohli, Sonam
Sharma, Ms. Rakhi Ray, Rajender Prasad, Rahul Narayan, Ms. Puja
Sharma, Ms. Garima Sharma, Mohit Chaudhary, Suchit Mohanty, Prakash
Ranjan Nayak, Niraj Gupta, Ms. Anshu C., Mukesh Jain, Md. Shahid
Anwar, Ms. Mona Dikshit, Ms. Yamini Dikshit, Mayank Pandey,
Purushottam Sharma Tripathi, Ravi Chandra Prakash, Mukesh Kumar
Singh, Ms. Vani Vyas, Ms. Sushama Singh, Mohit Koushik, Mr. Abhishek
Tripathi, M/s. Ravi Chandra Prakash & Co., Kaushik Choudhury, Girish
Chand Tyagi, Brijesh Tyagi, Lalit Chahar, Kailash Prashad Pandey,
Ms. Prerna Singh, Ravi Kishor, Niraj Singh, Guntur Prabhakar,
Ms. Geetanjali Mohan, Gaurav Kejriwal, Deepak Goel, Christopher
D'souza, Prabhat Rai, Prashant Tyagi, Braj Kishore Mishra, Binay Kumar
Das, Ms. Asha Jain Madan, Anil Nag, Arun Singh, Y. Lokesh, Anil Kumar
Tandale, Aneesh Mittal, Ms. Shreya Sharma, Amarjit Singh Bedi, Ajay
Marwah, Mool Singh, Anand, Abhijit Sengupta, Subhashis Biswas, Abhay
Kumar, Anivesh Bharadwaj, A. Lakshminarayanan, Vaibhav Kumar,
Ujjal Banerjee, Ms. Udita Singh, Somesh Chandra Jha, Shashank Shekhar
Singh, Sandeep Devashish Das, Ms. Surbhi Sharma, S. K. Bhattacharya,
L. K. Paonam, Mrs. Tomthinnganbi Koijam, Niraj Bobby Paonam, Rahul
Sharma, Santosh K. Sethi, Arjun Jaidka, Mithilesh Kumar Singh,
Krishna Kumar Singh, Ajay Jain, Pranay Jain, Jinendra Jain, I. C. Jain,
Ms. Aastha Chopra, Ajay Singh, Jay Bhati, Gagan Gupta, Saurabh Gupta,
Bhargava V. Desai, Ajay Sharma, Rajesh P., Sunil Malhotra, P. N. Puri,
Rajat Malhotra, Mrs. Reeta Dewan Puri, Chander Shekhar Ashri,
Ayush Sharma, Sandeep Devashish Das, Sahil Sethi, Shivam Sharma,
Ms. Astha Sharma, Syed Shahid Ansari Rizvi, Harish V. Shankar, Arvind
Kr. Sharma, Sumant Batra, Syed Sarfaraz Karim, Abhinav Shrivastava,
Rahul Guptak, R.P. Singh, Rachit Mittal, Ms. Tanvi Aggarwal, Ankit
Khera, Mrs. K. Enatoli Sema, Amit Kumar Singh, Ashutosh Dubey,
Sushil Pandey, Rajendra, Ms. Rashmi Dubey, Samarendra Nath Verma,
Anil Kr. Mishra, A. Rohen Singh, Naveen Kumar, Anil Kumar Mishra,
A. Rohen Singh, Randhin K. Singh, Naveen Kr., Ms. Kanika Sehgal,
Dr. Lalit Bhasin, Ms. Sureen Shukla, P. V. Yogeswaran, Vivek Sarin,
Aakarshan Aditya, Rashid Saeed, Lalit Chauhan, Ms. Sonal Gupta,
Ms. Aishwarya Dash, Saurabh Kirpal, Advs. for the
appearing parties.
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The Judgment of the Court was delivered by
DR. D. Y. CHANDRACHUD, J. 1. Permission to file the Special
Leave Petitions is granted.
2. These proceedings have been initiated under Article 32 of the
Constitution for protecting the interests of home buyers in projects floated
by Jaypee Infratech Limited1. JIL is a special purpose vehicle created
by its holding company, Jaiprakash Associates Limited2.
3. IDBI Bank Limited instituted a petition under Section 7 of the
Insolvency and Bankruptcy Code 20163against JIL4 before the National
Company Law Tribunal5 at its Bench at Allahabad. The bank sought the
initiation of a Corporate Insolvency Resolution Process6 against JIL.
JIL filed its objections opposing admission of the petition. However,
according to the petitioners, JIL withdrew its objections and furnished its
consent for a resolution plan under the provisions of the IBC. IDBI
Bank claimed that JIL had committed a default of Rs. 526.11 crores in
the repayment of its dues. On 9 August 2017, NCLT initiated the CIRP
in respect of JIL. An order of moratorium was issued under Section 14
by which the institution of suits and the continuation of pending
proceedings, including execution proceedings was prohibited. An Interim
Resolution Professional7 was appointed under the provisions of the IBC.
On 14 August 2017, JIL, in pursuance of the order of NCLT called for
submissions of claims by creditors: financial creditors in Form-C,
operational creditors in Form -B, workmen and employees in Form -E
and other creditors in Form -F. On 16 August 2017, the Insolvency and
Bankruptcy Board of India made an amendment to its regulations and
Regulation 9(a) was inserted to include claims by other creditors. On 18
August 2017, the Board released a press note clarifying that home buyers
could fill in Form -F as they could not be treated at par with financial and
operational creditors.
4. These proceedings were instituted for the following reliefs:
 (i) A declaration that Sections 6,7,10,14 and 53 of the Code are ultra
vires insofar as only financial or operational creditors are
recognized, disregarding other stakeholders such as the home
buyers;
1JIL
2JAL
3IBC
4 CP (IB) 77/ALB/2017)
5 NCLT
6CIRP
7IRP
CHITRA SHARMA AND ORS. v. UNION OF INDIA AND ORS.
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(ii) The order dated 9 August 2017 of the NCLT be set aside;
(iii) The Union of India be directed to notify under Section 14(3) that
the provisions for moratorium contained under Section 14(1)(a)
shall not apply to consumers and that the home buyers be allowed
to exercise the rights available to them under the Consumer
Protection Act 1986 and the Real Estate (Regulation and
Development) Act 2016;
(iv) A forensic audit of JIL and JAL be conducted for the period from
2009 to 2017; and
(v) A direction be issued to the Union of India to protect the interests
of home buyers in the larger public interest.
5. As the above narration indicates, the grievance with which this
Court was moved under Article 32 was that the CIRP ignores the interests
of vital stakeholders in building projects, chief among whom are individuals
who have invested their wealth in pursuit of the human desire to own a
home. The IBC, in the submission of the petitioners, recognized only
three categories or classes namely (i) corporate debtors; (ii) financial
creditors and (iii) operational creditors. Not being protected by the IBC,
the petitioners contended that the rights conferred upon them by special
enactments including the Consumer Protection Act 1986 and by RERA
could not be divested. Suspension of the right to seek redressal before
an adjudicatory forum under Section 14(1)(a) would, it was asserted,
leave the home buyers without a remedy. Section 238 of the IBC gives
it an overriding effect over other laws in existence.
6. The petition before this Court has grown in size to incorporate
as many as 646 persons who claim to be home buyers. Arrayed before
the Court as respondents to these proceedings, besides JIL, JAL and the
Union of India are statutory authorities (including the Reserve Bank of
India), banks and welfare associations representing home buyers. A large
number of intervention applications have been filed.
7. The home buyers invested in residential projects ("high-tech"
townships as they were described) proposed by JIL and JAL in the
National Capital Region. The townships were to be ready for possession
within thirty to thirty-six months of the booking by a prospective buyer.
Relying on the representations of the developers, individual purchasers
invested in the residential projects. A large number of them have obtained
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loans from financial institutions. As a result of the delay in handing over
possession, numerous flat buyers filed consumer complaints before the
State and National Consumer Disputes Redressal Commissions. In June
2017, RBI is stated to have published a list of the top 12 defaulters in the
country including JIL which was declared to be in default of an amount
approximately of Rs. 8,000 crores to its lenders.
8. This Court was moved in the exercise of its jurisdiction under
Article 32 to protect the interests of home buyers, who had been left in
the lurch. When the petition was instituted, they had no locus in the
CIRP. Liquidation would leave the home buyers to face an uncertain
future. The disposal of assets would, it is apprehended, deprive them of
their right to own a home. Faced with a situation of human distress,
occasioned by the failure of the developers to meet their contractual
obligations and a legal regime as it then stood under the IBC which
provided no solace to home buyers, this Court issued notice on 4
September 2017 in a batch of writ petitions. Proceedings before the
NCLT at Allahabad were directed to remain stayed until further orders.
The Court further directed that a copy of the proceedings be served on
the office of the learned Attorney General for India. Applications for
impleadment and intervention were allowed.
9. On 11 September 2017, IDBI Bank Limited file an application
for vacating the ad-interim order dated 4 September 2017. The Attorney
General submitted before this Court that the order of stay would result
in a consequence which was unintended: control of JIL would be restored
to the erstwhile management. Such a consequence would affect the
rights of creditors and of the consumers as well. In the meantime, as a
result of the ad-interim stay, the IRP had handed over records to JIL.
Counsel for the home buyers contended that if the order of stay was
being modified to enable the IRP to take back control, it was necessary
to have their representative on the Committee of Creditors8. The regime
of the Act did not at that stage include any representation for the home
buyers on the CoC.
10. Accordingly, on 11 September 2017, this Court modified its
earlier order dated 4 September 2017 in the following terms:
a) The IRP shall forthwith take over the Management of JIL.
The IRP shall formulate and submit an Interim Resolution Plan
8CoC
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within 45 days before this Court. The Interim Resolution Plan
shall make all necessary provisions to protect the interests of the
home buyers;
b) Mr.Shekhar Naphade, learned senior counsel along with
Ms.Shubhangi Tuli, Advocate-on-Record, shall participate in the
meetings of the Committee of Creditors under Section 21 of the
Insolvency and Bankruptcy Code, 2016 to espouse the cause of
the home buyers and protect their interests;
c) The Managing Director and the Directors of JIL and JAL shall
not leave India without the prior permission of this Court;
d) JAL which is not a party to the insolvency proceedings, shall
deposit a sum of Rs.2,000 crores (Rupees two thousand crores)
before this Court on or before 27.10.2017. For the said purpose, if
any assets or property of JAL have to be sold, that should be done
after obtaining prior approval of this Court. Any person who was
a Director or Managing Director of JIL or JAL on the date of the
institution of the insolvency proceedings against JIL as well as the
present Directors/Managing Director shall also not leave the
country without prior permission of this Court. The foregoing
restraint shall not apply to nominee Directors of lending institutions
(IDBI/ICICI/SBI);
e) All suits and proceeding instituted against JIL shall in terms of
Section 14(1)(a) remain stayed as we have directed the IRP to
remain in Management. Be it clarified that we have passed this
order keeping in view the provisions of the Act and also the interest
of the home buyers."
11. The above interim directions indicate that three significant
aspects were the foundation of the order:
First, following the discipline of the IBC, the IRP was permitted
to take over management of JIL and to proceed to formulate an interim
resolution plan within a stipulated period;
Second, the IRP was directed to ensure that necessary provisions
were made to protect the interests of home buyers. To facilitate the
views of the home buyers being placed before the CoC this Court
nominated a senior counsel practicing before this Court to participate in
those meetings under Section 21 of the IBC;
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Third, JAL as the holding company of JIL was directed to deposit
a sum of Rs 2,000 crores on or before 27 October 2017.
In formulating these directions, the Court initiated steps to protect
the interests of the home buyers. At that stage, it must be noted, the
CoC as constituted under Section 21 of the IBC did not include a
representative of the home buyers. Nor were the home buyers regarded
as financial creditors under the IBC. The mechanism evolved by the
Court was intended to provide a workable arrangement under the then
prevailing regime so that the interests of the home buyers would not be
ignored.
12. By an order dated 23 October 2017 leave was granted to the
IRP to file an action plan and an information memorandum in a sealed
cover before this Court.
13. JAL moved an application before this Court for vacating the
direction for deposit of Rs 2,000 crores or for a modification that would
enable JAL to transfer its rights under a concession agreement in respect
of the Yamuna Expressway (between NOIDA and Agra. This request
was seriously opposed by the Attorney General as well as by counsel
appearing on behalf of IDBI Bank and the Yamuna Expressway
Industrial Development Authority. Counsel for the IRP drew the attention
of the Court to the fact that the rights under the concession agreement
belong to JIL which was subject to proceedings under the IBC as a
result of which such a request for alienation could not be permitted. By
its order dated 25 October 2017, this Court declined to modify the direction
for deposit of an amount of Rs 2,000 crores. However, time to do so
was extended until 5 November 2017.
14. On 30 November 2017 this Court directed that the home buyers
may approach the amicus curiae9 appointed in the case. The amicus
curiae was to open a web portal on which details of the home buyers
would be uploaded. All directors were required to remain present in this
Court on the next date to disclose their personal assets on affidavit. The
directors were present before this Court on 22 November 2017 when a
statement was made on behalf of JAL of its readiness to deposit a sum
of Rs 275 crores. By its order dated 22 November 2017 this Court
permitted JAL to deposit a demand draft of Rs 275 crores during the
course of the day and directed that a further sum of Rs 150 crores be
deposited by 13 December 2017 and of Rs 125 crores by 31 December
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2017. A restraint was imposed on the alienation of the properties and
assets of the directors and their families. The earlier direction for the
deposit of Rs 2,000 crores was maintained. In pursuance of the order
dated 22 November 2017 an amount of Rs 150 crores was deposited, as
noticed in the order dated 15 December 2017.
15. On 10 January 2018 RBI moved an Interlocutory Application
before this Court seeking leave to move the NCLT against JAL under
the provisions of the IBC. While observing that the application filed by
the RBI would be considered at a later stage, this Court issued directions
to JAL to file details of its housing projects on affidavit. The amicus
curiae was permitted to open a separate web portal reflecting the details
of the home buyers of JAL.
16. When the proceedings were listed before this Court on 21
March 2018, JAL stated through its counsel that an amount of Rs 550
crores had been deposited with the Registry. Counsel for JAL stated
that only 8% of the home buyers are interested in seeking a refund while
others have expressed the desire to seek possession of their flats. The
Court indicated in its order that presently it was concerned with those
home buyers who sought a refund while the grievances of those who
wished to have possession of their flats would be considered at a
subsequent stage. Since the order for the deposit of Rs 2,000 crores
had not been complied with despite the end of the deadline under the
previous directions, the Court issued further directions. As agreed by
the Managing Director of JAL, an instalment of Rs 100 crores was to
be deposited by 15 April 2018 while a second instalment in the like amount
was directed to be deposited by 10 May 2018. The amicus curiae in
formed the Court that information gathered from the web portal indicated
that an amount of Rs 1300 crores was required to be refunded by way
of principal alone to the home buyers who were seeking refunds. The
amicus curiae was requested to submit a project-wise chart to the Court,
indicating the number of persons and the stage of completion. One of
the grievances of the home buyers was that the developer was making
demands towards monthly instalments despite being unable to complete
construction. Consequently, a direction was issued restraining the
developer from raising demands towards outstanding or future instalments
in respect of those flat buyers who had expressed a desire to obtain
refunds. By the order of this Court, the IRP was permitted to finalise
the resolution plan. However, the plan would, this Court directed, be
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implemented only with its leave. The NCLT was permitted to decide
the proceedings subject to the directions which were issued.
17. On 16 April 2018, the Court was apprised of the fact that JAL
had deposited the first instalment of Rs 100 crores. We may note at this
stage, that JAL had submitted before the Court that it should be permitted
to participate as one of the intending bidders in the resolution plan which
was being formulated by the IRP. Dealing with the submission, this
Court allowed JAL to submit a representation to the competent
authority, though with the clarification that the Court had not expressed
any opinion on that issue. This Court also directed that if the amount as
directed was not deposited within the time specified, steps would be
taken to attach the personal properties of the directors.
18. On 16 May 2018, the Court was apprised of the fact that an
amount of Rs 750 crores was deposited by JAL. A further direction
was issued for the deposit of Rs 1000 crores by 15 June 2018 subject to
which, a stay was granted of further proceedings only in so far as the
liquidation is concerned.
19. We may note at this stage that both in its earlier order dated
21 March 2018 as well as in the subsequent order dated 16 May 2018,
this Court had recorded the request of the home buyers for a pro-rata
disbursement of the amount which was deposited by JAL. No direction
for disbursement has been issued and the request was deferred for being
considered.
20. On 13 July 2018, certain proposals were made by JAL before
this Court for permission to alienate specific assets to secure compliance
with the interim directions of this Court for deposit of Rs 2,000 crores.
This proposal was seriously opposed by counsel for the petitioners and
home buyers, besides the financial institutions. Observing that the Court
was not inclined to entertain the proposals mooted by the JAL, the
proceedings were directed to be listed on 16 July 2018 "exclusively for
the purpose of considering the issue of the rights of the home buyers and
the capability of JAL and JIL to construct the projects."
21. Section 12(1) of the IBC envisages that the CIRP has to be
completed within a period of 180 days from the date of admission of the
application. However, a window is provided to the resolution professional
to seek an extension of a further period of 90 days upon a resolution
from the CoC. The extension can be provided only once.
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22. In the case of JIL, the period for completing the CIRP was to
end on 6 February 2018. Based on the approval of the CoC an extension
of 90 days was sought and granted by the NCLT by an order dated 12
February 2018. The extended period was to end on 12 May 2018. During
the course of the process, the IRP invited expressions of interest in
pursuance of which ten applicants including JAL submitted resolution
plans. The IRP had made it clear while inviting applications for
Expressions of Interest that the resolution plan to be submitted by the
applicants must protect the interests of home buyers and provide for
expeditious completion of the work of construction. The bid submitted
by JAL was found to be ineligible in view of the bar contained in Section
29 A of the IBC and was not opened. Of the resolution plans submitted
by nine resolution applicants, five were found not to be compliant with
the IBC and were not presented to the CoC for consideration. After
initial negotiations, a discussion took place with four resolution applicants,
these being:
(a) JSW Infrastructure Limited & IBC Knowledge Park Ltd.
(JSW-IBC);
(b) Adani Infrastructure and Developers Pvt. Ltd. (Adani);
(c) Lakshdeep investments & Finance Pvt. Ltd. along with
Sh.Sudhir Valia and relatives (Lakshdeep); and
(d) Cube Highways and Infrastructure Pte. Ltd., Kotak Investment
Advisors Ltd and I Squared Asia Advisors Pte Ltd (Cube-KotakI Squared).
Subsequently JSW was found to be ineligible under Section
29A.Hence, the resolution plans of the remaining three applicants were
taken up for consideration. Counsel for the IRP has drawn the attention
of the Court to the fact that none of the remaining three applicants
proposed to bring in any funds for refund of the amounts paid by the
home buyers to JIL. At a meeting held on 9 April 2018, the CoC decided
to shortlist the resolution plan of Lakshdeep for negotiation.
Lakshdeep submitted a resolution plan on 1 May 2018 and a meeting
of the CoC was scheduled on 7 May 2018 to consider it under Section
30(4). In the meantime, in pursuance of the liberty granted by this Court
on 16 April 2018,JAL submitted a representation on 6 May 2018. The
CoC considered the resolution plan of Lakshdeep and the representation
of JAL. JAL was permitted to present its plan before the CoC. The
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resolution plan submitted by JAL was rejected as a result of the statutory
bar contained in Section 29A and since it failed to convince the CoC of
its ability to tie up funds for construction. The CoC resolved to put the
resolution plan of Lakshdeep for voting on 8 May 2018. However,
when the plan was taken up, only 6 % of the votes cast were in favour
of Lakshdeep, as against a three-fourth majority which was then needed
under Section 30 (4) (the present requirement is of two-thirds, following
the amendment to the IBC which has taken effect from 6 June 2018).
Accordingly, the IRP informed the NCLT that no resolution plan was
approved by the CoC within a period of 270 days which came to an end
on 12 May 2018.
23. The total financial debt due to the financial creditors on the
date of the commencement of corporate insolvency (9 August 2017)
stood at Rs 9,984.70 crores.
24. Section 33(1) of the IBC postulates that liquidation follows
upon the rejection of a resolution plan:
"33. Initiation of liquidation.
(1) Where the Adjudicating Authority, -
(a) before the expiry of the insolvency resolution process period
or the maximum period permitted for completion of the corporate
insolvency resolution process under section 12 or the fast track
corporate insolvency resolution process under section 56, as the
case may be, does not receive a resolution plan under sub-section
(6) of section 30; or
(b) rejects the resolution plan under section 31 for the noncompliance of the requirements specified therein, it shall -
(i) pass an order requiring the corporate debtor to be liquidated in
the manner as laid down in this Chapter;
(ii) issue a public announcement stating that the corporate debtor
is in liquidation; and
(iii) require such order to be sent to the authority with which the
corporate debtor is registered. "
In terms of the provisions of Section 33(1), where the resolution
plan has been rejected under Section 31, the NCLT is required to pass
an order for the liquidation of the corporate debtor.
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25. During the course of the hearing, there has been a unanimity
of opinion that the liquidation of JIL will not subserve the interests of the
home buyers. The home buyers have made valuable investments by
contributing hard earned monies in the hope of obtaining a roof over
their heads. A home for the family is a basic human yearning. In diverse
contexts it has been held by this Court to be a part of the right to life, as
a fundamental constitutional guarantee10.All the counsel for the home
buyers have earnestly appealed to the Court to exercise its jurisdiction
to ensure complete justice to the home buyers instead of leaving them to
the mercy of a liquidation process. The Court appreciates the substance
in that plea, understanding at the same time, the need to abide by the
discipline of the law.
26. Now, it is in this background that it would be necessary for the
Court to understand and evaluate the provisions of the IBC which have
a bearing on the issue at hand. The IBC is intended to consolidate and
amend the laws relating to reorganisation and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound
manner to achieve a maximisation of the value of the assets of such
persons and to promote entrepreneurship, availability of credit and balance
the interests of all the stakeholders. The enactment of the IBC has
created a paradigm shift in the regulatory framework and processes
governing corporate insolvency. The IBC reflects a fundamental change
in the basic premise of a "debtor in possession" to a "creditor in
possession". The resolution process is market driven. Resolution
professionals are appointed or replaced by the CoC to conduct the entire
process within 180 days, which can be extended for a further period of
90 days. A moratorium would operate during the process. Failure of the
resolution process leads to liquidation. Primacy is given in the process
to commercial decisions. The success of the process is contingent upon
the competence of the IRP and the CoC. The responsibilities entrusted
to the IRP include managing the affairs of the corporate debtor, engaging
experts or professionals, constituting a CoC, preparation of an information
memorandum, determination of the liquidation value and enterprise value,
inviting expressions of interest, permitting resolution applicants to submit
plans which would be placed before the CoC where the applicant is
found to be eligible (Sections 17, 18, 20, 23, 25, 26, 29 and 30).