# PIONEER URBAN LAND AND INFRASTRUCTURE LIMITED & ANR v. UNION OF INDIA & ORS

- **Citation:** [2019] 10 S.C.R. 381
- **Court:** Supreme Court of India
- **Decided:** 2019-08-09
- **Bench:** R.F. Nariman, Sanjiv Khanna, Surya Kant
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/pioneer-urban-land-and-infrastructure-limited-anr-v-union-of-india-ors-32978
- **Pages:** 150

## Headnote

Insolvency and Bankruptcy Code, 2016:
ss. 5(8)(f), 21(6A)(b) and 25A - Amendments made to the Code
vide Amendment Act, which deem allottees of real estate projects to
be "financial creditors" so that they may initiate insolvency
proceedings u/s. 7 against the real estate developer and being
financial creditors, were entitled to be represented in the Committee
of Creditors by authorised representatives - Constitutional validity
of amendments made to the Code - Held: Constitutionality of the
Amendment Act is upheld - Amendment to the Code does not infringe
Arts. 14, 19(1)(g) r/w Art. 19(6), or 300-A - Constitution of India -
Arts. 14, 19(1)(g) r/w Art. 19(6), 300-A - Insolvency and Bankruptcy
Code (Second Amendment) Act, 2018.
s.7 - Amendment to the Code whereby home buyers categorized
as financial creditors under the Code - Reasons for amendment -
Held: Insolvency Law Committee found that delay in completion of
flats/apartments has become a common phenomenon, and amounts
raised from homebuyers contributes significantly to financing of
the construction of such flats/apartments - Thus, it was important,
to clarify that homebuyers are treated as financial creditors so that
they can trigger the Code u/s. 7 and have their rightful place in the
Committee of Creditors when it comes to making important decisions
as to execution of the real estate project in which homebuyers are
ultimately to be housed - Insolvency and Bankruptcy Code (Second
Amendment) Act, 2018.
Insolvency and Bankruptcy Code vis-à-vis Real Estate
(Regulation and Development) Act (RERA) - Held: Real Estate
(Regulation and Development) Act is to be read harmoniously with
the Code, as amended by the Amendment Act - In case of conflict,
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the Code will prevail over RERA - It cannot be said that RERA is a
special enactment which deals with real estate development projects
and must, thus, be given precedence over the Code, which is only a
general enactment dealing with insolvency generally - Parliament
was aware of RERA, and applied some of its definition provisions
so that they could apply when the Code is to be interpreted - RERA
is in addition to and not in derogation of the provisions of any
other law for the time being in force - Also the remedies under
RERA to allottees were intended to be additional and not exclusive
remedies - Code and RERA operate in completely different spheres
- Code deals with a proceeding in rem in which the focus is the
rehabilitation of the corporate debtor by means of a resolution plan
which puts the same or another management in the saddle, subject
to the provisions of the Code, whereas, RERA protects the interests
of the individual investor in real estate projects by requiring the
promoter to strictly adhere to its provisions - Real Estate (Regulation
and Development) Act, 2016.
ss. 5(7), 5(8) and 5(21) - Financial Creditors and Operational
Creditors - Explanation of - Held: Financial creditor is defined u/
s. 5(7) as a person to whom a financial debt is owed and a financial
debt is defined in s. 5(8) to mean a debt which is disbursed against
consideration for the time value of money - An operational creditor
means a person to whom an operational debt is owed and an
operational debt u/s. 5(21) means a claim in respect of provision of
goods or services - Financial creditor may trigger the Code either
by itself or jointly with other financial creditors or such persons as
may be notified by the Central Government when "default" occurs.
ss. 5(8)(f), 21(6A)(b), 25A - Plea that treating home buyers/
allottees to be financial creditor is violative of Arts. 14, 19(1)(g)
and Art. 300-A; that the amendment is discriminatory inasmuch as
it treats unequals equally, and equals unequally, having no intelligible
differentia; and that there is no nexus with the objects sought to be
achieved by the Code - Held: Amendment Act to the Code does not
infringe Arts 14, 19(1)

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PIONEER URBAN LAND AND INFRASTRUCTURE
LIMITED & ANR.
v.
UNION OF INDIA & ORS.
(Writ Petition (Civil) No. 43 of 2019)
AUGUST 09, 2019
[R.F. NARIMAN, SANJIV KHANNA AND SURYA KANT, JJ.]
Insolvency and Bankruptcy Code, 2016:
ss. 5(8)(f), 21(6A)(b) and 25A - Amendments made to the Code
vide Amendment Act, which deem allottees of real estate projects to
be "financial creditors" so that they may initiate insolvency
proceedings u/s. 7 against the real estate developer and being
financial creditors, were entitled to be represented in the Committee
of Creditors by authorised representatives - Constitutional validity
of amendments made to the Code - Held: Constitutionality of the
Amendment Act is upheld - Amendment to the Code does not infringe
Arts. 14, 19(1)(g) r/w Art. 19(6), or 300-A - Constitution of India -
Arts. 14, 19(1)(g) r/w Art. 19(6), 300-A - Insolvency and Bankruptcy
Code (Second Amendment) Act, 2018.
s.7 - Amendment to the Code whereby home buyers categorized
as financial creditors under the Code - Reasons for amendment -
Held: Insolvency Law Committee found that delay in completion of
flats/apartments has become a common phenomenon, and amounts
raised from homebuyers contributes significantly to financing of
the construction of such flats/apartments - Thus, it was important,
to clarify that homebuyers are treated as financial creditors so that
they can trigger the Code u/s. 7 and have their rightful place in the
Committee of Creditors when it comes to making important decisions
as to execution of the real estate project in which homebuyers are
ultimately to be housed - Insolvency and Bankruptcy Code (Second
Amendment) Act, 2018.
Insolvency and Bankruptcy Code vis-à-vis Real Estate
(Regulation and Development) Act (RERA) - Held: Real Estate
(Regulation and Development) Act is to be read harmoniously with
the Code, as amended by the Amendment Act - In case of conflict,
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the Code will prevail over RERA - It cannot be said that RERA is a
special enactment which deals with real estate development projects
and must, thus, be given precedence over the Code, which is only a
general enactment dealing with insolvency generally - Parliament
was aware of RERA, and applied some of its definition provisions
so that they could apply when the Code is to be interpreted - RERA
is in addition to and not in derogation of the provisions of any
other law for the time being in force - Also the remedies under
RERA to allottees were intended to be additional and not exclusive
remedies - Code and RERA operate in completely different spheres
- Code deals with a proceeding in rem in which the focus is the
rehabilitation of the corporate debtor by means of a resolution plan
which puts the same or another management in the saddle, subject
to the provisions of the Code, whereas, RERA protects the interests
of the individual investor in real estate projects by requiring the
promoter to strictly adhere to its provisions - Real Estate (Regulation
and Development) Act, 2016.
ss. 5(7), 5(8) and 5(21) - Financial Creditors and Operational
Creditors - Explanation of - Held: Financial creditor is defined u/
s. 5(7) as a person to whom a financial debt is owed and a financial
debt is defined in s. 5(8) to mean a debt which is disbursed against
consideration for the time value of money - An operational creditor
means a person to whom an operational debt is owed and an
operational debt u/s. 5(21) means a claim in respect of provision of
goods or services - Financial creditor may trigger the Code either
by itself or jointly with other financial creditors or such persons as
may be notified by the Central Government when "default" occurs.
ss. 5(8)(f), 21(6A)(b), 25A - Plea that treating home buyers/
allottees to be financial creditor is violative of Arts. 14, 19(1)(g)
and Art. 300-A; that the amendment is discriminatory inasmuch as
it treats unequals equally, and equals unequally, having no intelligible
differentia; and that there is no nexus with the objects sought to be
achieved by the Code - Held: Amendment Act to the Code does not
infringe Arts 14, 19(1)(g) rw Art. 19(6), or 300-A - Home buyers/
allottees give advance to the real estate developer and thereby
finance the real estate project at hand, are really financial creditors
- Objects of the Code are sub-served by treating allottees as financial
creditors - Code is, thus a beneficial legislation which can be
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invoked by unsecured creditors like allottees against the corporate
debtor so that a replaced management may then carry out the real
estate project as originally envisaged - It cannot be said that Art.
19(1)(g) has been infracted and not saved by Art. 19(6) as the
Amendment Act is made in public interest - There is no unreasonable
restriction on the petitioner's fundamental right u/Art. 19(1)(g) -
Also, there is no infraction of Art. 300-A as no person is deprived
of its property without authority of a constitutionally valid law -
Furthermore, it cannot be said that classifying real estate developers
is not founded upon an intelligible differentia which distinguishes
them from other operational creditors - Allottees, being individual
financial creditors like debenture holders and fixed deposit holders
and classified as such, show that they within the larger class of
financial creditors, there being no infraction of Art. 14 - Insolvency
and Bankruptcy Code (Second Amendment) Act, 2018 - Constitution
of India - Arts 14, 19(1)(g) rw Art 19(6), or 300-A.
s. 7 - Application u/s. 7 by allottee/home buyer - Effect of -
Held: Code is not meant to be a debt recovery mechanism - It is a
proceeding in rem which, after being triggered, goes completely
outside the control of the allottee who triggers it - Thus, any allottee/
home buyer who prefers an application u/s. 7 takes the risk of his
flat/apartment not being completed in the near future, in the event
of there being a breach on the part of the developer - Under the
Code, he may never get a refund of the entire principal, let alone
interest - After the petition is admitted u/s. 7, a resolution plan is
taken up, usually by another developer, who has to pass muster
under the Code and must further go through challenges before NCLT
and NCLAT before the new management can take over and either
complete construction, or pay out or refund amounts - Thus, given
the bona fides of the allottee who moves an application u/s. 7, it is
only such allottee who has completely lost faith in the management
of the real estate developer who would come before NCLT under
the Code.
ss. 21(6A) and 25A - Committee of creditors - Rights and
duties of authorized representatives of financial creditors -
Challenge to ss. 21(6A) and 25A - Held: Allottees may not be a
homogenous group, yet there are only two ways in which they can
vote on the Committee of Creditors, either to approve or to
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disapprove of a proposed resolution plan - Under s. 25A(3A) the
authorised representative now casts his vote on behalf of all
financial creditors that he represents - If a decision taken by a vote
of more than 50% of the voting share of the financial creditors that
he represents is that a particular plan be either accepted or rejected,
it is clear that the minority of those who vote, and all others, will
now be bound by this decision - Legislature must be given freedom
to experiment - Thus, any challenge to machinery provisions
contained in ss. 21(6A) and 25A cannot be accepted.
s. 5(8)(f) - Interpretation of - Plea that s. 5(8)(f), as it
originally stood, is an exhaustive provision which must be read
noscitur a sociis, and if so read, sub-clause (f) must take colour from
the other clauses of the provision; that an allottee under a real
estate project cannot fall within s. 5(8)(f), as it originally stood and
the explanation must then be read prospectively; that since s. 5(8)
is a "means and includes" definition clause, it is exhaustive , thus,
to then introduce by way of amendment something extra by means
of a deeming fiction is not permissible - Held: Section 5(8)(f) as it
originally appeared in the Code being a residuary provision, always
subsumed within it allottees of flats/apartments - Explanation
together with the deeming fiction added by the Amendment Act is
only clarificatory of this position in law that had arisen as to whether
home buyers/allottees were subsumed within s. 5(8)(f) - Explanation
added to s. 5(8)(f) does not in fact enlarge the scope of the original
Section - Thus, the allottees/home buyers were included in s. 5(8)(f)
with effect from the inception of the Code, the explanation being
added in 2018 merely to clarify doubts that had arisen.
s. 5(8)(f) explanation - Effect of a deeming fiction - Held:
Deeming fiction that is used by the explanation is to put beyond
doubt the fact that allottees are to be regarded as financial creditors
within the enacting part contained in s. 5(8)(f) - Under the
explanation added to s. 5(8)(f), 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 - Although a deeming provision
is to deem what is not there in reality, thereby requiring the subject
matter to be treated as if it were real, yet several authorities and
judgments show that a deeming fiction can also be used to put
beyond doubt a particular construction that might otherwise be
uncertain.
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Real Estate (Regulation and Development) Act, 2016: ss. 2,
20 to 39, 41 to 58, 71 to 78 and 81 to 92 - Impact of the RERA on
the real estate sector - Stated.
Doctrines/Principles: Doctrine of 'Reading Down' -
Application of - Matter pertaining to constitutional validity of the
Insolvency Code (Second Amendment) Act - Plea that if the
constitutional validity of the impugned provisions is to be upheld,
then the amendment to the Insolvency and Bankruptcy Code needs
to be read-down so as to make it conform with Art. 14 and 19(1)(g)
and 300-A - Held: In application u/s. 7 made by an allottee, the
NCLT's 'satisfaction' will be with both eyes open - NCLT will not
ignore a legitimate defences by a real estate developer - Furthermore,
the Amendment Act has been held to be constitutionally valid, and
considering that its language is clear and unambiguous, there is no
necessity to read into or read down any of these provisions -
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 -
Insolvency and Bankruptcy Code, 2016.
Legislation: Economic legislation-Insolvency Code -
Legislature's right to experiment in economic matters - Held:
Insolvency Code is a legislation which deals with economic matters
and, in the larger sense, deals with the economy of the country as a
whole - While dealing with economic legislation, the legislature
must be given liberty - Legislative judgment in economic choices
must be given a certain degree of deference by the courts -
Insolvency and Bankruptcy Code, 2016.
Disposing of the Writ Petitions and Civil Appeals, the Court
HELD: Provisions of Insolvency And Bankruptcy Code,
2016 being challenged
1. It is declared that the Insolvency and Bankruptcy Code
(Second Amendment) Act, 2018 is constitutionally valid.
[Para 88] [529-F]
2. (i) The Insolvency and Bankruptcy Code (Second
Amendment) Act, 2018 to the Insolvency and Bankruptcy Code,
2016 does not infringe Articles 14, 19(1)(g) read with Article 19(6),
or 300-A of the Constitution of India.
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ii The Real Estate (Regulation and Development) Act, 2016
is to be read harmoniously with the Code, as amended by the
Amendment Act. It is only in the event of conflict that the Code
will prevail over the RERA. Remedies that are given to allottees
of flats/apartments are therefore concurrent remedies, such
allottees of flats/apartments being in a position to avail of
remedies under the Consumer Protection Act, 1986, RERA as
well as the triggering of the Code.
iii Section 5(8)(f) as it originally appeared in the Code
being a residuary provision, always subsumed within it allottees
of flats/apartments. The explanation together with the deeming
fiction added by the Amendment Act is only clarificatory of this
position in law. [Para 86] [528-G-H; 529-A-C]
The Legislature's right to experiment in economic matters
3. Legislature must be given free play in the joints when it
comes to economic legislation. Apart from the presumption of
constitutionality which arises in such cases, the legislative
judgment in economic choices must be given a certain degree of
deference by the courts. [Para 15] [429-E-F]
Raison d'être for the Insolvency Code (Second Amendment)
Act of 2018
4. The Insolvency Committee Report is of importance in
understanding why the legislature thought it fit to categorise home
buyers as financial creditors under the Code. The Insolvency
Law Committee found that delay in completion of flats/apartments
has become a common phenomenon, and that amounts raised
from home buyers contributes significantly to the financing of
the construction of such flats/apartments. This being the case, it
was important, thus, to clarify that home buyers are treated as
financial creditors so that they can trigger the Code u/s.7 and
have their rightful place on the Committee of Creditors when it
comes to making important decisions as to the future of the
building construction company, which is the execution of the real
estate project in which such home buyers are ultimately to be
housed. [Para 16, 18] [430-D; 434-H; 435-A-B]
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Real Estate (Regulation and Development) Act, 2016
(RERA) and its impact on the real estate sector
5. Perusal of the provisions of the Real Estate (Regulation
and Development) Act, 2016 would show that, on and from the
coming into force of the RERA, all real estate projects (as defined)
would first have to be registered with the Real Estate Regulatory
Authority, which, before registering such projects, would look
into all relevant details, including delay in completion of other
projects by the developer. Importantly, the promoter is now to
make a declaration supported by an affidavit, that he undertakes
to complete the project within a certain time period, and that
70% of the amounts realised for the project from allottees, from
time to time, shall be deposited in a separate account, which would
be spent only to defray the cost of construction and land cost for
that particular project. Registration is granted by the authority
only when it is satisfied that the promoter is a bona fide promoter
who is likely to perform his part of the bargain satisfactorily.
Registration of the project enures only for a certain period and
can only be extended due to force majeure events for a maximum
period of one year by the authority, on being satisfied that such
events have, in fact, taken place. Registration once granted, may
be revoked if it is found that the promoter defaults in complying
with the various statutory requirements or indulges in unfair
practices or irregularities. Upon revocation of registration, the
authority is to facilitate the remaining development work, which
can then be carried out either by the "competent authority" as
defined by the RERA or by the association of allottees or
otherwise. The promoter at the time of booking and issue of
allotment letters has to make available to the allottees
information, inter alia, as to the stage-wise time schedule of
completion of the project. Deposits or advances beyond 10% of
the estimated cost as advance payment cannot be taken without
first entering into an agreement for sale. The agreement for sale
will now no longer be a one-sided contract of adhesion, but in
such form as may be prescribed, which balances the rights and
obligations of both the promoter and the allottees. Under Section
18, if the promoter fails to complete or is unable to give possession
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of an apartment, plot or building in accordance with the terms of
the agreement for sale, he must return the amount received by
him in respect of such apartment etc. with such interest as may
be prescribed and must, in addition, compensate the allottee in
case of any loss caused to him. Under Section 19, the allottee
shall be entitled to claim possession of the apartment, plot or
building, as the case may be, or refund of amount paid along with
interest in accordance with the terms of the agreement for sale.
In addition, all allottees are to be responsible for making
necessary payments in instalments within the time specified in
the agreement for sale and shall be liable to pay interest at such
rate as may be prescribed for any delay in such payment. Under
Section 31, any aggrieved person may file a complaint with the
authority or the adjudicating officers set up by such authority
against any promoter, allottee or real estate agent, as the case
may be, for violation or contravention of the RERA, and rules
and regulations made thereunder. Also, if after adjudication a
promoter, allottee or real estate agent fails to pay interest, penalty
or compensation imposed on him by the authorities under the
RERA, the same shall be recoverable as arrears of land revenue.
Appeals may be filed to the Real Estate Appellate Tribunal against
decisions or orders of the authority or the adjudicating officer.
From orders of the Appellate Tribunal, appeals may thereafter
be filed to the High Court. Stiff penalties are to be awarded for
breach and/or contravention of the provisions of the RERA.
Importantly, under Section 72, the adjudicating officer must first
determine that the complainant has established "default" on the
part of the respondent, after which consequential orders may then
follow. Under Section 88, the provisions of RERA are in addition
to and not in derogation of the provisions of any other law for
time being in force and under Section 89, RERA is to have effect
notwithstanding anything inconsistent contained in any other law
for the time being in force. [Para 22] [459-C-H; 460-A-G]
Insolvency and Bankruptcy Code, 2016 vis-à-vis the Real
Estate (Regulation and Development) Act, 2016
6.1 There is no provision similar to that of Section 88 of
RERA in the Code, which is meant to be a complete and
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exhaustive statement of the law insofar as its subject matter is
concerned. Also, the non-obstante clause of RERA came into
force on 1st May, 2016, as opposed to the non-obstante clause of
the Code which came into force on 1st December, 2016. Further,
the concerned amendment came into force only on 6th June, 2018.
Given these circumstances, it cannot be said that RERA is a
special enactment which deals with real estate development
projects and must, therefore, be given precedence over the Code,
which is only a general enactment dealing with insolvency
generally. From the introduction of the explanation to Section
5(8)(f) of the Code, it is clear that Parliament was aware of RERA,
and applied some of its definition provisions so that they could
apply when the Code is to be interpreted. The fact that RERA is
in addition to and not in derogation of the provisions of any other
law for the time being in force, also makes it clear that the
remedies under RERA to allottees were intended to be additional
and not exclusive remedies. Also, as the authorities under RERA
were to be set up within one year from 1st May, 2016, remedies
before those authorities would come into effect only on and from
1st May, 2017 making it clear that the provisions of the Code,
which came into force on 1st December, 2016, would apply in
addition to the RERA. The Code as amended, is both later in
point of time than RERA, and must be given precedence over
RERA, given Section 88 of RERA. Thus, even by a process of
harmonious construction, RERA and the Code must be held to
co-exist, and, in the event of a clash, RERA must give way to the
Code. RERA, therefore, cannot be held to be a special statute
which, in the case of a conflict, would override the general statute,
viz. the Code. [Para 24, 26, 28] [461-B-F; 464-D; 465-B-C]
KSL & Industries Ltd. v. Arihant Threads Ltd. (2015) 1
SCC 166 ; Bank of India v. Ketan Parekh (2008) 8
SCC 148 : [2008] 9 SCR 346 - referred to.
6.2 The Code and RERA operate in completely different
spheres. The Code deals with a proceeding in rem in which the
focus is the rehabilitation of the corporate debtor. This is to take
place by replacing the management of the corporate debtor by
means of a resolution plan which must be accepted by 66% of the
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Committee of Creditors, which is now put at the helm of affairs,
in deciding the fate of the corporate debtor. Such resolution plan
then puts the same or another management in the saddle, subject
to the provisions of the Code, so that the corporate debtor may
be pulled out of the woods and may continue as a going concern,
thus benefitting all stakeholders involved. It is only as a last resort
that winding up of the corporate debtor is resorted to, so that its
assets may be liquidated and paid out in the manner provided by
Section 53 of the Code. On the other hand, RERA protects the
interests of the individual investor in real estate projects by
requiring the promoter to strictly adhere to its provisions. The
object of RERA is to see that real estate projects come to fruition
within the stated period and to see that allottees of such projects
are not left in the lurch and are finally able to realise their dream
of a home, or be paid compensation if such dream is shattered, or
at least get back monies that they had advanced towards the
project with interest. At the same time, recalcitrant allottees are
not to be tolerated, as they must also perform their part of the
bargain, namely, to pay instalments as and when they become
due and payable. Given the different spheres within which these
two enactments operate, different parallel remedies are given to
allottees-under RERA to see that their flat/apartment is
constructed and delivered to them in time, barring which
compensation for the same and/or refund of amounts paid
together with interest at the very least comes their way. If,
however, the allottee wants that the corporate debtor's
management itself be removed and replaced, so that the corporate
debtor can be rehabilitated, he may prefer a Section 7 application
under the Code. That another parallel remedy is available is
recognised by RERA itself in the proviso to Section 71(1), by
which an allottee may continue with an application already filed
before the Consumer Protection fora, he being given the choice
to withdraw such complaint and file an application before the
adjudicating officer under RERA read with Section 88.
[Para 29] [465-C-H; 466-A-B]
Swaraj Infrastructure Private Limited v. Kotak
Mahindra Bank Limited (2019) 3 SCC 620 : [2019] 1
SCR 682 - referred to.
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Financial and Operational Creditors
7. A financial creditor has been defined under Section 5(7)
of the Code as a person to whom a financial debt is owed and a
financial debt is defined in Section 5(8) to mean a debt which is
disbursed against consideration for the time value of money. As
opposed to this, an operational creditor means a person to whom
an operational debt is owed and an operational debt under Section
5(21) means a claim in respect of provision of goods or services.
Financial creditor may trigger the Code either by itself or jointly
with other financial creditors or such persons as may be notified
by the Central Government when a "default" occurs.
[Para 30, 31] [466-H; 467-A; 469-C]
Innoventive Industries v. ICICI Bank & Anr. (2018) 1
SCC 407 ; Swiss Ribbons v. Union of India (2019) 4
SCC 17 : [2019] 3 SCR 535 - relied on.
Article 14 Challenge (I): Discrimination
8.1 The principle contained in Swiss Ribbons's case, that
far greater deference is accorded to economic legislation, as the
legislature is given free play in the joints and is at liberty to
conduct economic experiments in public interest, applies on all
fours in the instant case. [Para 38] [482-A-B]
8.2 The Code is not meant to be a debt recovery mechanism.
It is a proceeding in rem which, after being triggered, goes
completely outside the control of the allottee who triggers it.
Thus, any allottee/home buyer who prefers an application under
Section 7 of the Code takes the risk of his flat/apartment not
being completed in the near future, in the event of there being a
breach on the part of the developer. Under the Code, he may
never get a refund of the entire principal, let alone interest. This
is because, the moment a petition is admitted under Section 7,
the resolution professional must first advertise for and find a
resolution plan by somebody, usually another developer, which
has then to pass muster under the Code, i.e. that it must be
approved by at least 66% of the Committee of Creditors and
must further go through challenges before NCLT and NCLAT
before the new management can take over and either complete
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construction, or pay out or refund amounts. Depending on the
kind of resolution plan that is approved, such home buyer/allottee
may have to wait for a very long period for the successful
completion of the project. He may never get his full money back
together with interest in the event that no suitable resolution
plan is forthcoming, in which case, winding up of the corporate
debtor alone would ensue. On the other hand, if such allottee
were to approach the Real Estate Regulatory Authority under
RERA, it is more than likely that the project would be completed
early by the persons mentioned therein, and/or full amount of
refund and interest together with compensation and penalty, if
any, would be awarded. Thus, given the bona fides of the allottee
who moves an application under Section 7 of the Code, it is only
such allottee who has completely lost faith in the management of
the real estate developer who would come before the NCLT under
the Code hoping that some other developer takes over and
completes the project, while always taking the risk that if no one
were to come forward, corporate death must ensue and the
allottee must then stand in line to receive whatever is given to
him in winding up. Given the reasons of the Insolvency Committee
Report, which show that experience of the real estate sector in
this country has not been encouraging, in that huge amounts are
advanced by ordinary people to finance housing projects which
end up in massive delays on the part of the developer or even
worse, i.e. failure of the project itself, and given the state of facts
which was existing at the time of the legislation, as adverted to
by the Insolvency Committee Report, it is clear that any alleged
discrimination has to meet the tests laid down in Ram Krishna
Dalmia's case, V.C. Shukla's case, Shri Ambica Mills's case,
Venkateshwara Theatre's case, and Mardia Chemicals's case.
[Para 39] [482-B-H; 483-A-B]
Ram Krishna Dalmia v. Justice S.R. Tendolkar (1959)
SCR 279 ; State of Bihar v. Shree Baidyanath Ayurved
Bhawan (P) Ltd. (2005) 2 SCC 762 : [2005] 1 SCR
334 ; Karnataka Live Band Restaurants Assn. v. State
of Karnataka (2018) 4 SCC 372 : [2018] 1 SCR 533;
State of Gujarat and Anr. v. Shri Ambica Mills Ltd.,
Ahmedabad, etc. (1974) 4 SCC 656 : [1974] 3 SCR
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760 ; Swiss Ribbons v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535 ; V.C. Shukla v. State (Delhi
Administration) (1980) Suppl. SCC 249 : [1980] SCR
500 ; Venkateshwara Theatre v. State of A.P. (1993) 3
SCC 677 : [1993] 3 SCR 616 ; Mardia Chemicals Ltd.
v. Union of India (2004) 4 SCC 311 : [2004] 3 SCR
982 - relied on.
8.3 It is impossible to say that classifying real estate
developers is not founded upon an intelligible differentia which
distinguishes them from other operational creditors, nor is it
possible to say that such classification is palpably arbitrary having
no rational relation to the objects of the Code. It was submitted
that if at all real estate developers were to be brought within the
clutches of the Code, being like operational debtors, at best they
could have been brought in under this rubric and not as financial
debtors. In operational debts generally, when a person supplies
goods and services, such person is the creditor and the person
who has to pay for such goods and services is the debtor. In the
case of real estate developers, the developer who is the supplier
of the flat/apartment is the debtor inasmuch as the home buyer/
allottee funds his own apartment by paying amounts in advance
to the developer for construction of the building in which his
apartment is to be found. Another vital difference between
operational debts and allottees of real estate projects is that an
operational creditor has no interest in or stake in the corporate
debtor, unlike the case of an allottee of a real estate project, who
is vitally concerned with the financial health of the corporate
debtor, for otherwise, the real estate project may not be brought
to fruition. Also, in such event, no compensation, nor refund
together with interest, which is the other option, will be
recoverable from the corporate debtor. One other important
distinction is that in an operational debt, there is no consideration
for the time value of money - the consideration of the debt is the
goods or services that are either sold or availed of from the
operational creditor. Payments made in advance for goods and
services are not made to fund manufacture of such goods or
provision of such services. In real estate projects, money is raised
from the allottee, being raised against consideration for the time
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value of money. Even the total consideration agreed at a time
when the flat/apartment is non-existent or incomplete, is
significantly less than the price the buyer would have to pay for a
ready/complete flat/apartment, and therefore, he gains the time
value of money. Likewise, the developer who benefits from the
amounts disbursed also gains from the time value of money. The
fact that the allottee makes such payments in instalments which
are co-terminus with phases of completion of the real estate
project does not any the less make such payments as payments
involving "exchange", i.e. advances paid only in order to obtain
a flat/apartment. What is predominant, insofar as the real estate
developer is concerned, is the fact that such instalment payments
are used as a means of finance qua the real estate project. One
other vital difference with operational debts is the fact that the
documentary evidence for amounts being due and payable by the
real estate developer is there in the form of the information
provided by the real estate developer compulsorily under RERA.
This information, like the information from information utilities
under the Code, makes it easy for home buyers/allottees to
approach the NCLT under Section 7 of the Code to trigger the
Code on the real estate developer's own information given on its
webpage as to delay in construction, etc. It is these fundamental
differences between the real estate developer and the supplier
of goods and services that the legislature has focused upon and
included real estate developers as financial debtors. This being
the case, it is clear that there cannot be said to be any infraction
of equal protection of the laws. [Para 40] [483-C-H; 484-A-F]
8.4 Real estate developers are, in substance, persons who
avail finance from allottees who then fund the real estate
development project. The object of dividing debts into two
categories under the Code, namely, financial and operational
debts, is broadly to sub-divide debts into those in which money
is lent and those where debts are incurred on account of goods
being sold or services being rendered. There is no doubt that
real estate developers fall squarely within the object of the Code
as originally enacted insofar as they are financial debtors and not
operational debtors. So far as unequals being treated as equals is
concerned, home buyers/allottees can be assimilated with other
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individual financial creditors like debenture holders and fixed
deposit holders, who have advanced certain amounts to the
corporate debtor. For example, fixed deposit holders, though
financial creditors, would be like real estate allottees in that they
are unsecured creditors. Financial contracts in the case of these
individuals need not involve large sums of money. Debenture
holders and fixed deposit holders, unlike real estate holders, are
involved in seeing that they recover the amounts that are lent
and are thus not directly involved or interested in assessing the
viability of the corporate debtors. Though not having the
expertise or information to be in a position to evaluate feasibility
and viability of resolution plans, such individuals, by virtue of
being financial creditors, have a right to be on the Committee of
Creditors to safeguard their interest. Also, the question that is
to be asked when a debenture holder or fixed deposit holder
prefers a Section 7 application under the Code will be asked in
the case of allottees of real estate developers - is a debt due in
fact or in law? Thus, allottees, being individual financial creditors
like debenture holders and fixed deposit holders and classified
as such, show that they within the larger class of financial creditors,
there being no infraction of Article 14 on this score.
[Para 41] [484-H; 485-A-F]
Nagpur Improvement Trust and Anr. v. Vithal Rao and
Ors. (1973) 1 SCC 500 : [1973] 3 SCR 39 ;
Subramanian Swamy v. Director, Central Bureau of
Investigation and Anr. (2014) 8 SCC 682 : [2014] 6
SCR 873 - referred to.
8.5 The presumption that the legislature has understood
and correctly appreciated the need of its people and that the
amendment to the Code is directed to problems made manifest
by experience, as was pointed out by the Insolvency Law
Committee findings, demonstrates that the presumption of
constitutionality that attaches to the Amendment Act has not been
displaced by the Petitioners. [Para 42] [485-G]
8.6 Home buyers/allottees give advances to the real estate
developer and thereby finance the real estate project at hand,
are really financial creditors. The plea that homebuyers would
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really fall within "other creditors" as a residuary class, who would
have to stand in line with their claims which would be made to
the resolution professional once the Code is triggered, cannot
be accepted. [Para 43] [485-H; 486-A, E-F]
Article 14 Challenge (II): Manifest arbitrariness; Article
19(1)(g) and Article 300-A
9.1 A reading of the paragraphs in Swiss Ribbons's case will
show these very objects are sub-served by treating allottees as
financial creditors. The Code is thus a beneficial legislation which
can be triggered to put the corporate debtor back on its feet in
the interest of unsecured creditors like allottees, who are vitally
interested in the financial health of the corporate debtor, so that
a replaced management may then carry out the real estate project
as originally envisaged and deliver the flat/apartment as soon as
possible and/or pay compensation in the event of late delivery,
or non-delivery, or refund amounts advanced together with
interest. Thus, applying the Shayara Bano case test, it cannot be
said that a square peg has been forcibly fixed into a round hole so
as to render Section 5(8)(f) manifestly arbitrary i.e. excessive,
disproportionate or without adequate determining principle. For
the same reason, it cannot be said that Article 19(1)(g) has been
infracted and not saved by Article 19(6) as the Amendment Act is
made in public interest, and it cannot be said to be an unreasonable
restriction on the Petitioner's fundamental right under Article
19(1)(g). Also, there is no infraction of Article 300-A as no person
is deprived of its property without authority of a constitutionally
valid law.[Para 45] [494-D-G]
Swiss Ribbons v. Union of India (2019) 4 SCC 17 :
[2019] 3 SCR 535 ; Shayara Bano v. Union of India
(2017) 9 SCC 1 - relied on.
9.2 Real estate allottees are really in the nature of financial
creditors, and thus the UNCITRAL Legislative Guide has been
followed, and not breached. Since allottees of real estate projects
have always been subsumed within Section 5(8)(f), no new rights
or claims have been created. Allottees, like individual financial
creditors who are already on the Committee of Creditors, are to
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have a voice in determining the corporate debtor and their own
future. [Para 46] [495-B-D]
9.3 All the allottees of the project in question can either
join together under the explanation to Section 7(1) of the Code,
or file their own individual petitions after the Code gets triggered
by a single allottee, stating that in addition to the construction of
their flat/apartment, they are also entitled to compensation under
RERA and/or under the general law, and would thus be persons
who have a "claim", i.e. a right to remedy for breach of contract
which gives rise to a right to compensation, whether or not such
right is reduced to judgment, and would therefore be persons to
whom a liability or obligation in respect of a "claim" is due. Such
persons would, therefore, have a voice in the Committee of
Creditors as to future plans for completion of the project, and
compensation for late delivery of the flat/apartment. [Para 47]
[495-G-H; 496-A-B]
9.4 If a Section 7 application is admitted in favour of an
allottee, and if the management of the corporate debtor is in fact
a strong and stable one, nothing debars the same erstwhile
management from offering a resolution plan, subject to Section
29A of the Code, which may well be accepted by the Committee
of Creditors in which home buyers now have a voice. Equally, to
assume that the moment the insolvency resolution process starts,
corporate death must ensue is wholly incorrect. If the real estate
project is otherwise viable, resolution plans from others may well
be accepted and the best of these would then work in order to
maximise the value of the assets of the corporate debtor.
Corporate death, is the last resort under the Code after all other
available options have failed. [Para 48] [496-C-D]
Swiss Ribbons v. Union of India (2019) 4 SCC 17 :
[2019] 3 SCR 535 - relied on.
9.5 Under paragraph 3 of the Statement of Objects and
Reasons of RERA, one of the important reasons for enacting the
RERA is to "establish symmetry of information between the
promoter and purchaser". This is achieved through Section 4,
where every promoter in its application to the authority for
registration under sub-clause (2)(b), has to include the current
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status of the project, any delay in its completion, details of cases
pending, payments pending etc.