India: Homebuyers Under The Insolvency & Bankruptcy Code, 2016 – A Visible Lacuna

The Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as "The Code") was ushered in with much fervor and enthusiasm as an elixir possessing a cure to all infirmities plaguing the erstwhile insolvency and bankruptcy regime in India. The lack of a single and unified law dealing with insolvency and bankruptcy was, inter alia, an area which required radical reform to revamp the then existing structure and for alleviating the distressed credit market. The reform was expected to benefit stakeholders across a wide spectrum given the scheme of The Code. However, there exists a lacuna with respect to purchasers of residential property and their categorization under the Code which needs immediate redressal to subvert injustice that may be meted out to them.

The objective of The Code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an insolvency & bankruptcy fund, and matters connected therewith and incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve the ease of doing business, and facilitate more investments leading to higher economic growth and development.16 In the light of the underlying object behind the enactment of The Code, 2016, it would be prudent to speak of the kind of creditors who can, under The Code, initiate insolvency resolution process against the corporate debtor. According to Sections 7, 9 & 10 the financial creditor, the operational creditor and the corporate debtor may initiate corporate insolvency resolution process against the corporate debtor in the form and manner as specified in the aforesaid provisions. The different classes of creditors are classified into their respective heads in accordance with the nomenclature of debt owed to them by the corporate debtor which is seen in juxtaposition to the definitions provided in the statute. Section 5(8) lays down the definition of financial debt while Section 5(21) lays down the meaning of an operational debt.

Under Chapter II of The Code, 2016 only the financial creditor, the operational creditor and the corporate debtor can initiate corporate insolvency resolution process. It remains unclear under the statute as also in the light of various judicial pronouncements whether the homebuyers would come under any of the above categories. The first case in line which pronounced on the aforesaid question was the case of Nikhil Mehta vs. AMR Infrastructures17 then due in the NCLT principal bench in New Delhi where the applicants approached the NCLT under Section 7 of The Code, claiming themselves to be financial creditors. The corporate debtor undertook to pay a particular amount to the buyer each month, as Committed Returns/ Assured Returns from the date of execution of the MOU till the time of handing over the actual physical possession to the buyer. In the present case, after the execution of various Memorandum of Understandings, the Respondent started paying the monthly "Assured Returns" to the applicants although erratically. It is alleged that the cheques issued by the respondent was dishonored for the reasons, inter alia, of insufficient funds. It was alleged that many other like the applicants have been duped to invest their hard-earned money in many projects belonging to the respondent. The court held that the "Assured returns" associated to the delivery of possession had nothing to do with the requirement of sub-section (8) of Section 5 as it was the time value of money which was missing from the transaction at hand and as such the applicants did not satisfy the definition of "financial creditors" within the meaning of The Code.

In an appeal preferred against the aforesaid order, the NCLAT by order dated 21.07.2017 in Company Appeal (AT) (Insolvency) No. 07 of 2017, after due perusal of the Memorandum of Understanding, the annual returns and the subsequent TDS deduction under Form 16A, arrived at the conclusion that the 'Corporate Debtor' treated the appellants as 'investors' and borrowed the amount pursuant to sale purchase agreement for their commercial purpose treating at par with 'loan' in their return. Thereby, the amount invested by appellants came within the meaning of 'Financial Debt', as defined in Section 5(8) (f) of The Code. The instant pronouncement by the NCLAT was specifically applicable to the "Committed assured return plans" and as such the position of the homebuyers without an assured return plan was condemned to oblivion.

At this juncture, it would be opportune to mention another case Pawan Dubey & Ors. Vs. J.B.K. Developers18, the principal bench of NCLT at New Delhi considered the question whether the applicants could be treated as operational creditors within the meaning of Section 9 of The Code. The NCLT, placing reliance on the decision rendered in the case of Col. Vinod Awasthy vs. A.M.R. Infrastructures Ltd.19 where it was held that given the time line in The Code it is not possible to construe section 9 read with section 5(20) & (21) of The Code so widely to include within its scope even the cases where dues are on account of advance made to purchase the flat or a commercial site from a construction company like the Respondent in the present case especially when the Petitioner has remedy available under the Consumer Protection Act and the general law of the land, declined to admit the petition. In an appeal preferred against the earlier order in the matter of Pawan Dubey20 the NCLAT held that the appellants were merely allottees of the flats and thus did not come within the meaning of operational creditors within the meaning of The Code.

However, the NCLAT in the matter of Rubina Chadha vs A.M.R. Infrastructures21 Ltd. though it shied away from deciding the question of law pertaining to the locus standi of the homebuyers, it referred the matter back to the NCLT with the following finding. "The appellants herein, whether they are 'Financial Creditor' or 'Operational Creditor' or 'Secured Creditor' or 'Unsecured Creditor', as claim to be creditors are now entitled to file their respective claims before the 'Interim Resolution Professional and their claims are to be considered in accordance with the provisions of The Code."

The Insolvency & Bankruptcy Board of India by notification dated 16.08.2017 brought forth an amendment to the regulations by bringing in FORM F for submission claims by creditors other than financial creditors and operational creditors. The aforesaid amendment was brought forth at a time when approximately 32000 home buyers remained bemused about their locus with respect to their pending claims against the infrastructure giant, giving them a ray of hope. However, subsequently the Interim Resolution Professional granting respite to the homebuyers of the housing projects by Jaypee Infratech decided to accept whichever forms their claims were filed in. Despite this act of the interim resolution professional, the problems of the homebuyers remained far from being over, as during liquidation, the homebuyers would only get what is left over after the secured and the operational creditors are repaid. In a bid to address the situation, acting on a PIL, the Hon'ble Supreme Court, vide order dated 04.09.201722, stayed the insolvency proceedings initiated by the National Company Law Tribunal, Allahabad on the plea of IDBI Bank against Jaypee Infratech. The aforesaid order of the apex court was to protect the interests of over 30,000 homebuyers who would otherwise be left in the lurch due to the insolvency proceedings.

The position of law relating to the position of the homebuyers continues to be fraught with uncertainty. The existing lacuna in The Code with respect to the locus of the homebuyers needs immediate legislative intervention as was evident during the Jaypee debacle.

Footnotes

16 Statement of objects and reasons, The Insolvency and Bankruptcy Code, 2016.

17 CP No.(ISB)-03/(PB)/2017

18 C.P. No. (IB)-19(PB)/2017 decided on 31.03.2017

19 C.P NO.(IB) -10(PB)/2017 decided on 20.02.2017

20 (supra)

21 Company Appeal (AT) (Insolvency) No. 8 of 2017

22 Writ Petition(s) (Civil) No. 744/2017.

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