The Curious Case of Homebuyers under the Insolvency and Bankruptcy Code, 2016

[Manaswi Agarwal is an advocate based in Mumbai and Aayush Mitruka is an advocate based in New Delhi]

One of the crucial issues which has emerged and is widely talked about under the Insolvency and Bankruptcy Code, 2016 (Code) relates to the interest of homebuyers under the Code. The jurisprudence developing around the Code does not adequately address their concerns, and therefore the law palpably appears wanting in that regard. The aim of this post is to highlight and discuss the status of homebuyers as creditors of the builder companies and their rights against the builder companies.

Presently, the Code entitles only two types of creditors, viz. operational and financial, who can initiate CIRP against the corporate debtor. In the case of Pawan Dubey & Another v. M/s J. B. K Developers Private Limited, the National Company Law Appellate Tribunal (NCLAT) held that homebuyers (without any agreement of assured returns)^[1] are neither financial creditors nor operational creditors under the Code and, therefore, they cannot file proceedings to initiate corporate insolvency resolution process (CIRP) under the Code. The NCLAT reasoned that while the homebuyers may have a right to refund of their amounts in case the property was not transferred to them, such property did not fall into either category of ‘goods’ or ‘services’. Since the operational debt relates to provision of goods or services, the NCLAT decided that the homebuyers’ debt did not qualify to be an operational debt and, consequently, the homebuyers did not qualify to be operational creditors.  Pertinently, the view of the NCLAT was upheld by the Supreme Court, in a cryptic order dated September 15, 2017 passed in Civil Appeal No. 11197 of 2017 filed by Pawan Dubey against the Order of NCLAT.

On a plain reading of the Code, one does not find any safeguards for the interests of any creditors other than financial and operational creditors during the CIRP. However, by an amendment to the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations) and Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution for Corporate Persons) Regulations, 2017 (Fast Track CIRP Regulations), with effect from August 16, 2017, Form F has been provided for creditors other than financial and operational creditors to file their claims with the Insolvency Resolution Professional (IRP). This amendment merely facilitates the process of collection and collation by the IRP of all the claims pertaining to corporate debtor without bringing any real comfort to the homebuyers (or creditors other than financial and operational creditors).

That apart, another amendment to the CIRP Regulations and Fast Track CIRP Regulations with effect from October 5, 2017 provides that “a Resolution Plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor”. These provisions are far from adequate to safeguard the interests of the homebuyers. This artificial categorization only serves as a band-aid solution. In the current situation, the homebuyers do not fit in either of the two categories of creditors (financial or operational). Therefore, treating them as so called ‘other’ creditors does not achieve any objective.

It is submitted that there is neither a reasonable classification in keeping homebuyers out of the category of operational creditors nor does such a classification have any nexus with the object of the Code. The NCLAT (and perhaps the Supreme Court) failed to appreciate that homebuyers are usually the largest (in number and often in the total amount of debt) creditors for a builder company (apart from the financial creditors) and the debt of the homebuyers arise directly out of operations of a builder company. However, the NCLAT preferred to maintain the distinction between the immovable property on one hand and goods and services on the other hand. At this juncture, it is relevant to note that in order to further the intention of the legislation, the Supreme Court had blurred this distinction under Consumer Protection Act, 1986. Though, the expression ‘housing construction’ had been included in the definition of ‘service’ under the Consumer Protection Act, 1986 by way of an amendment in the year 1993, the legal position on this subject was fairly settled even without the amendment by various pronouncements of the Supreme Court, such as Lucknow Development Authority v. M K Gupta,(1994) 1 SCC 243, and Narne Construction (P) Ltd. v. Union of India, AIR 2012 SC 2396.

The effect of the decision of the NCLAT is that the homebuyers, a class of people across India who need protection from nefarious builders, have been reduced to the status of creditors who cannot initiate the CIRP against the builders. Moreover, the uncertainty regarding their rights during the CIRP also looms large. In contrast, under the ‘winding up’ regime prior to the Code, the homebuyers had a right to seek winding up of a corporate debtor in case the corporate debtor failed to transfer the property, or to refund the money paid by the homebuyer.

Furthermore, once the CIRP is initiated, the moratorium under Section 14 of the Code commences which prohibits the continuation of all other recovery proceedings and bars any fresh proceedings against the corporate debtor. An IRP is appointed who forms the Committee of Creditors (CoC) and takes over the reins of the company. In the current scheme of the Code, the entire CIRP is driven by the CoC which consists of only financial creditors and it is apparent that the homebuyers will have no representation therein. In the absence of a provision ensuring protection of interests of the creditors other than financial and operational creditors (like the one provided for operational creditors under section 30(2)(b)),[2] it is unlikely that the interests of the homebuyers will be considered while taking any decisions by the CoC and they will eventually be left at the mercy of the National Company Law Tribunal (NCLT).

The Code dictates that once the resolution plan is approved by the CoC, the same has to be approved by the NCLT. On a cursory reading of Section 31 of the Code it appears that the power of the NCLT is restricted to either accord an approval to the resolution plan if the plan meets the requirements prescribed under section 30(2) of the Code, or to reject the resolution plan if the said requirements are not met with. However, it is submitted that the contours of the power of NCLT while adjudicating upon the resolution plan cannot be so limited, and that judicial discretion would be exercisable to protect the interests of all the stakeholders. Interestingly, the NCLT did interfere with the resolution plan submitted in the Synergies Dooray case[3] and minor changes.

It must be borne in mind that the effect of the moratorium is such that the homebuyers are now precluded from asserting their rights in the civil court or consumer forum or for that matter in any other fora. In essence, the moratorium deprives them of other remedies also which they would otherwise be entitled to avail. The homebuyers are precluded from agitating their grievances before any fora while the Code does not effectively protect their interests. In this view as well, it is submitted that exclusion of homebuyers from the category of operational creditors is an unreasonable classification and without any reasonable nexus with the objects of the Code.

Before concluding, it would be relevant to note that although the distinction between the operational creditor and homebuyers affects the rights of the homebuyers at the stage of CIRP, all unsecured creditors (except the unsecured financial creditors) are treated at par at the time of liquidation under Section 53 of the Code. Therefore, the homebuyers and operational creditors would stand together in queue in case of liquidation of a builder company. For this reason as well, to ensure consistency, it is submitted that the rights of homebuyers ought to be at par and equivalent to the rights of the operational creditors.

Be that as it may, the Supreme Court is presently seized of the questions regarding the interests of homebuyers in the matter of Chitra Sharma & Others v. Union of India & Others [4] (Jaypee Infratech Limited matter). We hope that the Supreme Court would decide these controversies and protect the interests of the homebuyers under the Code.

– Manaswi Agarwal & Aayush Mitruka

[1] Notably the NCLAT has held that those with an assured return agreement with the builder companies would be treated as financial creditors.

[2] Section 30(2)(b) provides that the resolution plan must provide for repayment of debts of the operational creditors such that the amount paid to the operational creditors is not less than the amount to be paid to them in the event of liquidation of the corporate debtor.

[3] NCLT, Hyderabad, CP No. 01/IBC/HDB/2017 U/s 10 IBC, 2016 (IBC).

[4] Supreme Court of India, W.P (C) No. 000744 of 2017