2019 (8) TMI 532 - SC - Insolvency and Bankruptcy

Constitutional validity of amendments made to the Insolvency and Bankruptcy Code, 2016 - allottees of real estate projects deemed to be financial creditors - corporate debtor - Code for reorganization and insolvency resolution of corporate debtors HELD THAT - 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 - As a matter of fact, 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 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 - 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. In Swiss Ribbons 2019 (1) TMI 1508 - SUPREME COURT , this Court while repelling a challenge to the constitutional validity of the Code based on a purported infraction of Article 14, differentiated between financial and operational creditors. In so doing, it made it clear that the context of the decision dealt with banks and financial institutions as financial creditors as opposed to operational creditors who could be corporations or individuals to whom monies were owed for goods and/or services - The principle contained in Swiss Ribbons (supra), 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, finds an early application in STATE OF GUJARAT VERSUS AMBICA MILLS LTD. AHMEDABAD 1974 (3) TMI 108 - SUPREME COURT , and applies on all fours in this case. The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India - The RERA 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 - 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.

Summary

Issues Involved:
1. Constitutional validity of amendments to the Insolvency and Bankruptcy Code, 2016.
2. Classification of allottees of real estate projects as financial creditors.
3. Interpretation of Section 5(8)(f) of the Code.
4. Harmonious construction of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Insolvency and Bankruptcy Code, 2016.
5. Procedural aspects and machinery provisions under Sections 21(6A) and 25A of the Code.

Issue-wise Detailed Analysis:

1. Constitutional Validity of Amendments to the Insolvency and Bankruptcy Code, 2016:
The amendments to the Code, which classify allottees of real estate projects as financial creditors, were challenged on the grounds of violating Articles 14, 19(1)(g), and 300-A of the Constitution. The court upheld the amendments, stating that the classification is based on intelligible differentia and has a rational nexus with the object sought to be achieved by the Code. The court emphasized that the legislature is allowed to experiment in economic matters and that the amendments aim to protect the interests of home buyers who finance real estate projects. The court also noted that the amendments are not arbitrary and do not infringe upon the fundamental rights of real estate developers.

2. Classification of Allottees of Real Estate Projects as Financial Creditors:
The court held that the classification of allottees as financial creditors is valid. It reasoned that allottees finance real estate projects by making advance payments, which have the commercial effect of a borrowing. The court distinguished between operational creditors and financial creditors, noting that operational creditors supply goods and services, whereas financial creditors provide finance. The court found that allottees are more akin to financial creditors as they are vitally concerned with the financial health of the corporate debtor to ensure the completion of the project.

3. Interpretation of Section 5(8)(f) of the Code:
The court interpreted Section 5(8)(f) of the Code, which defines "financial debt," to include amounts raised under any transaction having the commercial effect of a borrowing. The court held that the explanation added by the Amendment Act, which deems amounts raised from allottees as financial debt, is clarificatory in nature. It clarified that even without the explanation, amounts raised from allottees would fall within the definition of financial debt under Section 5(8)(f). The court emphasized that the definition of financial debt is broad and includes various forms of financial transactions, not limited to traditional loans.

4. Harmonious Construction of RERA and the Insolvency and Bankruptcy Code, 2016:
The court held that RERA and the Code operate in different spheres and provide concurrent remedies to allottees. While RERA aims to protect the interests of home buyers and ensure the timely completion of real estate projects, the Code focuses on the resolution of insolvency and financial distress of corporate debtors. The court stated that in case of a conflict, the Code will prevail over RERA. The remedies under RERA are additional and not exclusive, allowing allottees to seek relief under both statutes.

5. Procedural Aspects and Machinery Provisions under Sections 21(6A) and 25A of the Code:
The court addressed the procedural challenges to Sections 21(6A) and 25A, which provide for the representation of financial creditors, including allottees, in the Committee of Creditors (CoC). The court upheld these provisions, stating that they ensure adequate representation of allottees in the decision-making process. The court noted that the recent amendment to Section 25A, which allows the authorized representative to vote on behalf of all financial creditors based on the majority decision, addresses concerns about the practical implementation of these provisions. The court emphasized that the legislature is allowed to experiment and make necessary adjustments to the procedural aspects of the Code.

Conclusion:
The court concluded that the amendments to the Insolvency and Bankruptcy Code, 2016, are constitutionally valid and do not infringe upon the fundamental rights of real estate developers. The classification of allottees as financial creditors is justified, and the interpretation of Section 5(8)(f) includes amounts raised from allottees. The court also held that RERA and the Code provide concurrent remedies, and the procedural provisions under Sections 21(6A) and 25A ensure adequate representation of allottees in the CoC. The judgment directs states and union territories to establish the necessary authorities under RERA and emphasizes the need for sufficient members in the NCLT and NCLAT to handle the increased litigation.