SC on Status of Homebuyers under the Waterfall mechanisms

Case Analysis: Pioneer Urban Land and Infrastructure Ltd. vs Union of India

Facts

Numerous writ petitions have been filed before the SC challenging the constitutionality of the amendment of 2018. This amendment made deem allottees of a real estate project to be financial creditors, enabling them to trigger CIRP against the real estate developers under Section 7 of the Code. The amendment additionally entitles them to be represented at the COC through ARs. 

Explanation given under Section 5(8)(f) clarified that the real estate allotees also come within the scope of financial debt as it falls under the category of forward sale or purchase agreement with the commercial effect of a borrowing. Respective changes have also been introduced under Section 21(6A)(b) to include allottees in the constitution of the COC and under Section 25A to lay out provisions concerning authorised representatives. 

Issues

1. Whether the funds raised under a real estate project from allottees has the commercial effect of a borrowing?
2. Whether the provisions of RERA and IBC may be read harmoniously after the amendment?
3. Whether the distinction made between operational creditors and real estate allottees is based on intelligible differentia?
4. Whether the amendment made the allotees of a real-estate project financial creditors, entitled to be represented in the COC by an AR?
5. Whether deeming fiction can be adopted to include allotees under the scope of Section 5(8)(f) of the Code?
6. Whether the explanation given under this provision enlarges the scope of it?

Ratio

The allottees entered into assured returns/committed returns agreements with the developers, whereby the developers agree to pay a certain amount to the allottees on a monthly basis from the date of execution of the agreement till handing over the possession of the property. The amount raised by the developers by the assured returns scheme was shown as “commitment charges” under the head “financial costs”. This indicates that the funds raised have the commercial effect of a borrowing. A financial debt means a debt along with interest, which disbursed against the consideration of time value of money. The promoter was asked to provide a declaration that he undertakes to complete the project within a certain time period and that 70% of the funds raised from allotees under this project from time to time shall be deposited into a separate account spent only to defray the cost of construction of that particular project. The courts have included home buyers as financial creditors in cases where the agreement includes an assured returns policy. In some cases they have been categorised as “creditors other than financial or operational creditors”. By not giving them the status of either financial creditors or operational creditors they are being deprived of:

The right to initiate CIRP 

1. The right to be a part of COC
2. The guarantee of receiving at least the liquidation value under a resolution plan. 

The money disbursed by the home buyers was in relation to a future asset and these funds amount to a significant portion of the funds that are used to finance the real estate projects. It was held that even if not all forward sale or purchase agreements are financial transactions, if they are structured as a tool or means for raising finance then it shall be classified as a financial debt. 

The non obstante clause under Section 88 of RERA came into effect on 1^st May 2016 and Section 238 of IBC came into effect on 1^st December 2016. It was contended on behalf of the real estate developers that, RERA is a special enactment and IBC is a general law, hence RERA is to be given precedence. It was held that, the fact that the amendment drew the definition of allottees from RERA implies that the drafting committee was aware of the existence of the enactment and taken into consideration of all of the applicable provisions. The provisions under RERA are in addition to and not in derogation of the provisions of IBC. The remedies laid out under RERA are intended to be additional remedies and not exclusive remedies. Moreover it is to be noted that the authorities to be set up under RERA are to come into effect from 1^st May 2017 succeeding the provisions of the code that came into effect on 1^st December 2016 itself. 

RERA and IBC function into compltetely different fields and the code deals with proceedings in rem which focuses on rehabilitation of the corporate debtor. On the other hand RERA seeks to protect the interests of the individual investors so that they are not left in a lurch by ensuring that they are compensated or reimbursed to the extent of their payment towards the allotted property. Hence both the enactments can co-exist and to the extent of any inconstancy, RERA is to give way to IBC. 

It was contended by the counsels for the real estate developers that the classification of allottees as financial creditors is discriminatory as it treats unequals equally and equals unequally without any intelligible differentia having any nexus with the objects of the Code. It was contended that the real estate developers were being discriminated against as they are not being treated equal to other entities that supply goods and services. If the allottees are treated as financial creditors, then all they have to do is to produce evidence indicating that a debt is due to him irrespective of any disputes, while an operational creditor would fall outside the purview of code in case of a dispute. This discrimination was to have infracted Article 14 of the Constitution. The Apex Court held that equal protection under law, does not necessarily invalidate any classification made by law. It was elucidated that the reasonable classification includes “all who are similarly situated and none who are not”. It was held that the legislature is at liberty to experiment with economic legislations in public interest and any practical considerations that hurt a few cannot be helped. It was concluded that the contentions by the real estate developers were not successful in establishing that the classification of real estate developers is not based upon intelligible differentia that distinguishes them from other operational creditors. 

Supplementary contentions that this categorisation also infringes article 19(1)(g) and 300A was also put forth by the real estate developers. The court held that the language of the provisions is unambiguous and clear, hence the contentions raised by the Petitioners do not stand. 

In the light of the deliberations under the preceding issues, the Apex court adjudged allottees under real estate projects to be financial creditors and hence have a right to have representation in a COC meeting. Homebuyers and debenture holders can be numerous so the committee was of the opinion that the only feasible mode of accommodating all these financial creditors in a COC meeting was through an authorised representative. Such an authorised representative can be appointed either by the way of the debt agreement or by the NCLT for each such class of creditors.

It was contended by the Petitioner that the definition under Section 5(8)(f) was to be an exhaustive provision and to be read noscitur a sociis (an unclear or ambiguous word must be read in its context). It was argued that this provision cannot be stretched to include allottees. The primary argument by the petitioner is concerning the existence of a debt. The court held that noscitur a sociis is a mere rule of construction and words with wide scope have been deliberately used in residuary power to subsume instances that do not fall under the scope of the sub-clauses to fit within the umbrella of Section 5(8)(f). For the existence of a debt, a liability or an obligation in respect of a claim must be due. It was held by the court that a claim is defined as a right to payment or a right to remedy even if it arises out of a breach of contract. The disbursal under this provision refers to the payment of instalments by the allottees against consideration of time value of money. The real estate developers have an obligation to use the funds raised in the construction of the project and it being at a discounted value from the perspective of the allottee as he is having to lesser by the way of instalments than if he were to pay the complete amount after the completion of the project. Further the phrase “commercial effect of a borrowing” has a wide bearing on any other transactions that that inflicts financial indebtedness. It is clear that the allottees fall within the scope of this provision owing to the nature of the financial arrangement between them and the developers at various stages of construction. 

The introduction of deeming fiction is necessitated where the Parliament requires the subject matter to be treated as real. It was held by the Supreme Court that the deeming fiction has been taken into account only to the extent necessary to provide clarification on the true legal position. After the purpose of the statutory fiction has been ascertained, it must be carried to its logical conclusion and assume all such other necessary facts for it to operate. Thus the explanation uses deeming fiction only to put it beyond doubt that the allottees also fall within the scope of Section 5(8)(f) of the Code. 

It was held by the court that the explanation inserted by the amendment does not enlarge the scope of the provision. It merely clarifies the doubts concerning the status of allottees under real estate projects. The allottees are being subsumed under the provisions as it originally stood. The court resorted to creative interpretation of the provision for the purpose of a beneficial legislation.