Author name: CBCL

[By Abhishek Jha & Rishi Raj]  The authors are students at the Maharashtra National Law University, Aurangabad.  Introduction The Insolvency and Bankruptcy Code 2016 (“the Code”), a milestone in the Indian Legislative journey has by far been successful in safeguarding the interests of most stakeholders, if not all. However, one such stakeholder has lagged behind, i.e., the homebuyers. Even after substantial developments in the Code, the homebuyers still remain highly risk averse owing to the host of unresolved issues in the Real Estate sector. In this article, the authors will discuss the position of the homebuyers with respect to the Code. The Real Estate Sector has been witness to a steep increase in corporate insolvency resolution processes (CIRPs) over the course of four years. Such an increase was triggered by an ever-growing liquidity crisis and accelerated by the pandemic’s effect on the Real estate sector. As a result, the Real estate now accounts for more than 20 percent of the overall CIRPs initiated. Although the homebuyers have availed certain protection through courtroom victories, the skirmish is far from being resolved. This gets even more complicated when remedies are sought against pending projects that are already under moratorium. Therefore, the above warrants a re-visit to the Code for a brief analysis of the real extent of Homebuyers’ protection. Recent Developments  Under the Code, only financial creditors[i] constitute the Committee of Creditors (“COC”) and enjoy voting rights in the COC. However, such rights are not extended to the operational creditors[ii] which was worrisome as the homebuyers were recognized as “Operational creditors” within the Code. Therefore, the Homebuyers were deprived of certain important privileges, including the right to be represented in the Committee Of Creditors (“CoC”) and a favorable treatment for payment of debts. Thus, a growing demand was felt to recognize the homebuyers as “financial creditors”. Subsequently, in  Nikhil Mehta v. AMR Infrastructure, the NCLAT classified the allottees as ‘financial creditors’. It was observed by the NCLAT that the assured return scheme in the Buyer-BuilderAgreement(“Homebuyer’s agreement”) was ultimately a transaction wherein ‘financial credit’ was raised in the nature of the loan. In  Anil Mahindroo & Anr v. Earth Organics Infrastructure, the NCLAT concluded that an effect of commercial borrowing  could be seen within the terms of the homebuyer’s agreement. The effect amounted to financial credit within the meaning of the Code. Ultimately, the IBC (Amendment) Ordinance, 2018 came into existence, placing the allottees on an equal pedestal as other financial creditors like Banks, NBFCs, etc. Such inclusion was necessary as the builders usually raise huge capital through home buyers, a primal example of this can be found in cases like Chitra Sharma v. Union of India in which, a whooping INR Fifteen Thousand Crore was owed to the Homebuyers. However, it cannot yet be concluded that an inclusion of homebuyers as Financial Creditors sufficiently equips the homebuyers to get justice. This is because the effect of inclusion was diluted by the changes in legislation discussed below. 2.1 Placing homebuyers with Financial Creditors: a relief or a patch-work? A positive yet incomplete step towards securing justice for homebuyers was to secure the status of financial creditors bestowed upon them under the Code as per Section 5(8). However, the legislature, while providing this right, has also neutralized its effects by attaching certain conditions to it. The IBC 2019 Ordinance (now replaced by the 2020 Amendment Act) sought to impose a threshold limit on the homebuyers to initiate CIRP. Section 7 of the ordinance required no less than 100 or 10% homebuyers, whichever is less, to initiate insolvency against the builder. Further, the amendment also barred a single buyer from approaching the NCLT under Section 7 of the Code. Therefore, the homebuyers’ failure in achieving such numbers would seriously cripple the pursuit of availing their home units. 2.2 Challenges to the threshold: Karvy Investor’s case The Ordinance was subsequently challenged upon its constitutional validity before the hon’ble the Supreme Court in Manish Kumar v Union of India. The Supreme Court initially imposed a stay on the ordinance, but ultimately upheld the threshold limit under the IBC 2019 ordinance stating that “the mere difficulties in given cases to comply with a law can hardly furnish a ground to strike it down”. The hon’ble Supreme court also refused to delve into the question of constitutionality with regards to the threshold requirements which according to petitioners amounted to class creation  amongst the Financial Creditors violating Article 14 of the Constitution. Meanwhile, an amendment to IBC was introduced in 2020 (the 2020 amendment) which again imposed the aforementioned threshold to initiate CIRP. Subsequently, the 2020 amendment was also challenged before the Hon’ble Supreme Court  in the Association of Karvy Investors v. Union of India & Ors. The plea stated that the 2020 Amendment has imposed a severe and almost impossible condition on the right of an individual financial creditor to file an application to initiate CIRP. . Even though a deviation from the decision in Manish Kumar (Supra) is highly unlikely, the Karvy investors case has been filed and remains pending before the SC. A setback from the Supreme Court In Shelly Lal & Ors v. Union of India & Ors, an amount of INR 49 crore was raised from the Homebuyers for real estate project in Noida Sector but the directors of the project absconded and the project was stalled. In the wake of this, the homebuyers approached the Supreme Court under Article 32 and requested the Apex Court to take a supervisory role of the project. However, the apex Court shied away from passing any relief premised upon the reasoning that managing day to day supervision of the project is outside the purview of the Judiciary and the court is not competent to do so. The apex court justified taking such a stance by highlighting that the law has improved considerably and now Homebuyers can approach alternative forums such as the consumer court or the Real Estate Regulatory Authority. On similar lines, in Upendra Choudhury v. Bulandsahar Development Authority and

[By Sourav Jena & Shivani Pattnaik] The authors are students at the National Law University, Odisha.  The insertion of Section 29A in the Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a turning point in the Corporate Insolvency Resolution Process (“CIRP”). Prior to its existence, any individual who submitted a resolution plan could qualify as a resolution applicant. However, this technicality served as a ‘back-door entry’ for individuals who contributed to the default of the corporate debtor to reclaim key managerial control by outbidding other financial institutes. Therefore, Section 29A serves as a ‘restrictive provision’ by narrowing the scope of eligibility of a resolution applicant. In pursuance of securing the interests of the corporate debtor, the Supreme Court of India (“SC”) in the recent judgment of Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Anr. has held that individuals disqualified under Section 29A of IBC would also stand to be disqualified under Section 230 of the Companies Act, 2013(“the Act”). Consequently, individuals shall not make any compromise /arrangement with creditors and members as provided under Section 230 of the Act if they fail to qualify as resolution applicants. The article seeks to present the facts of the case, and findings of the Court along with a critical analysis of the status quo of corporate insolvency in light of the judgement. Background The background of the case spans two separate civil appeals and a writ petition. Facts of Civil Appeal No. 9664 of 2019 On 07.04.2017, corporate applicant ‘Gujarat NRE Coke Limited’ (“GNCL”) filed an application to initiate the CIRP. One of its promoters namely, Mr. Arun Kumar Jagatramka sought to present a resolution plan before the Committee of Creditors (“CoC”). Meanwhile, Section 29A was inserted into the IBC wherein Section 29A(g) prohibits a promoter of the corporate debtor to be eligible as a resolution applicant. As a consequence, Mr. Jagatramka failed to qualify, thereby, prompting the National Company Law Tribunal (“NCLT”) to initiate the liquidation of GNCL in the absence of any other resolution plan. Whilst Mr. Jagatramka challenged the NCLT order before the National Company Law Appellate Tribunal (“NCLAT”), he proceeded to present a scheme of compromise and arrangement to which the NCLT directed for a meeting to be conducted to approve the same. However, an operational creditor viz. Jindal Steel and Power Ltd. (“JSPL”) appealed to the NCLAT against the NCLT order. It was held that as a promoter of the corporate debtor, Mr. Jagatramka was ineligible to become a resolution applicant, thereby, relinquishing the power to propose a scheme of compromise and arrangement for creditors and members. Facts of Civil Appeal No. 2719 of 2020 On 05.04.2018, the NCLT directed the CIRP of Su-Kam Power Systems Ltd. (“Su-Kam”). Mr. Kunwer Sachdev, one of the promoters, submitted a resolution plan on 15.11.2018. However, with the amendment of the IBC, he became ineligible to qualify as a resolution applicant. Hence, Su-Kam was directed to be liquidated. On the appeal against the appointment of the liquidator, NCLAT not only upheld the decision but also directed the liquidator to invite applications for compromise and arrangement with creditors. Mr. Kunwer, having applied to submit a scheme, was again found ineligible to do so, thereby, giving rise to a slew of appeals. Writ Petition Civil No. 269 of 2020 Regulation 2B delineates compromise and arrangement under Section 230 of the Act was challenged to be ultra vires the IBC as it was inserted by an amendment notification dated 25.07.2019 under the IBBI (Liquidation Process) Regulation, 2016. Issues and Contentions The question of law SC dealt with was whether an ineligible resolution applicant could submit a scheme for compromise during liquidation. The promoters put forth that the ineligibility under Section 29A was applicable only during resolution. This resolution was distinct from proposing a scheme of compromise under Section 230 of the Act, which connotes ‘settlement mechanism.’ Furthermore, Regulation 2B of the Liquidation Regulation was put under the scanner for being violative of  Articles 14, 19, and 21 of the Indian Constitution alleging that it sought to draw a parallel between ineligibility under Section 29A of the IBC to the distinct provision of Section 230 under the Companies Act. However, the Respondents drew attention to the inherent objective of Section 29A which was to keep individuals, responsible for default of the corporate debtor, away from gaining control of the corporate debtor’s assets. Therefore, the Respondents argued that the resolution process under Section 29A and the liquidation process were shown to be inconsistent by the promoters in order to utilize the loophole. Findings of the Court The SC reasoned that liquidation proceedings under the IBC and the proposal of the scheme of compromise under Section 230 lay on the same spectrum. While referring to the Swiss Ribbon v. UOI case, the SC mulled over the intent behind introducing Section 29A and concluded that Section 29A would pervade Section 35(1)(f) of the IBC during the liquidation process. Furthermore, it was observed that courts should be open to interpreting Section 29A in light of Section 230 of the Act in a manner that does not defeat the purpose of their statutory linkage. In addition, while analyzing the utility of both the Sections, the  SC opined that the legislative intent behind  Section 230 of the Act is to “ensure revival and continuation of the corporate debtor by protecting it from liquidation.” Moreover, the restrictions under Section 35(1)(f) of IBC acts as an extension to that protection and therefore, shall be applicable. While referring to the Meghal Homes case, the SC contemplated questions raised upon Regulation 2B and stated that the raison d’etre behind the resolution process cannot be distinct from the liquidation process and the same was clear in the regulatory provisions. Therefore, the SC upheld that persons ineligible under Section 29A would also be ineligible to propose a scheme of compromise under Section 230.  Critical Analysis The recent judgment of Arun Kumar Jagatramka has partly addressed the issue of the scheme of arrangement in the