ALL HOME BUYERS ARE FINANCIAL CREDITORS

[Mr. M. GOVINDARAJAN]

Financial creditor

Section 5(7) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) defines the expression ‘financial creditor’ as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. 

Home buyer - a financial creditor

Section 5(8)(f) of the Code defines the expression ‘financial debt’  as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.   The explanation to the said section provides that for the purposes of this sub-clause-

• any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
• the expressions, ‘allottee’ and ‘real estate project’ shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016. (‘Act’ for short).

Compensation to home buyer

Section 18 of the Act provides that if the promoter fails to complete or is unable to give possession of an apartment, plot or building, -

• In accordance with the terms of the agreement for sale or, as the case may be, duly completed by the date specified therein; or
• due to discontinuance of his business as a developer on account of suspension or revocation of the registration under this Act or for any other reason,

he shall be liable on demand to the allottees, in case the allottee wishes to withdraw from the project, without prejudice to any other remedy available, to return the amount received by him in respect of that apartment, plot, building, as the case may be, with interest at such rate as may be prescribed in this behalf including compensation in the manner as provided under this Act.  Where an allottee does not intend to withdraw from the project, he shall be paid, by the promoter, interest for every month of delay, till the handing over of the possession, at such rate as may be prescribed.

The promoter shall compensate the allottees in case of any loss cause to him due to defective title of the land, on which the project is being developed or has been developed, in the manner as provided under this Act, and the claim for compensation under this sub-section shall be not barred by limitation provided under any law for the time being in force.  If the promoter fails to discharge any other obligations imposed on him under this Act or the rules or regulations made there under or in accordance with the terms and conditions of the agreement for sale, he shall be liable to pay such compensation to the allottees, in the manner as provided under this Act.

Issue

The issue to be discussed in this article is as to whether the homebuyer who obtains decree from the RERA can be a financial creditor in the proceedings before the Adjudicating Authority in corporate insolvency resolution process with decided case laws.  The two case laws discussed in this article clearly provides that the homebuyer is a financial creditor.  There is no two different classifications between the home buyers who have approached the RERA and those who have not.

Case laws

In MR. NATWAR AGRAWAL (HUF) VERSUS MS. SSAKASH DEVELOPERS & BUILDERS PVT. LTD. - 2023 (8) TMI 1362 - NATIONAL COMPANY LAW TRIBUNAL MUMBAI, the Adjudicating Authority, Mumbai bench held that a decree would be categorized as either financial or operational debt depending on the nature of the underlying claim which stands crystallized through the arbitral or court the nature of the debt due under decree would depend on the nature of transaction from which the decretal debt has arisen.   The Adjudicating Authority observed that in the present case the applicant had obtained a decree from RERA in capacity of allottee in a Real Estate Project and allottee in Real Estate Project is covered under the definition of Financial Debt contained in under Explanation to Section 5(8)(f) of the Code.  The Adjudicating Authority held that the applicant, being holder of a decree in capacity of allottee is a Financial Creditor.

In VISHAL CHELANI & ORS. VERSUS DEBASHIS NANDA - 2023 (10) TMI 949 - SUPREME COURT, the appellants are home buyers.  They opted for allotment in a real estate project of ‘Bulland Buildtech Private Limited’.  There was a delay in completion of the project.  Therefore the appellants approached Uttarpradesh Real Estate Regulatory Authority (‘Authority’ for short) for the refund of the amount deposited with the respondent.  The Authority directed the builder to refund the amount deposited by the Appellants with the respondent along with interest.

In the meanwhile corporate insolvency resolution process was initiated against the builder before the Adjudicating Authority under the Code.  The corporate insolvency resolution process was duly conducted.  The Committee of Creditors approved a resolution plan and the Resolution Professional filed an application before the Adjudicating Authority for the approval of the resolution plan.   In that plan, a distinction was made between home buyers, who had opted or elected for other remedies such as i.e. applying before the Authority and having secured orders in their favor, and those who did not do so.  Home buyers who did not approach authorities under Real Estate (Regulation and Development) Act,  2016 (‘Act’ for short) were given the benefit of 50% better terms than that given to those who approached Authority or who were decree holders.  The same was approved by the Adjudicating Authority.

Being aggrieved against the order of Adjudicating Authority the appellants filed an appeal before the National Company Law Appellate Tribunal.  The National Company Law Appellate Tribunal dismissed the appeals.  Therefore the appellants filed the present appeal before the Supreme Court. 

The appellants contended that  having regard to the definition of financial debt [Section 5(8)(f)] which was amended in 2018 after which home buyer allottees in real estate projects also fell within the broad description of financial creditors, a distinction cannot be made between one set of such home buyer allottees and another.   The Resolution Professional contended that the appellants cannot be permitted to secure two benefits.  Having approached the Authority, they fell into a different sub-class of home buyers, who were entitled to specified amounts and, therefore, were unsecured creditors, as compared with allottees who had not approached the Authority.  Such home buyers relinquished their rights under Section 18 of the Act.

The Supreme Court analyzed the provisions of Section 5(7) which defines the expression ‘financial creditor’ and Section 5(8) which defines the expression ‘financial debt’.  The Supreme Court observed that with the introduction of the explanation home buyers and allottees of real estate projects were included in the class of ‘financial creditors’, because financial debt is owed to them.  On a plain reading of Section 5 (8)(f) no distinction is per se made out between different classes of financial creditors for the purposes of drawing a resolution plan.

The Supreme Court analyzed the case law ‘Natwar Agarwal’ (supra) and Section 18 of the Act.  The Supreme Court observed that the Resolution Professional’s view appears to be that once an allottee seeks remedies under RERA, and opts for return of money in terms of the order made in her favor, it is not open for her to be treated in the class of home buyer. The Supreme Court was  unpersuaded by the submission. It is only home buyers that can approach and seek remedies under RERA – no others. In such circumstances, to treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable.

The Supreme Court held that the underlying claim of an aggrieved party is crystallized in the form of a Court order or decree. That does not alter or disturb the status of the concerned party - in the present case of allottees as financial creditors.  Section 238 of the IBC contains a non obstante clause which gives overriding effect to its provisions. Consequently its provisions acquire primacy, and cannot be read as subordinate to the RERA Act. In any case, the distinction made by the R.P. is artificial; it amounts to ‘hyper-classification’ and falls afoul of Article 14. Such an interpretation cannot therefore, be countenanced.

The Supreme Court set aside the impugned order and declared that the appellants are financial creditors within the meaning of Section 5(8)(f) (Explanation) and entitled to be treated as such along with other home buyers/financial creditors for the purposes of the resolution plan which is awaiting final decision before the adjudicating authority.