Equality in Financial Creditor Status: The Supreme Court's Ruling in regarding the status of home buyers in CIRP proceedings under IBC

2023 (10) TMI 949 - Supreme Court

In this case, the Supreme Court of India addressed a critical issue regarding the status of home buyers as financial creditors under the Insolvency and Bankruptcy Code (IBC) 2016. The appellants, who were home buyers in a project developed by Bulland Buildtech Pvt. Ltd., challenged a decision of the National Company Law Appellate Tribunal (NCLAT). The NCLAT had ruled that the order of the Resolution Professional (RP), proposing different treatment for these home buyers compared to other allottees, did not warrant interference​​.

The appellants had approached the Uttar Pradesh Real Estate Regulatory Authority (UPRERA), seeking refunds with interest due to delays in the project completion. During the IBC proceedings, the Committee of Creditors presented a resolution plan that distinguished between home buyers who had sought remedies under the RERA, including those who had secured orders in their favor, and those who had not. Home buyers who did not approach RERA authorities were given 50% better terms than those who did. This distinction led to the appellants' unsuccessful appeals and their approach to the Supreme Court​​.

The appellants' counsel argued that, as per the amended definition of financial debt (Section 5(8)(f)), home buyer allottees in real estate projects should be considered financial creditors, and no distinction should be made within this group​​. In contrast, the counsel for the resolution professional contended that the appellants, having approached UPRERA, fell into a different sub-class of home buyers and were thus unsecured creditors​​.

The court analyzed the definition of "financial creditors" and "financial debt" under Section 5 (7) & (8) of the IBC. The explanation to this section, introduced in 2018, explicitly deemed amounts raised from allottees under a real estate project as having the commercial effect of a borrowing, thus including home buyers and allottees of real estate projects in the class of financial creditors​​.

Additionally, the court examined Section 18 of the RERA Act, which outlines the obligations of promoters to allottees, including the return of amounts with interest and compensation in cases of delay or failure to meet contractual obligations​​.

Ultimately, the Supreme Court found the resolution professional's view, which suggested that once an allottee sought remedies under RERA and opted for a return of money, they should not be treated as part of the class of home buyers, to be unpersuasive. It emphasized that treating a segment of home buyers differently for another enactment's purposes was inequitable. The court also noted that such a distinction was a form of "hyper-classification" and violated Article 14 of the Indian Constitution, which guarantees equality before the law​​.

In conclusion, the Supreme Court set aside the impugned order and declared the appellants as financial creditors within the meaning of Section 5(8)(f) of the IBC. They were entitled to be treated equally with other home buyers/financial creditors concerning the resolution plan under consideration by the adjudicating authority. This ruling reinforces the rights of home buyers as financial creditors and upholds the principle of equal treatment under the IBC, ensuring that home buyers who seek legal remedies for their grievances are not disadvantaged in the insolvency resolution process​​.

The impact of this ruling is significant. It strengthens the position of home buyers in real estate projects, particularly in situations where developers face insolvency proceedings. By affirming the status of home buyers as financial creditors, the Supreme Court's decision ensures that their interests are adequately represented and protected in the resolution process. This judgment also serves as a precedent for future cases where the classification of creditors might be in question, thereby contributing to more consistent and equitable treatment in insolvency proceedings.

In summary, "Equality in Financial Creditor Status: The present Supreme Court's Ruling" presents a landmark judgment that clarifies the status of home buyers within the ambit of the IBC. It underscores the commitment of the Indian judiciary to uphold the principles of equality and fairness in the treatment of financial creditors, thereby reinforcing confidence in the insolvency resolution framework in India.

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2023 (10) TMI 949 - Supreme Court