Insolvency and Bankruptcy Code, 2016: ss. 5(8)(f), 21(6A)(b) and 25A – Amendments made to the Code vide Amendment Act, which deem allottees of real estate projects to be “financial creditors” so that they may initiate insolvency proceedings u/s. 7 against the real estate developer and being financial creditors, were entitled to be represented in the Committee of Creditors by authorised representatives – Constitutional validity of amendments made to the Code – Held: Constitutionality of the Amendment Act is upheld – Amendment to the Code does not infringe Arts. 14, 19(1)(g) r/w Art. 19(6), or 300-A – Constitution of India – Arts. 14, 19(1)(g) r/w Art. 19(6), 300-A – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. s.7 – Amendment to the Code whereby home buyers categorized as financial creditors under the Code – Reasons for amendment – Held: Insolvency Law Committee found that delay in completion of flats/apartments has become a common phenomenon, and amounts raised from homebuyers contributes significantly to financing of the construction of such flats/apartments – Thus, it was important, to clarify that homebuyers are treated as financial creditors so that they can trigger the Code u/s. 7 and have their rightful place in the Committee of Creditors when it comes to making important decisions as to execution of the real estate project in which homebuyers are ultimately to be housed – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. Insolvency and Bankruptcy Code vis-à-vis Real Estate (Regulation and Development) Act (RERA) – Held: Real Estate (Regulation and Development) Act is to be read harmoniously with the Code, as amended by the Amendment Act – In case of conflict, the Code will prevail over RERA – It cannot be said that RERA is a special enactment which deals with real estate development projects and must, thus, be given precedence over the Code, which is only a general enactment dealing with insolvency generally – Parliament was aware of RERA, and applied some of its definition provisions so that they could apply when the Code is to be interpreted – RERA is in addition to and not in derogation of the provisions of any other law for the time being in force – Also the remedies under RERA to allottees were intended to be additional and not exclusive remedies – Code and RERA operate in completely different spheres – Code deals with a proceeding in rem in which the focus is the rehabilitation of the corporate debtor by means of a resolution plan which puts the same or another management in the saddle, subject to the provisions of the Code, whereas, RERA protects the interests of the individual investor in real estate projects by requiring the promoter to strictly adhere to its provisions – Real Estate (Regulation and Development) Act, 2016. ss. 5(7), 5(8) and 5(21) – Financial Creditors and Operational Creditors – Explanation of – Held: Financial creditor is defined u/ s. 5(7) as a person to whom a financial debt is owed and a financial debt is defined in s. 5(8) to mean a debt which is disbursed against consideration for the time value of money – An operational creditor means a person to whom an operational debt is owed and an operational debt u/s. 5(21) means a claim in respect of provision of goods or services – Financial creditor may trigger the Code either by itself or jointly with other financial creditors or such persons as may be notified by the Central Government when “default” occurs. ss. 5(8)(f), 21(6A)(b), 25A – Plea that treating home buyers/ allottees to be financial creditor is violative of Arts. 14, 19(1)(g) and Art. 300-A; that the amendment is discriminatory inasmuch as it treats unequals equally, and equals unequally, having no intelligible differentia; and that there is no nexus with the objects sought to be achieved by the Code – Held: Amendment Act to the Code does not infringe Arts 14, 19(1)(g) rw Art. 19(6), or 300-A – Home buyers/ allottees give advance to the real estate developer and thereby finance the real estate project at hand, are really financial creditors – Objects of the Code are sub-served by treating allottees as financial creditors – Code is, thus a beneficial legislation which can be invoked by unsecured creditors like allottees against the corporate debtor so that a replaced management may then carry out the real estate project as originally envisaged – It cannot be said that Art. 19(1)(g) has been infracted and not saved by Art. 19(6) as the Amendment Act is made in public interest – There is no unreasonable restriction on the petitioner’s fundamental right u/Art. 19(1)(g) – Also, there is no infraction of Art. 300-A as no person is deprived of its property without authority of a constitutionally valid law – Furthermore, it cannot be said that classifying real estate developers is not founded upon an intelligible differentia which distinguishes them from other operational creditors – Allottees, being individual financial creditors like debenture holders and fixed deposit holders and classified as such, show that they within the larger class of financial creditors, there being no infraction of Art. 14 – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 – Constitution of India – Arts 14, 19(1)(g) rw Art 19(6), or 300-A. s. 7 – Application u/s. 7 by allottee/home buyer – Effect of – Held: Code is not meant to be a debt recovery mechanism – It is a proceeding in rem which, after being triggered, goes completely outside the control of the allottee who triggers it – Thus, any allottee/ home buyer who prefers an application u/s. 7 takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer – Under the Code, he may never get a refund of the entire principal, let alone interest – After the petition is admitted u/s. 7, a resolution plan is taken up, usually by another developer, who has to pass muster under the Code and must further go through challenges before NCLT and NCLAT before the new management can take over and either complete construction, or pay out or refund amounts – Thus, given the bona fides of the allottee who moves an application u/s. 7, it is only such allottee who has completely lost faith in the management of the real estate developer who would come before NCLT under the Code. ss. 21(6A) and 25A – Committee of creditors – Rights and duties of authorized representatives of financial creditors – Challenge to ss. 21(6A) and 25A – Held: Allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors, either to approve or to disapprove of a proposed resolution plan – Under s. 25A(3A) the authorised representative now casts his vote on behalf of all financial creditors that he represents – If a decision taken by a vote of more than 50% of the voting share of the financial creditors that he represents is that a particular plan be either accepted or rejected, it is clear that the minority of those who vote, and all others, will now be bound by this decision – Legislature must be given freedom to experiment – Thus, any challenge to machinery provisions contained in ss. 21(6A) and 25A cannot be accepted. s. 5(8)(f) – Interpretation of – Plea that s. 5(8)(f), as it originally stood, is an exhaustive provision which must be read noscitur a sociis, and if so read, sub-clause (f) must take colour from the other clauses of the provision; that an allottee under a real estate project cannot fall within s. 5(8)(f), as it originally stood and the explanation must then be read prospectively; that since s. 5(8) is a “means and includes” definition clause, it is exhaustive , thus, to then introduce by way of amendment something extra by means of a deeming fiction is not permissible – Held: Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments – Explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law that had arisen as to whether home buyers/allottees were subsumed within s. 5(8)(f) – Explanation added to s. 5(8)(f) does not in fact enlarge the scope of the original Section – Thus, the allottees/home buyers were included in s. 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen. s. 5(8)(f) explanation – Effect of a deeming fiction – Held: Deeming fiction that is used by the explanation is to put beyond doubt the fact that allottees are to be regarded as financial creditors within the enacting part contained in s. 5(8)(f) – Under the explanation added to s. 5(8)(f), 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 – Although a deeming provision is to deem what is not there in reality, thereby requiring the subject matter to be treated as if it were real, yet several authorities and judgments show that a deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain Real Estate (Regulation and Development) Act, 2016: ss. 2, 20 to 39, 41 to 58, 71 to 78 and 81 to 92 – Impact of the RERA on the real estate sector – Stated. Doctrines/Principles: Doctrine of ‘Reading Down’ – Application of – Matter pertaining to constitutional validity of the Insolvency Code (Second Amendment) Act – Plea that if the constitutional validity of the impugned provisions is to be upheld, then the amendment to the Insolvency and Bankruptcy Code needs to be read-down so as to make it conform with Art. 14 and 19(1)(g) and 300-A – Held: In application u/s. 7 made by an allottee, the NCLT’s ‘satisfaction’ will be with both eyes open – NCLT will not ignore a legitimate defences by a real estate developer – Furthermore, the Amendment Act has been held to be constitutionally valid, and considering that its language is clear and unambiguous, there is no necessity to read into or read down any of these provisions – Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 – Insolvency and Bankruptcy Code, 2016. Legislation: Economic legislation-Insolvency Code – Legislature’s right to experiment in economic matters – Held: Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole – While dealing with economic legislation, the legislature must be given liberty – Legislative judgment in economic choices must be given a certain degree of deference by the courts – Insolvency and Bankruptcy Code, 2016.