SC upholds threshold for filing insolvency plea against realty developers

Amendments to IBC not vague: court

The Supreme Court on Tuesday upheld amendments in the Insolvency and Bankruptcy Code which prescribe that at least 100 allottees from the same real estate project should support the initiation of corporate insolvency resolution process in the National Company Law Tribunal (NCLT) against their property developer.

The Insolvency and Bankruptcy Code (Amendment) Act of 2020 had introduced a threshold that required a minimum of 100 allottees, or 10% of the total allottees of a project, whichever was less, to jointly apply for corporate insolvency resolution in the NCLT. The allottees should be from the same real estate project. Aggrieved allottees drawn from different projects of the same developer cannot form the 100.

A third amendment had given a 30-day deadline for existing applicants to find the requisite number of supporters to meet the threshold of 100, else their plea pending in the tribunal even before the commencement of the 2020 Act would be deemed as withdrawn.

Under the erstwhile regime, even a single allottee could initiate the corporate insolvency resolution process against his property developer. There was no need to garner support from other allottees.

A three-judge Bench led by Justice Rohinton F. Nariman found none of the amendments vague or arbitrary.

The court agreed with the legislature that having a single allottee approach the tribunal would be risky, considering that a corporate insolvency resolution may also entail a complete overhaul or replacement of the developer’s company management.

Such an initiative by a lone allottee would derail the plans of other allottees, who still had faith in the existing developer or were pursuing other legal remedies.

‘Against others’ interest’

“There can be hundreds or even thousands of allottees in a project. If a single allottee, as a financial creditor, is allowed to move an application, the interests of all the other allottees may be put in peril… Other allottees may have a different take of the whole scenario. Some of them may approach the Authority under the Real Estate (Regulation and Development) Act of 2016. Others may, instead, resort to the Consumer Protection Act. The remedy of a civil suit is, no doubt, not ruled out,” Justice K.M. Joseph, who authored the judgment for the Bench, reasoned.

The court said allottees of a real estate project are a heterogenous group. A majority of them may want to give more time to the developer to complete the project.

“An individual allottee, out of the heterogenous group, would throw the spanner in the works and bring the entire real estate project itself to a possible doom,” Justice Joseph pointed out the flaw in the working of the previous regime before the amendments.

The 474-page judgment, based on petitions filed by allottees of real estate projects and money lenders who finance such property endeavours, said there is a sound rationale behind the law’s requirement that the 100 applicants should be from the same project.

Several allottees bunch together from various projects would lead to confusion as their complaints would vary and make the insolvency resolution process cumbersome.

“The connection with the same real estate project is crucial to the determination of the critical mass… If it is to embrace the total number of allottees of all projects, which a promoter of a real estate project may be having, in one sense, it will make the task of the applicant himself, more cumbersome. It becomes a sword, which will cut both ways. This is for the reason that the complaints, relating to different projects, may be different,” the court explained.

The court dismissed averments made by petitioners that the 30-day deadline was “manifestly arbitrary”.

“Prescribing a time limit in regard to pending applications, cannot be, per se, described as arbitrary, as otherwise, it would be an endless and uncertain procedure. The applications would remain part of the docket and also become a Damocles Sword overhanging the debtor and the other stakeholders with deleterious consequences also qua the objects of the Code,” the Supreme Court said.

However, the court said it would have been, undoubtedly, more reassuring if the period had been longer than 30 days.

In a mild criticism of the manner of enactment of the amendments, the court said “the law came as a bolt from the blue”.

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