19 February 2019: Ireo on Monday challenged the section 5(8)(f) of the Insolvency and Bankruptcy Code 2016 in the Supreme Court which ensures inclusion of home buyers as financial creditors under the code. The company has taken a stay over the insolvency proceedings going-on against them.
Ireo is the latest in the line of several builders who have knocked the SC’s door and have received a temporary relief. In the last one week, Supertech, TDI Infrastructure, Ansal Properties, all have filed a plea in the apex court regarding the insolvency cases going on against them.
“The filing of petitions started after SC in January 2019 gave a stay order in the case filed by Pioneer Urban Land and Infrastructure against the insolvency proceedings going on against it in NCLT-Delhi,” informed Aditya Parolia, partner, PSP Legal Advocates and Solicitors. Parolia is representing about 50 home buyers against Ireo, Parsvnath and Ansal Properties.
In its petition the company had prayed that direction be given against the amendment that has been made in IBC. “The petition is filed under Article 32 of the constitution of India, challenging the validity of the explanation of section 5(8)(f), section 21 (6A)(b) and section 25 A of the Insolvency and Bankruptcy Code 2016 as being violations of articles 14 and 19(1)(g) of the constitution.”
Hearing the petition, justice Rohinton Fali Nariman and justice Vineet Saran on January 21 had said “there shall be stay of further proceedings before the National Company Law Tribunal, Principal Bench, New Delhi.”
Interestingly few days later, the same judge, Rohinton Fali Nariman, upheld the constitutional validity of the IBC code in its entirety in the case related to Swiss Ribbons.
However after SC’s judgement in Pioneer’s case, all other builders quickly moved to SC taking a stay order against all the proceedings.
Shubham Jain, vice president, Corporate Ratings at ICRA said, “Even a single buyer in a single project pursuing such a remedy could put the company at risk of defaulting on loan obligations, irrespective of the liquidity position of the company. Managing such risks will be a challenge for developers, especially those who have legacy projects where completion has been affected by factors such as weak sales, declining prices or inadequate funds.”
It must also be noted that after the said amendment was made in the IBC code, SC had sent the Jaypee Infratech’s case back to NCLT even after it completed the 270 days. “If the judgement goes in the favour of builders it might have a cascading affect on home buyers across India. The entire case of Jaypee Infratech now is based on this particular amendment. SC sent back the case to NCLT after the amendment was made in IBC to give representation to the home buyers involved in the case,” said Ashwarya Sinha, advocate representing home buyers in several cases against builders.
Daizy Chawla, senior partner, Singh & Associates also argues that one must also look at the fact that after the amendment, the number of cases under IBC Code filed by a single/handful of home buyer(s), whose project have been delayed for some reason, have increased tremendously.
“With the focus under IBC remaining on providing recoveries to financial creditors, its effectiveness in addressing the issue of timely completion of projects remains to be seen,” added Jain.
Initially home buyers were treated neither as financial nor operational creditors under the IBC. Hence in June 2018, the amendment of Section 5(8)(f) with respect to the definition of ‘Financial Debt’ ensured inclusion of home buyers as financial creditors under the Code. With this amendment, home buyers can now initiate insolvency proceedings against developers who have not completed projects within the dates specified in the sale agreements.