The Supreme Court sought response from the government on a couple of petitions challenging the validity of a recent amendment to the IBC introducing a threshold of at least 10% of homebuyers in a project or 100 of the total allottees for initiating insolvency proceedings against the real estate developer. A Bench of Justice RF Nariman issued notice the ministries of finance, law and corporate affairs on the petitions filed by homebuyers and the Association of Karvy Investors, challenging the Insolvency and Bankruptcy Code (Amendment) Ordinance 2019. The apex court also asked parties to maintain a status quo with regard to the application filed by homebuyers for initiating insolvency proceedings in the National Company Law Tribunals.
  1. The ordinance says homebuyers looking to take a developer to an insolvency court will have to ensure that a minimum of 100 or 10% of the total allottees of a project were part of the joint petition seeking initiation of insolvency proceedings against the builder.
  2. Challenging Section 3 of the ordinance, the petitions said the ordinance is in violation of Articles 14 (equality before law) and 21 (protection of life and personal liberty) of the Constitution as it had rendered buyers, who are financial creditors, bereft of remedy and also subjected them to discrimination by putting a precondition in the form of a minimum number of allottees of a particular project required for filing an application under Section 7 of the IBC for initiation of the IRP.
  3. That a conjoint reading of the Section 3 of the Ordinance along with the other IBC provisions makes it clear that even though no difference exists between different classes of financial creditors, the ordinance seeks to differentiate between creditors… without any substantial difference existing in law. 
  4. As a consequence, the ordinance is violative of Article 14 of the Constitution of India and is liable to be struck down, counsel Ashwarya Sinha, who filed the petition for the association, said.
  5. Petitioner Manish Kumar also challenged the retrospective application of the ordinance with respect to the homebuyers’ plea before tribunals. Kumar in his petition filed through his counsel Akash Vajpai said the new changes will affect homebuyers who have already approached the NCLT under the IBC.
  6. One of the plea said financial creditors already form a ‘class’ within creditors under the IBC and debt owed to them forms a ‘class’ under the Code.
  7. The ordinance dissects financial creditor further and imposes a condition on that newly-created class. This condition hinders them from reaping the benefits available to others under the Code. 
  8. This amounts to creation of a ‘class within a class’ and is unconstitutional and manifestly arbitrary, violating Article 14 of the Constitution, the petition said.