SC Upholds Homebuyers' Status of Financial Creditors, Says It Does Not Infringe on Builder Rights

New Delhi: In a big boost for the homebuyers, the Supreme Court on Friday affirmed the government's decision to grant homebuyers the status of financial creditors, enabling them to claim their dues while banks also claim their debt.

A bench headed by Justice RF Nariman upheld the constitutional validity of the amendment brought in the Insolvency and Bankruptcy Code, 2016.

The judge, reading out the operative part of the judgment, said that the 2018 amendment in Section 5(8)(f) is being upheld with certain safeguards, especially in view of the adjudicatory role of the NCLT and NCLAT in deciding individual cases.

The bench added that the IBC amendment shall be read harmoniously with the RERA provisions.

The 2018 amendment enables homebuyers to have a place in the committee of creditors and initiate insolvency proceedings in case of a delayed possession as well as in other cases of default by the real estate companies.

The first challenge to the amendment was laid by the Pioneer Urban Land and Infrastructure filed in the Supreme Court in January 2019.

It challenged the validity of section 5(8)(f) of the IBC 2016, where homebuyers were given the right to be considered as financial creditors.

Subsequently, more than 130 similar writ petitions were filed by builders like Supertech, Parsvnath, BPTP, Ansal Hi-Tech Townships, Today Homes Noida, Ireo, SARE Shelters Projects, Wave MegaCity Centre, CHD Developers, Spaze Towers, Orris Infrastructure, AVP Buildtech, Three C Shelters, Emaar Hills Township, TDI Infrastructure, ATS Realty, among others.

Pending the final outcome of these petitions, the Supreme Court had stalled all proceedings before the NCLT, NCLAT.

While the government defended its amendment, saying the new law was meant to protect the interests of the home buyers. The amendment helped in their representation in the Committee of Creditors under IBC, argued the government's law officer.

It was further contended by the government that the explanation was inserted under Section 5(8)(f), providing that the allottees under the real estate project are considered as financial creditors, was only for the purpose of abundant clarity.

But the builders maintained that the home buyers must make their claim through RERA and consumer fora.

They argued that the amendment in IBC has only created more confusion and also resulted in additional encumbrance upon them.

The definition of 'default' in the pertinent amendment was also disputed as the law stated that financial creditors can initiate the insolvency proceedings against a corporate debtor when it commits a 'default'.

In case of delay of a project the definition of 'default' becomes vague, said the real estate firms, adding one of the reasons of delay could even be buyers' default in paying the instalments. They also dispute the ambiguity about treating home buyers as secured or unsecured creditors.

"Such cases when referred to insolvency forum turns into abuse of process of law and also sometimes lead to delay in project delivery," builders had said.

But the Supreme Court today held that there is a proper mechanism in place before the NCLT and the NCLAT and that it cannot be accepted that a trigger happy homebuyer can abuse the provision in the law.

The Court has also directed the government to ensure adequate manning of RERA and NCLT, and gave it three months to submit an affidavit in this regard.