SC upholds minimum homebuyers threshold for filing insolvency petition against real estate projects
Homebuyers have lost an important legal battle against the imposition of threshold of a minimum number of allottees for initiation of insolvency proceedings against real estate firms.
The Supreme Court on 19 January 2021 dismissed dozens of writ petitions filed against the amendment in the Section 7 (1) of the Insolvency and Bankruptcy Code (IBC) which put a condition that there should be at least 100 allottees or 10 per cent of the total allottees, whichever is less, to support an insolvency application against a real estate project.
The amendment came into force in December 2019.
Homebuyers had challenged the amendment pleading that the ‘amendment clearly falls foul of the mandate of Articles 14, 19 (1)(g), 21 and 300A of the Constitution.’ In their petition, homebuyers had argue that the amendment ‘makes a hostile discrimination between financial creditors, the category, to which the petitioners belong and the other financial creditors.’
Dismissing homebuyers argument that the said amendment violated the fundamental rights of the homebuyers given Article 14 of the constitution, the Supreme Court said that the rights of the homebuyers provided under Section 7 of IBC are not ‘personal right’ but they limited rights guided by the larger public interest.
The apex court said that it has been realised by the Legislature that there is dire need to condition the absolute right in respect of certain classes of financial creditors.
“From the standpoint of public interest, every application maintained by a single applicant, is perceived as a veritable threat to the fulfilment of the objectives of the IBC. The continuance of the applications could not, therefore, be in public interest,” said the court.
It also argued that public interest as a concept embraces, within its scope, the interest of different sections of the public, including those of the applicants, other stakeholders as well as the economy of the country, which it said is also the objective of IBC.
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It also pointed out that the consequences of an insolvency application may land the applicant and also all the stakeholders, in liquidation of the corporate debtor. Therefore, the court maintained that for safeguarding the interests of all the stakeholders, including the corporate debtor (the real estate company), from frivolous applications or those not representing a critical mass, it was dismissing the plea against the amendment introducing a threshold for homebuyers to start insolvency proceedings against real estate projects.
The court also made it clear the amendment should be applicable retrospectively as “the object of the Code would stand jeopardised if applications already filed could go on even when a fair and reasonable number of kindred souls are not available to support it.”
