Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

The Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, in Pioneer Urban Land and Infrastructure Limited v. Union of India. This act included “real estate allottees” as “financial creditors” by Section 5(8)(f) of the Insolvency and Bankruptcy Code.

The real estate developers who challenged the amendment argued that it was discriminatory and violative of Article 14 of the Constitution of India, which guarantees the right to equality before the law. They also argued that the amendment was not in line with the objectives of the IBC, which is to maximize the value of assets for the benefit of all creditors.

The Union of India, on the other hand, argued that the amendment was necessary to protect the interests of real estate allottees, who are often vulnerable to exploitation by developers. The government also argued that the amendment would help to improve the efficiency of the insolvency resolution process and boost investor confidence in the real estate sector.

For allottees, the decision in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors represents a turning point as it grants them the authority to join the Committee of Creditors on the same conditions as banks and other financial institutions, in addition to enabling them to enforce the Code. The judgment has also had a positive impact on the real estate sector as a whole. It has boosted investor confidence and has made the sector more attractive to foreign investors.

Facts of Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

In response to the Insolvency Law Committee Report, which was published by the Ministry of Corporate Affairs in March 2018, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was passed.

The recommendations were based on the National Company Law Appellate Tribunal’s decision in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited (NCLAT)[1]. In this instance, allottees who signed “assured returns / committed returns” contracts with those developers, wherein the developer committed to paying allottees a specific amount each month starting on the date of the contract’s execution in exchange for receiving a sizeable portion of the total sales consideration upfront at the time of execution.

The money that developers received under the guaranteed return schemes had the “commercial impact of borrowing,” as demonstrated by the amounts that they listed as “commitment payments” under the heading “finance charges” in their yearly reports. Proposals for the Amendment were made in light of this.

As a result, the Hon. Supreme Court has received many Writ Petitions challenging the validity of the 2018 Amendment. According to a report prepared by the Insolvency Law Committee dated 26th March 2018 (hereinafter referred to as the “Insolvency Committee Report”), a significant number of writ petitions have been filed in this Court challenging the constitutional validity of amendments made to the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”).

The aforementioned modifications designate allottees of real estate projects as “financial creditors,” enabling them to pursue legal action against the real estate developer under Section 7 of the Code. Furthermore, they have the right to have authorized representatives represent them in the Committee of Creditors because they are financial creditors.

Issues

The issues raised in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors were:

Whether Home Buyers can be considered “Financial Creditors” under the I&B Code, 2016?
Whether explanation added to Section 5(b)(f) is clarificatory or can enlarge the scope of Section 5?
Whether I&B Code, 2016 will have an overriding effect over RERA?
Whether consideration of a Home Buyer as a Financial Creditor violates Article 14, 19(1)(g) and 300-A of the Constitution of India.

Arguments in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

The recognition of allottees as financial creditors has raised concerns regarding its compatibility with Article 14 on two fronts. First, it is perceived as inequitable because it treats minority groups unfairly and lumps differences without any clear differentiation. Second, the integration of allottees into this category is considered lacking in alignment with the overarching objectives of the Insolvency and Bankruptcy Code, 2016. Moreover, these revisions have been criticized for not furthering the Code’s principal aims, which are centred on optimizing or maximising the asset value to shield corporate debtors’ shareholders from the ramifications of ineffective or clumsy management.
Critics have put forth the argument that these amendments appear arbitrary, excessive, disproportionate, and devoid of a rational foundation. They contend that these changes potentially infringe upon the constitutional rights of the petitioners under Article 19(1)(g) of the Indian Constitution, as the modifications are seen as unconstitutional and not a reasonable constraint on the grounds of public interest under Article 19(6). Additionally, the adjustments made to Section 21 and the introduction of Section 25A in the Code are seen as primarily favouring the commercial judgment of the Committee of Creditors, further accentuating the apparent arbitrariness of these changes.
Another contentious issue revolves around the Real Estate (Regulation and Development) Act of 2016, a comprehensive legislative framework addressing the intricacies of the real estate sector. It provides mechanisms for the adjudication of disputes between allottees and developers and offers a wide array of provisions favourable to allottees, including provisions about substantive agreements and the application of amendments. Critics argue that this Act could potentially supersede any prior agreements between allottees and developers. Hence, a careful analysis of the Real Estate Act reveals that it has the potential to redress all of the concerns voiced by allottees, thereby underscoring the argument that the contested modifications are excessive, disproportionate, and in violation of Articles 14 and 19(1)(g) of the Constitution.

(Respondent Side)

The Insolvency Law Committee uncovered a prevalent issue in the construction sector, namely the frequent delays in completing apartment and flat projects, which are often funded by payments collected from property buyers. It is crucial to acknowledge home buyers as financial creditors to grant them the right to invoke Section 7 of the Code and have a voice in pivotal decisions concerning the construction business and the projects, they have invested in.
The Code and the Real Estate (Regulation and Development) Act (RERA) operate in distinct domains. The Code primarily focuses on reviving corporate debtors through settlement procedures, aiming to benefit involved stakeholders. On the other hand, RERA primarily serves to safeguard the rights of private real estate investors by enforcing stringent developer standards. The protections provided to allottees under RERA are supplementary, rather than exclusive. Hence, RERA and the Code should coexist, with RERA taking precedence in the event of conflicts.
The modifications made to the Code were a response to the public’s demands and the challenges recognized by the Insolvency Law Committee. These changes align with the Code’s goals by classifying allottees as financial creditors. Importantly, this classification conforms with the Indian Constitution’s Articles 14, 19(1)(g), 19(6), and 300A. Homebuyers should be regarded as operational creditors, akin to individual financial creditors such as debenture holders and fixed deposit holders, given their substantial contributions to financing real estate projects. Furthermore, project allottees must meet the criterion of considering the time value of money to be recognized as financial creditors.

Ratio Decidendi in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

1. The Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Orsacknowledges that the Insolvency and Bankruptcy Code (the “Code”) plays a crucial role in enabling corporate debtors, particularly in the real estate sector, to succeed in their endeavours. This success often comes at the expense of unsecured creditors, such as allottees of properties. The primary objective here is to facilitate proper management within the corporate debtor’s framework, which ultimately benefits stakeholders and the public at large. This approach aims to ensure that real estate projects are executed as originally planned and that flat/apartment buyers receive their properties promptly. In cases of delayed delivery or non-delivery, the Code empowers the management to provide compensation or refund the amounts advanced by allottees along with interest.

2. In the context of Article 19(1)(g), the Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors finds that the IBC Amendment Act, 2018 which introduced changes to the Code, does not violate this constitutional provision. Article 19(1)(g) pertains to the fundamental right to carry on trade, business, or occupation. The Court asserts that the IBC Amendment Act, 2018 was enacted in the public interest, and it does not impose an unreasonable restriction on the fundamental rights guaranteed under Article 19(1)(g). The Amendment Act’s core objective is to enhance the efficiency and effectiveness of the insolvency resolution process, contributing to economic growth and stability. The Court emphasizes that in pursuing this public interest, the fundamental rights of the petitioner are not unduly curtailed.

3. Furthermore, the Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors maintains that there is no infringement of Article 300 A. Article 300-A pertains to the right to property and states that no person shall be deprived of their property except by the authority of a constitutionally valid law. In the context of the IBC Amendment Act, 2018 and its impact on corporate debtors and unsecured creditors, the Court finds that the IBC Amendment Act, 2018 is a constitutionally valid law that serves a legitimate public purpose.

It provides a structured framework for insolvency proceedings, safeguards the rights of various stakeholders, and ensures a fair and transparent resolution process. Consequently, the Court concludes that the petitioner’s property rights are not violated by the provisions of the IBC Amendment Act, 2018. In essence, the Supreme Court’s perspective underscores the balancing act between the interests of corporate debtors and unsecured creditors, particularly allottees in the real estate sector.

The Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors recognizes the Code’s role in promoting the timely completion of real estate projects and the protection of the rights of property buyers. It also upholds the constitutionality of the IBC Amendment Act, 2018 highlighting its public interest objectives and its compliance with constitutional provisions related to fundamental rights and property rights.

Judgement in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

The Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors ruled as follows:

The Insolvency Law Committee Report’s proposal that the Project be funded with the money paid by the house buyer was cited by the Supreme Court. The Supreme Court said that because it is paid in advance for temporary usage for the apartment to be returned to the lender, the money obtained under the terms of the sale agreement between the house buyer and the developer has the commercial impact of borrowing.

It is recommended to read the Code as revised by the Amendment Act in combination with the RERA. The Code will only supersede the RERA in the case of a disagreement. The remedies available to those who have been allotted flats or apartments are therefore complementary, and they may be used following the Code, RERA, and the Consumer Protection Act of 1986.

The Court cited its ruling in Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited[2], wherein it was decided that winding up procedures under the Companies Act, 1956, and Debt Recovery Tribunal proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, could take place concurrently.

The court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors found that RERA and the Code “must be held to coexist, and, in the event of a clash, RERA must give way to the Code, even by a process of harmonious construction.” Therefore, it cannot be said that RERA is a unique legislation that would supersede the Code in the event of a disagreement.

Since its initial appearance in the Code, Section 5(8)(f) has included allottees of flats/apartments as part of its residuary provisions. This legal position is only made clearer by the explanation and the deeming fiction introduced by the Amendment Act.

Analysis of Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors

The Supreme Court debated whether house purchasers might be considered “Financial Creditors” under Section 5 of the Insolvency and Bankruptcy Code (I&B Code) while deciding the first issue. It is important to realize that a financial creditor is a person who is owed money and that this money has to do with the idea of the “time value of money.” To put it another way, it describes situations in which lenders give money to borrowers, who use it, and eventually have to pay back the borrowed amount or its equivalent.

Examining the suggestions in the Insolvency Committee Report was another aspect of the Court’s deliberations. The widespread problem of housing project completion delays, which negatively impacts allottees or home buyers, was brought to light in this paper. These purchasers of real estate make a substantial contribution to the building of flats and apartments. As a result, the research stressed the necessity of defining homebuyers’ position as “Financial Creditors.” With this clarification, they would have the authority to start the Corporate Insolvency Resolution Process (CIRP) following Section 7 of the I&B Code. They would also be granted a legitimate position on the committee of creditors, allowing them to have an impact on decisions concerning the advancement of real estate projects.

Regarding the second matter, the petitioner in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors argued that Section 5(8)(f) ought to be construed following the doctrine of noscitur a sociis, which postulates that a statute’s definition, in cases where it is imprecise or unclear, ought to be construed in light of the phrases that surround it. That is to say, this suggests that the term “financial debt” should only refer to loans of money, whether or not they include an interest rate and must be returned with the money. The Supreme Court, however, disapproved of this view. It claimed that Section 5(8)(f) is a residual clause that functions as a “catch-all”. It therefore declares that “any amount” or “any transaction” that isn’t protected by another paragraph would be deemed a “Financial Debt” if it shows signs of “commercial borrowing.” This indicates that payments paid for a flat or apartment by house purchasers to real estate developers for the completion of projects are going to be considered “borrowings.”

On the third point, the petitioner in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors said that the I&B Code should yield to the Real Estate (Regulation and Development) Act (RERA). The underlying assumption of this argument was that the I&B Code is a broad legislation that deals with insolvency concerns, whereas RERA is a specialist act focused on the regulation of real estate development projects.

The Supreme Court, however, disagreed with this claim. It emphasized this position’s two main justifications.

First off, RERA Section 88 makes it clear that the Act’s provisions are supplemental and do not supplant or relax existing laws. This suggests that in addition to the remedies offered under the I&B Code, there are further remedies available under RERA.

Second, it was observed in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors that the non-obstante provision of the I&B Code was adopted on December 1, 2016, but the non-obstante clause of the RERA was legislated earlier and went into force on May 1, 2016. Moreover, on June 6, 2018, the modification that clarified Section 5(8)(f) came into effect, indicating that the Indian Parliament was informed about the existence of RERA at the time the change was proposed. The I&B Code was therefore given precedence over RERA in light of the events that transpired, and the two legal frameworks were intended to live peacefully, with the I&B Code assuming precedent in the case of a disagreement.

Concerning the fourth point, the petitioner claimed that the designation of allottees or property buyers as Financial Creditors was a violation of Article 14 of the Indian Constitution. In this case, the reasoning was that equals were treated unequally and unequal parties equally, and there was no obvious reason to distinguish between the two. The Supreme Court, however, disagreed with this claim and offered several arguments in favour of its stance. It was clear that real estate developers and operational debtors differed fundamentally from one another.

When it comes to operational debt, the party providing the products and services is known as the creditor, and the person having to pay for them is known as the debtor. On the other hand, in the context of real estate development, the developer—that is, the person who provides the apartments—becomes the debtor since the purchasers of the units make upfront payments to finance the building’s construction. Moreover, operational creditors are neither financially nor directly involved with the corporate debtor. On the other hand, in the case of real estate developers, the purchasers or allottees of real estate projects are highly worried about the corporate debtor’s financial stability because any instability might cause delays in project completion. It is thus difficult to claim that the categorization of house purchasers lacks a logical foundation because this distinction validates the classification of real estate developers as Financial Debtors.

The Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr vs Union of India & Ors gave a thorough explanation before moving on to the alleged breaches of Article 19(1)(g) and Article 300-A of the Indian Constitution. It made clear that the main goals of the Insolvency and Bankruptcy Code, which are to protect the interests of unsecured creditors like property purchasers and rehabilitate corporate debtors, are positive legislative measures. To guarantee that homebuyers receive their flats or apartments on time, the Code is activated to assist the corporate debtor in regaining its financial stability.

The Court stressed that it cannot be argued that Section 58%(f) was established arbitrarily, citing the “ShayaraBano v. Union of India”[3] test. Consequently, the Court determined that the alteration was made in the public interest and did not infringe Article 19(1)(g), constituting a fair restriction on the petitioner’s basic rights under that provision.

Conclusion

According to the Supreme Court, neither Articles 14, 19(1)(g) in combination with Article 19(6) nor Article 300-A of the Indian Constitution are violated by the Amendment Act to the I&B Code. The I&B Code supersedes RERA in the event of a disagreement, as the two codes are intended to coexist. The Consumer Protection Act, RERA, and the I&B Code are among the concurrent remedies that apartment or flat allottees may pursue. Rather than bringing about a major change, the explanation included in Section 5(8)(f) sought to clarify the current legal situation.