Law Maker

Pioneer Urban Land and Infrastructure Ltd. v. Union of India

Supreme Court of India · 9 August 2019 · 3 judges

The 2018 amendments to the Insolvency and Bankruptcy Code treating home buyers (allottees) as financial creditors are constitutionally valid; RERA and the Code operate concurrently, the Code prevailing in case of conflict.

Facts

After the NCLAT held in 2017 that allottees under assured return schemes were financial creditors, and after this Court's orders protecting home buyers in the Jaypee Infratech and Amrapali insolvencies, the Insolvency Law Committee recommended clarifying that allottees of real estate projects are financial creditors. An Ordinance of 6th June 2018, replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, added an Explanation to Section 5(8)(f) deeming amounts raised from allottees to have the commercial effect of a borrowing, and inserted Section 21(6A)(b) and Section 25A on authorised representatives of large classes of financial creditors. Real estate developers filed a large batch of writ petitions under Article 32 challenging these amendments as violating Articles 14, 19(1)(g) and 300-A, arguing among other things that RERA, as a special law, should govern allottees' claims.

Questions before the Court

  1. Do the amendments treating allottees as financial creditors violate Articles 14, 19(1)(g) or 300-A of the Constitution?
  2. How do RERA and the Insolvency and Bankruptcy Code interact, and does RERA as a special law override the Code?
  3. Should the amended provisions be read down to prevent misuse by allottees?
  4. Did Section 5(8)(f), as originally enacted, already cover allottees, making the Explanation clarificatory?

What the Court held

  • The Amendment Act does not violate Article 14, Article 19(1)(g) read with Article 19(6), or Article 300-A. Real estate developers form a distinct class: allottees fund construction through advances that carry the time value of money and are vitally interested in the developer's financial health. Economic legislation is owed greater deference.
  • RERA and the Code are to be read harmoniously and give allottees concurrent remedies, along with those under the Consumer Protection Act, 1986. In case of conflict the Code prevails, being the later law and given Section 88 of RERA.
  • The provisions are not to be read down. The NCLT must consider the developer's defences, including that the allottee is himself a defaulter, and under Section 65 that the process was invoked fraudulently or maliciously, for example by a speculative investor. The 14 day period in Section 7(4) is directory.
  • The machinery in Sections 21(6A)(b) and 25A for authorised representatives voting for allottees was upheld.
  • Section 5(8)(f), as a residuary provision, always included allottees from the inception of the Code. The 2018 Explanation and its deeming fiction only clarify this position.

Why it matters

The judgment upholds the inclusion of home buyers as financial creditors under the Code and settles that RERA, the Consumer Protection Act and the Code offer concurrent remedies, with the Code prevailing in conflict. It applies the Swiss Ribbons approach of deference to economic legislation and the manifest arbitrariness test, identifies safeguards for developers before the NCLT, and directs States and Union Territories to set up permanent RERA authorities and the Union to staff the NCLT and NCLAT adequately.

In the Court's words

Copied from the official judgment; each passage links to its page.

“The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. ii. The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.”
R.F. Nariman, J. (for the Court)Page 184 of the judgment
“We, therefore, hold that allottees/home buyers were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen.”
R.F. Nariman, J. (for the Court)Page 183 of the judgment
“under Section 65 of the Code, the real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency. This the real estate developer may do by pointing out, for example, that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment.”
R.F. Nariman, J. (for the Court)Page 138 of the judgment
“It is clear, therefore, that even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code.”
R.F. Nariman, J. (for the Court)Page 85 of the judgment

Provisions interpreted

Related judgments

Case and bench

Parties
Pioneer Urban Land and Infrastructure Limited v. Union of India
Case
Writ Petition (Civil) No. 43 of 2019 (with connected writ petitions and Civil Appeal No. 1486 of 2019)
Decided
9 August 2019
Bench
R.F. Nariman, Sanjiv Khanna, Surya Kant
Opinions
Unanimous. Judgment of the Court by R.F. Nariman, J., signed by all three judges.

Questions on this case

1 question in live Law Maker papers mentions this case. Practise them with the landmark judgments questions.