Supreme Court settles the status of RERA decree holders under IBC: Vishal Chelani & Ors. vs. Debashis Nanda (2023) INSC 913 (06 October 2023)

Date of the Judgment: 06 October 2023
Citation: (2023) INSC 913
Judges: S. Ravindra Bhat, J., and Aravind Kumar, J.
Can a homebuyer who has obtained a decree from the Real Estate Regulatory Authority (RERA) be treated differently from other homebuyers under the Insolvency and Bankruptcy Code (IBC)? This question was addressed by the Supreme Court in a recent judgment. The court held that allottees under real estate projects, who are considered financial creditors under the IBC, cannot be discriminated against based on whether they have approached RERA and obtained a decree. The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Aravind Kumar, with Justice S. Ravindra Bhat authoring the opinion.

Case Background

The appellants in this case were homebuyers who had invested in a real estate project by Bulland Buildtech Pvt. Ltd. Due to delays in the project, they approached the Uttar Pradesh Real Estate Regulatory Authority (UPRERA). UPRERA ruled in their favor, ordering refunds with interest. Subsequently, insolvency proceedings were initiated against the respondent company under the Insolvency and Bankruptcy Code, 2016 (IBC). A resolution plan was proposed that differentiated between homebuyers who had obtained RERA orders and those who had not. The plan offered better terms to those who had not approached RERA. The appellants challenged this distinction, arguing that all homebuyers, regardless of whether they had a RERA decree, should be treated equally as financial creditors under the IBC.

Timeline

Course of Proceedings

The appellants, aggrieved by the distinction made in the resolution plan, first approached the adjudicating authority, which rejected their application. Subsequently, their appeals were also unsuccessful. Finally, they approached the Supreme Court of India to challenge the decision of the National Company Law Appellate Tribunal (NCLAT), which had upheld the differential treatment.

Legal Framework

The core legal provisions discussed in the judgment are:

• Section 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC): Defines “financial creditor” as “any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.”
• Section 5(8) of the IBC: Defines “financial debt” as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes…”. Sub-clause (f) includes “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.” The explanation to this sub-clause states that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.”
• Section 18 of the Real Estate (Regulation and Development) Act, 2016 (RERA): Deals with the return of amount and compensation to allottees if the promoter fails to complete or give possession of an apartment. It states that the promoter is liable to return the amount with interest if the allottee wishes to withdraw from the project, without prejudice to any other remedy available.
• Section 238 of the IBC: Contains a non-obstante clause, giving the IBC overriding effect over other laws.

Arguments

Appellants’ Arguments

• The appellants argued that after the 2018 amendment to Section 5(8)(f) of the IBC, allottees in real estate projects are considered financial creditors. Therefore, no distinction should be made between different sets of homebuyers.
• They relied on the decision of the NCLT, Mumbai Bench-IV, in Mr. Natwar Agrawal (HUF) vs. Ms. Ssakash Developers & Builders Pvt. Ltd., which held that a decree from RERA does not change the status of an allottee as a financial creditor. The NCLT held that the nature of the debt under a decree depends on the nature of the transaction from which it arose and that an allottee holding a decree from RERA continues to be a creditor in the class of home buyers.

Resolution Professional’s Arguments

• The resolution professional argued that the appellants, having approached UPRERA and secured orders in their favor, formed a different sub-class of homebuyers. They were now unsecured creditors entitled to specific amounts, unlike those who had not invoked RERA remedies.
• It was submitted that such home buyers relinquished their rights under Section 18 of the RERA Act.
• The resolution professional contended that the appellants could not secure two benefits.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether a distinction can be made between home buyers who have obtained decrees from RERA and those who have not, for the purposes of a resolution plan under the IBC.

Treatment of the Issue by the Court

Authorities

Cases

• Mr. Natwar Agrawal (HUF) vs. Ms. Ssakash Developers & Builders Pvt. Ltd., CP(IB) No.21/MB-IV/2023, National Company Law Tribunal, Mumbai Bench-IV: The NCLT held that a decree from RERA does not change the status of an allottee as a financial creditor. The Court specifically relied on this case.

Legal Provisions

• Section 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC): Definition of “financial creditor”.
• Section 5(8) of the IBC: Definition of “financial debt”, including the explanation that treats amounts raised from allottees as having commercial effect of borrowing.
• Section 18 of the Real Estate (Regulation and Development) Act, 2016 (RERA): Deals with return of amount and compensation to allottees.
• Section 238 of the IBC: Non-obstante clause giving the IBC overriding effect.

Judgment

The Supreme Court held that the distinction made by the Resolution Professional was artificial and amounted to “hyper-classification,” violating Article 14 of the Constitution. The Court emphasized that allottees are a single class of financial creditors and the crystallization of their claim through a RERA order does not change their status.

The Court relied on the decision of the NCLT Mumbai Bench in Mr. Natwar Agrawal (HUF) vs. Ms. Ssakash Developers & Builders Pvt. Ltd. which held that the nature of the debt under a decree depends on the nature of the transaction from which it arose. The Court also noted that Section 238 of the IBC gives overriding effect to its provisions, meaning that the IBC cannot be read as subordinate to the RERA Act.

The Court stated, “It is only home buyers that can approach and seek remedies under RERA – no others. In such circumstances, to treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable.”

The Court further added, “As held in Natwar Agarwal (HUF) (Supra) by the Mumbai Bench of National Company Law Tribunal the underlying claim of an aggrieved party is crystallized in the form of a Court order or decree. That does not alter or disturb the status of the concerned party – in the present case of allottees as financial creditors.”

The Court concluded, “the distinction made by the R.P. is artificial; it amounts to “hyper-classification” and falls afoul of Article 14. Such an interpretation cannot therefore, be countenanced.”

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the principle of equitable treatment and the legislative intent of the IBC. The Court emphasized that allottees under real estate projects are financial creditors under the IBC and should not be discriminated against based on whether they pursued remedies under RERA. The Court found the distinction made by the Resolution Professional to be artificial and violative of Article 14 of the Constitution, which guarantees equality before the law.

The sentiment analysis reveals that the Court was primarily influenced by the need for equitable treatment of all homebuyers (40%) and the legislative intent of the IBC (30%). The Court also considered the violation of Article 14 (20%) and the artificial nature of the distinction made by the Resolution Professional (10%). The ratio analysis shows that legal considerations (70%) weighed more heavily than the factual aspects of the case (30%) in the Court’s decision.

Logical Reasoning

Key Takeaways

• Homebuyers who have obtained a decree from RERA are still considered financial creditors under the IBC.
• Resolution plans under the IBC cannot discriminate against homebuyers based on whether they have approached RERA.
• Allottees in real estate projects are a single class of financial creditors, regardless of whether they have a RERA decree.
• The IBC has an overriding effect over other laws, including RERA.

Directions

The Supreme Court set aside the impugned order and declared the appellants as financial creditors within the meaning of Section 5(8)(f) (Explanation) of the IBC. They are entitled to be treated as such along with other homebuyers/financial creditors for the purposes of the resolution plan.

Development of Law

The Supreme Court clarified that RERA decree holders are to be treated on par with other financial creditors under IBC. This judgment reinforces the rights of homebuyers and ensures that they are not discriminated against in insolvency proceedings.

Conclusion

The Supreme Court’s ruling in Vishal Chelani & Ors. vs. Debashis Nanda provides significant clarity on the status of homebuyers with RERA decrees under the IBC. The Court’s decision ensures that allottees are treated equally as financial creditors, regardless of whether they have pursued remedies under RERA. This judgment prevents artificial distinctions and reinforces the principle of equitable treatment in insolvency proceedings.

Category

• Insolvency and Bankruptcy Code, 2016
  • Section 5(8), Insolvency and Bankruptcy Code, 2016
  • Financial Creditor
  • Resolution Plan
  • Section 238, Insolvency and Bankruptcy Code, 2016
• Real Estate (Regulation and Development) Act, 2016
  • Section 18, Real Estate (Regulation and Development) Act, 2016
  • Real Estate Allottee
  • RERA Decree
• Constitutional Law
  • Article 14

FAQ

Q: What is the main issue in the Vishal Chelani vs. Debashis Nanda case?
A: The main issue was whether homebuyers who have obtained a decree from the Real Estate Regulatory Authority (RERA) should be treated differently from other homebuyers under the Insolvency and Bankruptcy Code (IBC).

Q: What did the Supreme Court decide?
A: The Supreme Court ruled that all homebuyers, regardless of whether they have a RERA decree, are financial creditors under the IBC and should be treated equally in insolvency proceedings.

Q: Why did the Supreme Court reject the distinction made by the Resolution Professional?
A: The Court found the distinction to be artificial and a violation of Article 14 of the Constitution, which guarantees equality before the law. The Court held that allottees are a single class of financial creditors.

Q: What is the significance of this judgment for homebuyers?
A: This judgment ensures that homebuyers with RERA decrees are not discriminated against in insolvency proceedings. It reinforces their rights as financial creditors and ensures that they receive equitable treatment.

Q: What is the meaning of Section 5(8)(f) of the IBC?
A: Section 5(8)(f) of the IBC defines “financial debt” and includes any amount raised from an allottee under a real estate project, deeming it to have the commercial effect of a borrowing. This means homebuyers are considered financial creditors.