PIONEER URBAN LAND AND INFRASTRUCTURE LIMITED & ANR. versus UNION OF INDIA & ORS.

[2019] 10 S.C.R. 381

PIONEER URBAN LAND AND INFRASTRUCTURELIMITED & ANR.

UNION OF INDIA & ORS.

(Writ Petition (Civil) No. 43 of 2019)

AUGUST 09, 2019

[R.F. NARIMAN, SANJIV KHANNA AND SURYA KANT, JJ.]

Insolvency and Bankruptcy Code, 2016:

ss. 5(8)(f), 21(6A)(b) and 25A – Amendments made to the Codevide Amendment Act, which deem allottees of real estate projects tobe “financial creditors” so that they may initiate insolvencyproceedings u/s. 7 against the real estate developer and beingfinancial creditors, were entitled to be represented in the Committeeof Creditors by authorised representatives – Constitutional validityof amendments made to the Code – Held: Constitutionality of theAmendment Act is upheld – Amendment to the Code does not infringeArts. 14, 19(1)(g) r/w Art. 19(6), or 300-A – Constitution of India –Arts. 14, 19(1)(g) r/w Art. 19(6), 300-A – Insolvency and BankruptcyCode (Second Amendment) Act, 2018.

s.7– Amendment to the Code whereby home buyers categorizedas financial creditors under the Code – Reasons for amendment –Held: Insolvency Law Committee found that delay in completion offlats/apartments has become common phenomenon, and amountsraised from homebuyers contributes significantly to financing ofthe construction of such flats/apartments – Thus, it was important,to clarify that homebuyers are treated as financial creditors so thatthey can trigger the Code u/s. 7 and have their rightful place in theCommittee of Creditors when it comes to making important decisionsas to execution of the real estate project in which homebuyers are–ultimately to be housed Insolvency and Bankruptcy Code (SecondAmendment) Act, 2018.

Insolvency and Bankruptcy Code vis-à-vis Real Estate(Regulation and Development) Act (RERA) – Held: Real Estate(Regulation and Development) Act is to be read harmoniously withthe Code, as amended by the Amendment Act – In case of conflict,

Athe Code will prevail over RERA – It cannot be said that RERA is aspecial enactment which deals with real estate development projectsand must, thus, be given precedence over the Code, which is only ageneral enactment dealing with insolvency generally – Parliamentwas aware of RERA, and applied some of its definition provisionsso that they could apply when the Code is to be interpreted – RERABis in addition to and not in derogation of the provisions of anyother law for the time being in force – Also the remedies underRERA to allottees were intended to be additional and not exclusiveremedies – Code and RERA operate in completely different spheres– Code deals with proceeding in rem in which the focus is theCrehabilitation of the corporate debtor by means of resolution planwhich puts the same or another management in the saddle, subjectto the provisions of the Code, whereas, RERA protects the interestsof the individual investor in real estate projects by requiring thepromoter to strictly adhere to its provisions – Real Estate (Regulationand Development) Act, 2016.D

ss. 5(7), 5(8) and 5(21) – Financial Creditors and OperationalCreditors – Explanation of – Held: Financial creditor is defined u/s. 5(7) as person to whom financial debt is owed and financialdebt is defined in s. 5(8) to mean debt which is disbursed againstconsideration for the time value of money – An operational creditorEmeans person to whom an operational debt is owed and anoperational debt u/s. 5(21) means claim in respect of provision ofgoods or services – Financial creditor may trigger the Code eitherby itself or jointly with other financial creditors or such persons asmay be notified by the Central Government when “default” occurs.Fss. 5(8)(f), 21(6A)(b), 25A – Plea that treating home buyers/allottees to be financial creditor is violative of Arts. 14, 19(1)(g)and Art. 300-A; that the amendment is discriminatory inasmuch asit treats unequals equally, and equals unequally, having no intelligibledifferentia; and that there is no nexus with the objects sought to beGachieved by the Code – Held: Amendment Act to the Code does notinfringe Arts 14, 19(1)(g) rw Art. 19(6), or 300-A – Home buyers/allottees give advance to the real estate developer and therebyfinance the real estate project at hand, are really financial creditors– Objects of the Code are sub-served by treating allottees as financialcreditors – Code is, thus beneficial legislation which can beH

invoked by unsecured creditors like allottees against the corporatedebtor so that replaced management may then carry out the realestate project as originally envisaged – It cannot be said that Art.19(1)(g) has been infracted and not saved by Art. 19(6) as theAmendment Act is made in public interest – There is no unreasonablerestriction on the petitioner’s fundamental right u/Art. 19(1)(g) –Also, there is no infraction of Art. 300-A as no person is deprivedof its property without authority of constitutionally valid law –Furthermore, it cannot be said that classifying real estate developersis not founded upon an intelligible differentia which distinguishesthem from other operational creditors – Allottees, being individualfinancial creditors like debenture holders and fixed deposit holdersand classified as such, show that they within the larger class offinancial creditors, there being no infraction of Art. 14 – Insolvencyand Bankruptcy Code (Second Amendment) Act, 2018 – Constitutionof India – Arts 14, 19(1)(g) rw Art 19(6), or 300-A.

s. 7 – Application u/s. 7 by allottee/home buyer – Effect of –Held: Code is not meant to be debt recovery mechanism – It is aproceeding in rem which, after being triggered, goes completelyoutside the control of the allottee who triggers it – Thus, any allottee/home buyer who prefers an application u/s. 7 takes the risk of hisflat/apartment not being completed in the near future, in the eventof there being breach on the part of the developer – Under theCode, he may never get refund of the entire principal, let aloneinterest – After the petition is admitted u/s. 7, resolution plan istaken up, usually by another developer, who has to pass musterunder the Code and must further go through challenges before NCLTand NCLAT before the new management can take over and eithercomplete construction, or pay out or refund amounts – Thus, giventhe bona fides of the allottee who moves an application u/s. 7, it isonly such allottee who has completely lost faith in the managementof the real estate developer who would come before NCLT underthe Code.

ss. 21(6A) and 25A – Committee of creditors – Rights andduties of authorized representatives of financial creditors –Challenge to ss. 21(6A) and 25A – Held: Allottees may not be ahomogenous group, yet there are only two ways in which they canvote on the Committee of Creditors, either to approve or to

Adisapprove of proposed resolution plan – Under s. 25A(3A) theauthorised representative now casts his vote on behalf of allfinancial creditors that he represents – If decision taken by voteof more than 50% of the voting share of the financial creditors thathe represents is that particular plan be either accepted or rejected,it is clear that the minority of those who vote, and all others, willBnow be bound by this decision – Legislature must be given freedomto experiment – Thus, any challenge to machinery provisionscontained in ss. 21(6A) and 25A cannot be accepted.s. 5(8)(f)– Interpretation of – Plea that s. 5(8)(f), as itoriginally stood, is an exhaustive provision which must be readCnoscitur sociis, and if so read, sub-clause (f) must take colour fromthe other clauses of the provision; that an allottee under realestate project cannot fall within s. 5(8)(f), as it originally stood andthe explanation must then be read prospectively; that since s. 5(8)is “means and includes” definition clause, it is exhaustive , thus,Dto then introduce by way of amendment something extra by meansof deeming fiction is not permissible – Held: Section 5(8)(f) as itoriginally appeared in the Code being residuary provision, alwayssubsumed within it allottees of flats/apartments – Explanationtogether with the deeming fiction added by the Amendment Act isonly clarificatory of this position in law that had arisen as to whetherEhome buyers/allottees were subsumed within s. 5(8)(f) – Explanationadded to s. 5(8)(f) does not in fact enlarge the scope of the originalSection – Thus, the allottees/home buyers were included in s. 5(8)(f)with effect from the inception of the Code, the explanation beingadded in 2018 merely to clarify doubts that had arisen.F

s. 5(8)(f) explanation – Effect of deeming fiction – Held:Deeming fiction that is used by the explanation is to put beyonddoubt the fact that allottees are to be regarded as financial creditorswithin the enacting part contained in s. 5(8)(f) – Under theexplanation added to s. 5(8)(f), any amount raised from an allotteeGunder real estate project shall be deemed to be an amount havingthe commercial effect of borrowing – Although deeming provisionis to deem what is not there in reality, thereby requiring the subjectmatter to be treated as if it were real, yet several authorities andjudgments show that deeming fiction can also be used to putbeyond doubt particular construction that might otherwise beHuncertain.

Real Estate (Regulation and Development) Act, 2016: ss. 2,20 to 39, 41 to 58, 71 to 78 and 81 to 92 – Impact of the RERA onthe real estate sector – Stated.

Doctrines/Principles: Doctrine of ‘Reading Down’ –Application of – Matter pertaining to constitutional validity of theInsolvency Code (Second Amendment) Act – Plea that if theconstitutional validity of the impugned provisions is to be upheld,then the amendment to the Insolvency and Bankruptcy Code needsto be read-down so as to make it conform with Art. 14 and 19(1)(g)and 300-A – Held: In application u/s. 7 made by an allottee, theNCLT’s ‘satisfaction’ will be with both eyes open – NCLT will notignore legitimate defences by real estate developer – Furthermore,the Amendment Act has been held to be constitutionally valid, andconsidering that its language is clear and unambiguous, there is nonecessity to read into or read down any of these provisions –Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 –Insolvency and Bankruptcy Code, 2016.

Legislation: Economic legislation-Insolvency Code –Legislature’s right to experiment in economic matters – Held:Insolvency Code is legislation which deals with economic mattersand, in the larger sense, deals with the economy of the country as awhole – While dealing with economic legislation, the legislaturemust be given liberty – Legislative judgment in economic choicesmust be given certain degree of deference by the courts –Insolvency and Bankruptcy Code, 2016.

Disposing of the Writ Petitions and Civil Appeals, the Court

HELD: Provisions of Insolvency And Bankruptcy Code,2016 being challenged

1. It is declared that the Insolvency and Bankruptcy Code(Second Amendment) Act, 2018 is constitutionally valid.[Para 88] [529-F]

2. (i) The Insolvency and Bankruptcy Code (SecondAmendment) Act, 2018 to the Insolvency and Bankruptcy Code,2016 does not infringe Articles 14, 19(1)(g) read with Article 19(6),or 300-A of the Constitution of India.

Aii The Real Estate (Regulation and Development) Act, 2016is to be read harmoniously with the Code, as amended by theAmendment Act. It is only in the event of conflict that the Codewill prevail over the RERA. Remedies that are given to allotteesof flats/apartments are therefore concurrent remedies, suchallottees of flats/apartments being in position to avail ofBremedies under the Consumer Protection Act, 1986, RERA aswell as the triggering of the Code.

iii Section 5(8)(f) as it originally appeared in the Codebeing residuary provision, always subsumed within it allotteesof flats/apartments. The explanation together with the deemingCfiction added by the Amendment Act is only clarificatory of thisposition in law. [Para 86] [528-G-H; 529-A-C]

The Legislature’s right to experiment in economic matters

3. Legislature must be given free play in the joints when itDcomes to economic legislation. Apart from the presumption ofconstitutionality which arises in such cases, the legislativejudgment in economic choices must be given certain degree ofdeference by the courts. [Para 15] [429-E-F]

Raison d’être forthe Insolvency Code (SecondAmendment)Act of 2018E

4. The Insolvency Committee Report is of importance inunderstanding why the legislature thought it fit to categorise homebuyers as financial creditors under the Code. The InsolvencyLaw Committee found that delay in completion of flats/apartmentsFhas become common phenomenon, and that amounts raisedfrom home buyers contributes significantly to the financing ofthe construction of such flats/apartments. This being the case, itwas important, thus, to clarify that home buyers are treated asfinancial creditors so that they can trigger the Code u/s.7 andhave their rightful place on the Committee of Creditors when itGcomes to making important decisions as to the future of thebuilding construction company, which is the execution of the realestate project in which such home buyers are ultimately to behoused. [Para 16, 18] [430-D; 434-H; 435-A-B]

Real Estate (Regulation and Development) Act, 2016(RERA) and its impact on the real estate sector

5. Perusal of the provisions of the Real Estate (Regulationand Development) Act, 2016 would show that, on and from thecoming into force of the RERA, all real estate projects (as defined)would first have to be registered with the Real Estate RegulatoryAuthority, which, before registering such projects, would lookinto all relevant details, including delay in completion of otherprojects by the developer. Importantly, the promoter is now tomake declaration supported by an affidavit, that he undertakesto complete the project within certain time period, and that70% of the amounts realised for the project from allottees, fromtime to time, shall be deposited in separate account, which wouldbe spent only to defray the cost of construction and land cost forthat particular project. Registration is granted by the authorityonly when it is satisfied that the promoter is bona fide promoterwho is likely to perform his part of the bargain satisfactorily.Registration of the project enures only for certain period andcan only be extended due to force majeure events for maximumperiod of one year by the authority, on being satisfied that suchevents have, in fact, taken place. Registration once granted, maybe revoked if it is found that the promoter defaults in complyingwith the various statutory requirements or indulges in unfairpractices or irregularities. Upon revocation of registration, theauthority is to facilitate the remaining development work, whichcan then be carried out either by the “competent authority” asdefined by the RERA or by the association of allottees orotherwise. The promoter at the time of booking and issue ofallotment letters has to make available to the allotteesinformation, inter alia, as to the stage-wise time schedule ofcompletion of the project. Deposits or advances beyond 10% ofthe estimated cost as advance payment cannot be taken withoutfirst entering into an agreement for sale. The agreement for salewill now no longer be one-sided contract of adhesion, but insuch form as may be prescribed, which balances the rights andobligations of both the promoter and the allottees. Under Section18, if the promoter fails to complete or is unable to give possession

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Aof an apartment, plot or building in accordance with the terms ofthe agreement for sale, he must return the amount received byhim in respect of such apartment etc. with such interest as maybe prescribed and must, in addition, compensate the allottee incase of any loss caused to him. Under Section 19, the allotteeshall be entitled to claim possession of the apartment, plot orBbuilding, as the case may be, or refund of amount paid along withinterest in accordance with the terms of the agreement for sale.In addition, all allottees are to be responsible for makingnecessary payments in instalments within the time specified inthe agreement for sale and shall be liable to pay interest at suchCrate as may be prescribed for any delay in such payment. UnderSection 31, any aggrieved person may file complaint with theauthority or the adjudicating officers set up by such authorityagainst any promoter, allottee or real estate agent, as the casemay be, for violation or contravention of the RERA, and rulesand regulations made thereunder. Also, if after adjudication aDpromoter, allottee or real estate agent fails to pay interest, penaltyor compensation imposed on him by the authorities under theRERA, the same shall be recoverable as arrears of land revenue.Appeals may be filed to the Real Estate Appellate Tribunal againstdecisions or orders of the authority or the adjudicating officer.EFrom orders of the Appellate Tribunal, appeals may thereafterbe filed to the High Court. Stiff penalties are to be awarded forbreach and/or contravention of the provisions of the RERA.Importantly, under Section 72, the adjudicating officer must firstdetermine that the complainant has established “default” on thepart of the respondent, after which consequential orders may thenFfollow. Under Section 88, the provisions of RERA are in additionto and not in derogation of the provisions of any other law fortime being in force and under Section 89, RERA is to have effectnotwithstanding anything inconsistent contained in any other lawfor the time being in force. [Para 22] [459-C-H; 460-A-G]GInsolvency and Bankruptcy Code, 2016 vis-à-vis the RealEstate (Regulation and Development) Act, 2016

6.1 There is no provision similar to that of Section 88 ofRERA in the Code, which is meant to be complete and

exhaustive statement of the law insofar as its subject matter isconcerned. Also, the non-obstante clause of RERA came intoforce on 1[st] May, 2016, as opposed to the non-obstante clause ofthe Code which came into force on 1[st] December, 2016. Further,the concerned amendment came into force only on 6[th] June, 2018.Given these circumstances, it cannot be said that RERA is aspecial enactment which deals with real estate developmentprojects and must, therefore, be given precedence over the Code,which is only general enactment dealing with insolvencygenerally. From the introduction of the explanation to Section5(8)(f) of the Code, it is clear that Parliament was aware of RERA,and applied some of its definition provisions so that they couldapply when the Code is to be interpreted. The fact that RERA isin addition to and not in derogation of the provisions of any otherlaw for the time being in force, also makes it clear that theremedies under RERA to allottees were intended to be additionaland not exclusive remedies. Also, as the authorities under RERAwere to be set up within one year from 1[st] May, 2016, remediesbefore those authorities would come into effect only on and from1[st] May, 2017 making it clear that the provisions of the Code,which came into force on 1[st] December, 2016, would apply inaddition to the RERA. The Code as amended, is both later inpoint of time than RERA, and must be given precedence overRERA, given Section 88 of RERA. Thus, even by process ofharmonious construction, RERA and the Code must be held toco-exist, and, in the event of clash, RERA must give way to theCode. RERA, therefore, cannot be held to be special statutewhich, in the case of conflict, would override the general statute,viz. the Code. [Para 24, 26, 28] [461-B-F; 464-D; 465-B-C]

KSL & Industries Ltd. v. Arihant Threads Ltd.(2015) 1SCC 166 ; Bank of India v. Ketan Parekh (2008) 8SCC 148 : [2008] 9 SCR 346 – referred to.

6.2 The Code and RERA operate in completely differentspheres. The Code deals with proceeding in rem in which thefocus is the rehabilitation of the corporate debtor. This is to takeplace by replacing the management of the corporate debtor bymeans of resolution plan which must be accepted by 66% of the

ACommittee of Creditors, which is now put at the helm of affairs,in deciding the fate of the corporate debtor. Such resolution planthen puts the same or another management in the saddle, subjectto the provisions of the Code, so that the corporate debtor maybe pulled out of the woods and may continue as going concern,thus benefitting all stakeholders involved. It is only as last resortBthat winding up of the corporate debtor is resorted to, so that itsassets may be liquidated and paid out in the manner provided bySection 53 of the Code. On the other hand, RERA protects theinterests of the individual investor in real estate projects byrequiring the promoter to strictly adhere to its provisions. TheCobject of RERA is to see that real estate projects come to fruitionwithin the stated period and to see that allottees of such projectsare not left in the lurch and are finally able to realise their dreamof home, or be paid compensation if such dream is shattered, orat least get back monies that they had advanced towards theproject with interest. At the same time, recalcitrant allottees areDnot to be tolerated, as they must also perform their part of thebargain, namely, to pay instalments as and when they becomedue and payable. Given the different spheres within which thesetwo enactments operate, different parallel remedies are given toallottees-under RERA to see that their flat/apartment isEconstructed and delivered to them in time, barring whichcompensation for the same and/or refund of amounts paidtogether with interest at the very least comes their way. If,however, the allottee wants that the corporate debtor’smanagement itself be removed and replaced, so that the corporatedebtor can be rehabilitated, he may prefer Section 7 applicationFunder the Code. That another parallel remedy is available isrecognised by RERA itself in the proviso to Section 71(1), bywhich an allottee may continue with an application already filedbefore the Consumer Protection fora, he being given the choiceto withdraw such complaint and file an application before theGadjudicating officer under RERA read with Section 88.[Para 29] [465-C-H; 466-A-B]

Swaraj Infrastructure Private Limited v. KotakMahindra Bank Limited(2019) 3 SCC 620 : [2019] 1SCR 682 – referred to.

Financial and Operational Creditors

7. financial creditor has been defined under Section 5(7)of the Code as person to whom financial debt is owed and afinancial debt is defined in Section 5(8) to mean debt which isdisbursed against consideration for the time value of money. Asopposed to this, an operational creditor means person to whoman operational debt is owed and an operational debt under Section5(21) means claim in respect of provision of goods or services.Financial creditor may trigger the Code either by itself or jointlywith other financial creditors or such persons as may be notifiedby the Central Government when “default” occurs.[Para 30, 31] [466-H; 467-A; 469-C]

Innoventive Industries v. ICICI Bank & Anr. (2018) 1SCC 407 ;Swiss Ribbons v. Union of India(2019) 4SCC 17 : [2019] 3 SCR 535 – relied on.

Article 14 Challenge (I): Discrimination

8.1 The principle contained in Swiss Ribbons’s case, thatfar greater deference is accorded to economic legislation, as thelegislature is given free play in the joints and is at liberty toconduct economic experiments in public interest, applies on allfours in the instant case. [Para 38] [482-A-B]

8.2 The Code is not meant to be debt recovery mechanism.It is proceeding in rem which, after being triggered, goescompletely outside the control of the allottee who triggers it.Thus, any allottee/home buyer who prefers an application underSection 7 of the Code takes the risk of his flat/apartment notbeing completed in the near future, in the event of there being abreach on the part of the developer. Under the Code, he maynever get refund of the entire principal, let alone interest. Thisis because, the moment petition is admitted under Section 7,the resolution professional must first advertise for and find aresolution plan by somebody, usually another developer, whichhas then to pass muster under the Code, i.e. that it must beapproved by at least 66% of the Committee of Creditors andmust further go through challenges before NCLT and NCLATbefore the new management can take over and either complete

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Aconstruction, or pay out or refund amounts. Depending on thekind of resolution plan that is approved, such home buyer/allotteemay have to wait for very long period for the successfulcompletion of the project. He may never get his full money backtogether with interest in the event that no suitable resolutionplan is forthcoming, in which case, winding up of the corporateBdebtor alone would ensue. On the other hand, if such allotteewere to approach the Real Estate Regulatory Authority underRERA, it is more than likely that the project would be completedearly by the persons mentioned therein, and/or full amount ofrefund and interest together with compensation and penalty, ifCany, would be awarded. Thus, given the bona fides of the allotteewho moves an application under Section 7 of the Code, it is onlysuch allottee who has completely lost faith in the management ofthe real estate developer who would come before the NCLT underthe Code hoping that some other developer takes over andcompletes the project, while always taking the risk that if no oneDwere to come forward, corporate death must ensue and theallottee must then stand in line to receive whatever is given tohim in winding up. Given the reasons of the Insolvency CommitteeReport, which show that experience of the real estate sector inthis country has not been encouraging, in that huge amounts areEadvanced by ordinary people to finance housing projects whichend up in massive delays on the part of the developer or evenworse, i.e. failure of the project itself, and given the state of factswhich was existing at the time of the legislation, as adverted toby the Insolvency Committee Report, it is clear that any allegeddiscrimination has to meet the tests laid down in Ram KrishnaFDalmia’s case, V.C. Shukla’s case, Shri Ambica Mills’s case,Venkateshwara Theatre’s case, and Mardia Chemicals’s case.[Para 39] [482-B-H; 483-A-B]

Ram Krishna Dalmia v. Justice S.R. Tendolkar(1959)SCR 279 ;State of Bihar v. Shree Baidyanath AyurvedGBhawan (P) Ltd. (2005) 2 SCC 762 : [2005] 1 SCR334 ;Karnataka Live Band Restaurants Assn. v. Stateof Karnataka (2018) 4 SCC 372 : [2018] 1 SCR 533;State of Gujarat and Anr. v. Shri Ambica Mills Ltd.,Ahmedabad, etc.(1974) 4 SCC 656 : [1974] 3 SCR

760 ;Swiss Ribbons v. Union of India(2019) 4 SCC17 : [2019] 3 SCR 535 ; V.C. Shukla v. State (DelhiAdministration)(1980) Suppl. SCC 249 : [1980] SCR500 ;Venkateshwara Theatre v. State of A.P.(1993) 3SCC 677 : [1993] 3 SCR 616 ;Mardia Chemicals Ltd.v. Union of India(2004) 4 SCC 311 : [2004] 3 SCR982 - relied on.

8.3 It is impossible to say that classifying real estatedevelopers is not founded upon an intelligible differentia whichdistinguishes them from other operational creditors, nor is itpossible to say that such classification is palpably arbitrary havingno rational relation to the objects of the Code. It was submittedthat if at all real estate developers were to be brought within theclutches of the Code, being like operational debtors, at best theycould have been brought in under this rubric and not as financialdebtors. In operational debts generally, when person suppliesgoods and services, such person is the creditor and the personwho has to pay for such goods and services is the debtor. In thecase of real estate developers, the developer who is the supplierof the flat/apartment is the debtor inasmuch as the home buyer/allottee funds his own apartment by paying amounts in advanceto the developer for construction of the building in which hisapartment is to be found. Another vital difference betweenoperational debts and allottees of real estate projects is that anoperational creditor has no interest in or stake in the corporatedebtor, unlike the case of an allottee of real estate project, whois vitally concerned with the financial health of the corporatedebtor, for otherwise, the real estate project may not be broughtto fruition. Also, in such event, no compensation, nor refundtogether with interest, which is the other option, will berecoverable from the corporate debtor. One other importantdistinction is that in an operational debt, there is no considerationfor the time value of money – the consideration of the debt is thegoods or services that are either sold or availed of from theoperational creditor. Payments made in advance for goods andservices are not made to fund manufacture of such goods orprovision of such services. In real estate projects, money is raisedfrom the allottee, being raised against consideration for the time

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Avalue of money. Even the total consideration agreed at timewhen the flat/apartment is non-existent or incomplete, issignificantly less than the price the buyer would have to pay for aready/complete flat/apartment, and therefore, he gains the timevalue of money. Likewise, the developer who benefits from theamounts disbursed also gains from the time value of money. TheBfact that the allottee makes such payments in instalments whichare co-terminus with phases of completion of the real estateproject does not any the less make such payments as paymentsinvolving “exchange”, i.e. advances paid only in order to obtaina flat/apartment. What is predominant, insofar as the real estateCdeveloper is concerned, is the fact that such instalment paymentsare used as means of finance qua the real estate project. Oneother vital difference with operational debts is the fact that thedocumentary evidence for amounts being due and payable by thereal estate developer is there in the form of the informationprovided by the real estate developer compulsorily under RERA.DThis information, like the information from information utilitiesunder the Code, makes it easy for home buyers/allottees toapproach the NCLT under Section 7 of the Code to trigger theCode on the real estate developer’s own information given on itswebpage as to delay in construction, etc. It is these fundamentalEdifferences between the real estate developer and the supplierof goods and services that the legislature has focused upon andincluded real estate developers as financial debtors. This beingthe case, it is clear that there cannot be said to be any infractionof equal protection of the laws. [Para 40] [483-C-H; 484-A-F]F8.4 Real estate developers are, in substance, persons whoavail finance from allottees who then fund the real estatedevelopment project. The object of dividing debts into twocategories under the Code, namely, financial and operationaldebts, is broadly to sub-divide debts into those in which moneyis lent and those where debts are incurred on account of goodsGbeing sold or services being rendered. There is no doubt thatreal estate developers fall squarely within the object of the Codeas originally enacted insofar as they are financial debtors and notoperational debtors. So far as unequals being treated as equals isconcerned, home buyers/allottees can be assimilated with other

individual financial creditors like debenture holders and fixeddeposit holders, who have advanced certain amounts to thecorporate debtor. For example, fixed deposit holders, thoughfinancial creditors, would be like real estate allottees in that theyare unsecured creditors. Financial contracts in the case of theseindividuals need not involve large sums of money. Debentureholders and fixed deposit holders, unlike real estate holders, areinvolved in seeing that they recover the amounts that are lentand are thus not directly involved or interested in assessing theviability of the corporate debtors. Though not having theexpertise or information to be in position to evaluate feasibilityand viability of resolution plans, such individuals, by virtue ofbeing financial creditors, have right to be on the Committee ofCreditors to safeguard their interest. Also, the question that isto be asked when debenture holder or fixed deposit holderprefers Section 7 application under the Code will be asked inthe case of allottees of real estate developers – is debt due infact or in law? Thus, allottees, being individual financial creditorslike debenture holders and fixed deposit holders and classifiedas such, show that they within the larger class of financial creditors,there being no infraction of Article 14 on this score.[Para 41] [484-H; 485-A-F]

Nagpur Improvement Trust and Anr. v. Vithal Rao andOrs.(1973) 1 SCC 500 : [1973] 3 SCR 39 ;Subramanian Swamy v. Director, Central Bureau ofInvestigation and Anr.(2014) 8 SCC 682 : [2014] 6SCR 873 – referred to.

8.5 The presumption that the legislature has understoodand correctly appreciated the need of its people and that theamendment to the Code is directed to problems made manifestby experience, as was pointed out by the Insolvency LawCommittee findings, demonstrates that the presumption ofconstitutionality that attaches to the Amendment Act has not beendisplaced by the Petitioners. [Para 42] [485-G]

8.6 Home buyers/allottees give advances to the real estatedeveloper and thereby finance the real estate project at hand,are really financial creditors. The plea that homebuyers would

Areally fall within “other creditors” as residuary class, who wouldhave to stand in line with their claims which would be made tothe resolution professional once the Code is triggered, cannotbe accepted. [Para 43] [485-H; 486-A, E-F]

Article 14 Challenge (II): Manifest arbitrariness; ArticleB19(1)(g) and Article 300-A

9.1 reading of the paragraphs in Swiss Ribbons’s case willshow these very objects are sub-served by treating allottees asfinancial creditors. The Code is thus beneficial legislation whichcan be triggered to put the corporate debtor back on its feet inCthe interest of unsecured creditors like allottees, who are vitallyinterested in the financial health of the corporate debtor, so thata replaced management may then carry out the real estate projectas originally envisaged and deliver the flat/apartment as soon aspossible and/or pay compensation in the event of late delivery,or non-delivery, or refund amounts advanced together withDinterest. Thus, applying the Shayara Bano case test, it cannot besaid that square peg has been forcibly fixed into round hole soas to render Section 5(8)(f) manifestly arbitrary i.e. excessive,disproportionate or without adequate determining principle. Forthe same reason, it cannot be said that Article 19(1)(g) has beenEinfracted and not saved by Article 19(6) as the Amendment Act ismade in public interest, and it cannot be said to be an unreasonablerestriction on the Petitioner’s fundamental right under Article19(1)(g). Also, there is no infraction of Article 300-A as no personis deprived of its property without authority of constitutionallyvalid law.[Para 45] [494-D-G]F

Swiss Ribbons v. Union of India(2019) 4 SCC 17 :[2019] 3 SCR 535 ; Shayara Bano v. Union of India(2017) 9 SCC 1 – relied on.

9.2 Real estate allottees are really in the nature of financialGcreditors, and thus the UNCITRAL Legislative Guide has beenfollowed, and not breached. Since allottees of real estate projectshave always been subsumed within Section 5(8)(f), no new rightsor claims have been created. Allottees, like individual financialcreditors who are already on the Committee of Creditors, are to

have voice in determining the corporate debtor and their ownfuture. [Para 46] [495-B-D]

9.3 All the allottees of the project in question can eitherjoin together under the explanation to Section 7(1) of the Code,or file their own individual petitions after the Code gets triggeredby single allottee, stating that in addition to the construction oftheir flat/apartment, they are also entitled to compensation underRERA and/or under the general law, and would thus be personswho have “claim”, i.e. right to remedy for breach of contractwhich gives rise to right to compensation, whether or not suchright is reduced to judgment, and would therefore be persons towhom liability or obligation in respect of “claim” is due. Suchpersons would, therefore, have voice in the Committee ofCreditors as to future plans for completion of the project, andcompensation for late delivery of the flat/apartment. [Para 47][495-G-H; 496-A-B]

9.4 If Section 7 application is admitted in favour of anallottee, and if the management of the corporate debtor is in facta strong and stable one, nothing debars the same erstwhilemanagement from offering resolution plan, subject to Section29A of the Code, which may well be accepted by the Committeeof Creditors in which home buyers now have voice. Equally, toassume that the moment the insolvency resolution process starts,corporate death must ensue is wholly incorrect. If the real estateproject is otherwise viable, resolution plans from others may wellbe accepted and the best of these would then work in order tomaximise the value of the assets of the corporate debtor.Corporate death, is the last resort under the Code after all otheravailable options have failed. [Para 48] [496-C-D]

Swiss Ribbons v. Union of India(2019) 4 SCC 17 :[2019] 3 SCR 535 – relied on.

9.5 Under paragraph 3 of the Statement of Objects andReasons of RERA, one of the important reasons for enacting theRERA is to “establish symmetry of information between thepromoter and purchaser”. This is achieved through Section 4,where every promoter in its application to the authority forregistration under sub-clause (2)(b), has to include the current

Astatus of the project, any delay in its completion, details of casespending, payments pending etc. Equally, under sub-clause (g),the proforma of the allotment letter, agreement for sale andconveyance deed proposed to be signed with the allottee are allto be furnished. Also, under sub-clause (l)(C), the time periodwithin which he undertakes to complete the project is also to beBstated. Above all, under Section 4(3) read with Section 11, theauthority is to operationalise web-based online system in whichthe promoter shall, upon receiving his Login Id and password,create webpage on the website of the authority to enter all detailsas required by Section 4(2), including quarterly update of the statusCof the project and the stage-wise time schedule of completion ofthe project. Also, under Section 7, the Authority may revokeregistration for various reasons, and under Section 7(4)(a) shalldebar the promoter from accessing its website in relation to thatproject, and thereafter specify its name in the list of defaultersand display its photograph on the website and inform other RealDEstate Regulatory Authorities in other States and UnionTerritories about such revocation. Equally, under Section 13(2),the prescribed agreement for sale, which is to be entered intobetween the promoter and allottee, must clearly state the dateon which possession of the apartment, plot or building is to beEhanded over, the rates of interest payable by the promoter to theallottee in the case of default and such other particulars, as maybe prescribed. [Para 50] [496-H; 497-A-E]

9.6 It can be seen that just as information utilities providethe kind of information as to default that banks and financialFinstitutions are provided under Sections 214 to 216 of the Coderead with Regulations 25 and 27 of the Insolvency and BankruptcyBoard of India (Information Utilities) Regulations, 2017, allotteesof real estate projects can come armed with the same kind ofinformation, this time provided by the promoter or real estatedeveloper itself, on the basis of which, prima facie at least, aG“default” relating to amounts due and payable to the allottee ismade out in an application under Section 7 of the Code. Oncethis prima facie case is made out, the burden shifts on thepromoter/real estate developer to point out in their reply and inthe hearing before the NCLT, that the allottee is himself adefaulter and would, therefore, on reading of the agreementand the applicable RERA Rules and Regulations, not be entitledto any relief including payment of compensation and/or refund,entailing dismissal of the said application. Under Section 65 ofthe Code, the real estate developer can also point out that theinsolvency resolution process under the Code has been invokedfraudulently, with malicious intent, or for any purpose other thanthe resolution of insolvency. This the real estate developer maydo by pointing out, for example, that the allottee who has knockedat the doors of the NCLT is speculative investor and not aperson who is genuinely interested in purchasing flat/apartment.They can also point out that in real estate market which is falling,the allottee does not, in fact, want to go ahead with its obligationto take possession of the flat/apartment under RERA, but wantsto jump ship and really get back, by way of this coercive measure,monies already paid by it. Given the above, it is clear that it isvery difficult to accede to the Petitioners’ contention that whollyone-sided and futile hearing will take place before the NCLT bytrigger-happy allottees who would be able to ignite the processof removal of the management of the real estate project and/orlead the corporate debtor to its death. [Para 50] [499-B-G]

9.7 The period of 14 days given to the NCLT for decisionunder Section 7(4) would be directory. Under Section 64(1) ofthe Code, the NCLT President or the Chairperson of the NCLATmay, after taking into account reasons by the NCLT or NCLATfor exceeding the period mentioned by statute, extend the periodof 14 days by period not exceeding 10 days. Even this provisionis directory, in that no consequence is provided either if the periodis not extended, or after the extension expires. This is also forthe good reason that an act of the court cannot harm the litigantbefore it. Unfortunately, both the NCLT and NCLAT do not havesufficient members to deal with the flood of applications andappeals that is before them. The time taken in the queue byapplicants who knock at their doors cannot, for no fault of theirs,be put against them. [Para 52] [500-C-E]

[2019] 10 S.C.R.

ASurendra Trading Company v. Juggilal Kamlapat JuteMills Company Limited and Ors.(2017) 16 SCC 143 :[2017] 9 SCR 743 – relied on.

State of Bihar v. Bihar Rajya Bhumi Vikas Bank Samiti(2018) 9 SCC 472 : [2018] 7 SCR 1147 - referred to.

BChallenge to Section 21(6A) and 25A of the Code

10.1 Like other financial creditors, be they banks andfinancial institutions, or other individuals, all persons who haveadvanced monies to the corporate debtor should have the rightto be on the Committee of Creditors. True, allottees areCunsecured creditors, but they have vital interest in amountsthat are advanced for completion of the project, maybe to theextent of 100% of the project being funded by them alone. Underthe proviso to Section 21(8) of the Code if the corporate debtorhas no financial creditors, then under Regulation 16 of theDInsolvency and Bankruptcy Board of India(Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016, up to 18operational creditors then become the Committee of Creditorsor, if there are more than 18 operational creditors, the highest inorder of debt owed to operational creditors to the extent of thefirst 18 are then represented on the Committee of CreditorsEtogether, with representative of the workers. If allottees whohave funded real estate project of the corporate debtor to theextent of 100% are neither financial creditors nor operationalcreditors, the mechanism of the Committee of Creditors, who isnow to take decisions after the Code is triggered as to the futureFof the corporate debtor, will be non-existent in case where thereare no operational creditors and no secured creditors, because100% of the project is funded by the allottees. Even otherwise,it would in fact be manifestly arbitrary to omit allottees from theCommittee of Creditors when they are vitally interested in thefuture of the corporate debtor as they have funded anywhere fromG50% to 100% of the project in most cases. [Para 54] [502-C-G]

10.2 Given the fact that allottees may not be homogenousgroup, yet there are only two ways in which they can vote on theCommittee of Creditors-either to approve or to disapprove of

proposed resolution plan. Sub-section (3A) goes long way toironing out any creases that may have been felt in the working ofSection 25A in that the authorised representative now casts hisvote on behalf of all financial creditors that he represents. If adecision taken by vote of more than 50% of the voting share ofthe financial creditors that he represents is that particular planbe either accepted or rejected, it is clear that the minority ofthose who vote, and all others, will now be bound by this decision.The legislature must be given free play in the joints to experiment.Minor hiccups that may arise in implementation can always besorted out later. Thus, any challenge to the machinery provisionscontained in Sections 21(6A) and 25A must be repelled.[Para 55] [503-D-F]

Swiss Ribbons v. Union of India(2019) 4 SCC 17 :[2019] 3 SCR 535 – relied on.

Competition Commission of India v. Bharti Airtel Limitedand Ors.(2019) 2 SCC 521 ;Cellular OperatorsAssociation of India v. TRAI (2016) 7 SCC 703 :[2016] 9 SCR 1 – referred to.

Doctrine of ‘Reading Down’

11. Given the fact that the Amendment Act has been heldto be constitutionally valid, and considering that its language isclear and unambiguous, it is not possible to read down the clearprovisions of the Amendment Act in the manner suggested.[Para 57] [507-C]

Interpretation of Section 5(8)(f) of the Code

12.1 financial debt is defined as meaning “debt”. “Debt”is defined by Section 3(11) of the Code and “claim” in Section3(6) and “default” in Section 3(12) of the Code. Thus, in order tobe “debt”, there ought to be liability or obligation in respectof “claim” which is due from any person. “Claim” then meanseither right to payment or right to payment arising out ofbreach of contract, and this claim can be made whether or notsuch right to payment is reduced to judgment. Then comes“default”, which in turn refers to non-payment of debt when whole

Aor any part of the debt has become due and payable and is notpaid by the corporate debtor. What is clear, therefore, is that adebt is liability or obligation in respect of right to payment,even if it arises out of breach of contract, which is due from anyperson, notwithstanding that there is no adjudication of the saidbreach, followed by judgment or decree or order. The expressionB“payment” is again an expression which is elastic enough toinclude “recompense”, and includes repayment. The definitionof “financial debt” in Section 5(8) then goes on to state that a“debt” must be “disbursed” against the consideration for timevalue of money. [Para 59, 60, 61] [507-G; 508-B, E-F; 509-A-D]CUnion of India v. Raman Iron Foundry (1974) 2 SCC231 : [1974] 3 SCR 556 ;Himachal Pradesh Housingand Urban Development Authority and Anr. v. RanjitSingh Rana(2012) 4 SCC 505 : [2012] 2 SCR 427– referred to.DWebster’s Comprehensive Dictionary (InternationalEdn.) Vol. 2 ;Law Lexicon byP. Ramanatha Aiyar2[nd] Edn.,Reprint;Black’s Law Dictionary10[th] Edn.– referred to.

12.2 It is clear that the expression “disburse” would referEto the payment of instalments by the allottee to the real estatedeveloper for the particular purpose of funding the real estateproject in which the allottee is to be allotted flat/apartment.The expression “disbursed” refers to money which has been paidagainst consideration for the “time value of money”. In short,Fthe “disbursal” must be money and must be against considerationfor the “time value of money”, meaning thereby, the fact thatsuch money is now no longer with the lender, but is with theborrower, who then utilises the money. Thus far, it is clear thatan allottee “disburses” money in the form of advance paymentsmade towards construction of the real estate project. That this isGagainst consideration for the time value of money is also clear asthe money that is “disbursed” is no longer with the allottee, but,is with the real estate developer who is legally obliged to givemoney’s equivalent back to the allottee, having used it in theconstruction of the project, and being at discounted value soHfar as the allottee is concerned (in the sense of the allottee having

to pay less by way of instalments than he would if he were to payfor the ultimate price of the flat/apartment). [Para 61] [509-E-G;510-B-C]

‘Dictionary of Banking Terms’ by Thomas P. FitchSecond Edn;ACT Borrower’s Guide to the LMA’sInvestment Grade Agreements by Slaughter and MayFifth Edn, 2017 – referred to.

12.3 When compared with Section 5(8), it is clear thatSection 5(8) seems to owe its genesis to the definition of “financialindebtedness” that is contained for the purposes of InvestmentGrade Agreements. It was submitted that even insofar asderivative transactions are concerned, it is clear that money aloneis given against consideration for time value of money and atransaction which is pure sale agreement between “borrowers”and “lender” cannot possibly be said to fit within any of thecategories mentioned in Section 5(8). It is clear from thesubmission that wide range of transactions are subsumed byparagraph (f) and that the precise scope of paragraph (f) isuncertain. Equally, paragraph (f) seems to be “catch all”provision which is really residuary in nature, and which wouldsubsume within it transactions which do not, in fact, fall underany of the other sub-clauses of Section 5(8). And now to the preciselanguage of Section 5(8)(f). First and foremost, the sub-clausedoes appear to be residuary provision which is “catch all” innature. This is clear from the words “any amount” and “any othertransaction” which means that amounts that are “raised” under“transactions” not covered by any of the other clauses, wouldamount to financial debt if they had the commercial effect of aborrowing. The expression ‘transaction’ is defined by Section3(33). The expression “any other transaction” would include anarrangement in writing for the transfer of funds to the corporatedebtor and would thus clearly include the kind of financingarrangement by allottees to real estate developers when theypay instalments at various stages of construction, so that theythemselves then fund the project either partially or completely.Sub-clause (f) Section 5(8) thus read would subsume within itamounts raised under transactions which are not necessarily loantransactions, so long as they have the commercial effect of aborrowing. [Para 63-66] [511-E-F; 512-C-H; 513-A]

CDEF

404SUPREME COURT REPORTS

AACT Borrower’s Guide to the LMA’s Investment GradeAgreements by Slaughter and May Fifth Edn, 2017;Collins English Dictionary & Thesaurus Second Edn.2000 – referred to.

12.4 perusal of these definitions would show that evenBthough the Petitioners may be right in stating that “borrowing”is loan of money for temporary use, they are not necessarilyright in stating that the transaction must culminate in money beinggiven back to the lender. The expression “borrow” is wideenough to include an advance given by the home buyers to realestate developer for “temporary use” i.e. for use in theCconstruction project so long as it is intended by the agreementto give “something equivalent” to money back to the homebuyers. The “something equivalent” in these matters is obviouslythe flat/apartment. Also of importance is the expression“commercial effect”. “Commercial” would generally involve

Dtransactions having profit as their main aim. Piecing the threadstogether, therefore, so long as an amount is “raised” under areal estate agreement, which is done with profit as the main aim,such amount would be subsumed within Section 5(8)(f) as thesale agreement between developer and home buyer would have

the “commercial effect” of borrowing, in that, money is paid inEadvance for temporary use so that flat/apartment is given backto the lender. Both parties have “commercial” interests in thesame – the real estate developer seeking to make profit on thesale of the apartment, and the flat/apartment purchaser profiting

by the sale of the apartment. Thus construed, there can be noFdifficulty in stating that the amounts raised from allottees underreal estate projects would, in fact, be subsumed within Section5(8)(f) even without adverting to the explanation introduced bythe Amendment Act. [Para 67] [513-E-H; 514-A]

12.5 The report of the Bankruptcy Law Reforms CommitteeGof November, 2015 and in particular paragraph 3 of ‘Box 5.2 –Trigger for IRP’, which led to the enactment of the Code, is animportant guide in understanding the provisions of the Code.However, where the provisions of the Code, as construed in thelight of the objects of the Code, are clear, the fact that from

huge report one word is picked up to indicate that all financialcreditors must have debtors who owe money “solely” fromfinancial transactions cannot possibly have the effect of negatingthe plain language of Section 5(8)(f) of the Code. In fact, what isimportant is that the threshold limit to trigger the Code ispurposely kept low – at only one lakh rupees – making it clearthat small individuals may also trigger the Code as financialcreditors (as financial creditors include debenture holders andbond holders), along with banks and financial institutions to whom

crores of money may be due. [Para 68] [514-B-D]

12.6 That this amendment is in fact clarificatory is also madeclear by the Insolvency Committee Report, which expressly usesthe word “clarify”, indicating that the Insolvency Law Committeealso thought that since there were differing judgments and doubtsraised on whether home buyers would or would not be includedwithin Section 5(8)(f), it was best to set these doubts at rest byexplicitly stating that they would be so covered by adding anexplanation to Section 5(8)(f). Incidentally, the Insolvency LawCommittee itself had no doubt that given the ‘financing’ of theproject by the allottees, they would fall within Section 5(8)(f) ofthe Code as originally enacted. [Para 69] [514-E-F]

Krishi Utpadan Mandi Samiti v. Shankar Industries(1993) 3 Suppl. SCC 361 : [1993] 1 SCR 1037 –Held not good law.

P. Kasilingam and Ors. v. P.S.G. College of Technologyand Ors.(1995) 2 Suppl. SCC 348 : [1995] 2 SCR1061; Jagir Singh & Ors. v. State of Bihar & Anr.(1976) 2 SCC 942 : [1976] 2 SCR 809 ;MahalakshmiOil Mills v. State of Andhra Pradesh & Ors.(1989) 1SCC 164 : [1988] 2 Suppl. SCR 1088;Bharat Coop.Bank (Mumbai) Ltd. v. Coop. Bank Employees Union(2007) 4 SCC 685 : [2007] 4 SCR 347;State of WestBengal and Ors. v. Associated Contractors(2015) 1SCC 32 : [2014] 10 SCR 426 – referred to.

12.7 The legislature is not precluded by way of amendmentfrom inserting words into what may even be an exhaustive

[2019] 10 S.C.R.

Adefinition. What is an exhaustive definition is exhaustive forpurposes of interpretation of statute by the Courts, which cannotbind the legislature when it adds something to the statute by wayof amendment. [Para 73] [518-D]

12.8 The submission that Section 5(8)(f) must be construedBnoscitur sociis with sub-clauses (a) to (e) and (g) to (i), and soconstrued would only refer to loans or other financial transactionswhich would involve money at both ends, cannot be acceptedsince Section 5(8)(f) is clearly residuary “catch all” provision,taking within it matters which are not subsumed within the othersub-clauses. Furthermore, noscitur sociis being mere rule ofCconstruction cannot be applied in the present case as it is clearthat wider words have been deliberately used in residuaryprovision, to make the scope of the definition of “financial debt”subsume matters which are not found in the other sub-clauses ofSection 5(8). [Para 74-75] [518-E-F; 522-F]DController of Estate Duty v. Kantilal Trikamlal (1976) 4SCC 643 : [1977] 1 SCR 9 ;Subramanian Swamy v.Union of India (2016) 7 SCC 221 : [2016] 3 SCR 865– referred to.

12.9 As regards, the effect of deeming fiction, under theEexplanation added to Section 5(8)(f), any amount raised from anallottee under real estate project shall be deemed to be anamount having the commercial effect of borrowing. Although adeeming provision is to deem what is not there in reality, therebyrequiring the subject matter to be treated as if it were real, yetFseveral authorities and judgments show that deeming fictioncan also be used to put beyond doubt particular constructionthat might otherwise be uncertain. It is clear that the deemingfiction that is used by the explanation is to put beyond doubt thefact that allottees are to be regarded as financial creditors withinthe enacting part contained in Section 5(8)(f) of the Code.G[Paras 76, 83, 84] [522-G; 525-B-C; 528-A]

M. Venugopal v. Divisional Manager, LIC(1994) 2 SCC323 : [1994] 1 SCR 433;Commissioner of Income Tax,Bombay v. Bombay Trust CorporationAIR 1930 PC54;K. Kamaraja Nadar v. Kunju Thevar and Ors.

AIR 1958 SC 687 : [1959] SCR 583 ;Delhi Cloth &General Mills Co. Ltd. and Anr. v. State of Rajasthanand Ors.(1996) 2 SCC 449 : [1996] 1 SCR 518 ;Daiichi Sankyo Company Limited v. JayaramChigurupati and Ors.(2010) 7 SCC 449 : [2010] 8SCR 251 ; Shri Prithvi Cotton Mills Ltd. & Anr. v.Broach Borough Municipality & Ors.(1969) 2 SCC283 : [1970] 1 SCR 388 ;Hindustan CooperativeHousing Building Society Limited v. Registrar,Cooperative Societies and Anr.(2009) 14 SCC 302 :[2009] 2 SCR 331 – referred to.

East End Dwellings Co. Ltd. v. Finsbury BoroughCouncil(1952) Appeal Cases 109 - referred to.

Stroud’s Judicial Dictionary of Words and PhrasesSeventh Edn. 2008 – referred to.

12.10 The explanation was added by the Amendment Actonly to clarify doubts that had arisen as to whether home buyers/allottees were subsumed within Section 5(8)(f). The explanationadded to Section 5(8)(f) of the Code by the Amendment Act doesnot in fact enlarge the scope of the original Section as home buyers/allottees would be subsumed within Section 5(8)(f) as it originallystood. As matter of statutory interpretation, that interpretation,which accords with the objects of the statute in question,particularly when beneficial legislation is dealt with, is alwaysthe better interpretation or the “creative interpretation” whichis the modern trend of authority. Thus, the allottees/home buyerswere included in Section 5(8)(f) with effect from the inception ofthe Code, the explanation being added in 2018 merely to clarifydoubts that had arisen. [Para 85-86] [528-C-F]Hiralal Ratanlal Etc. v. State of U.P and Anr. Etc.(1973) 1 SCC 216 : [1973] 2 SCR 502 ;Eera (throughDr. Manjula Krippendorf) v. State (NCT of Delhi) andAnr.(2017) 15 SCC 133 : [2017] 7 SCR 924 ;S. Sundaram Pillai v. V.R. Pattabiraman(1985) 1 SCC591 : [1985] 2 SCR 643 – referred to.

13. In the States and Union Territories where only interimor no adjudicating officer/Real Estate Regulatory Authority and/

Aor Appellate Tribunal have been appointed/established, suchStates/Union Territories are directed to appoint permanentadjudicating officers, Real Estate Regulatory Authority andAppellate Tribunal within the stipulated period. Given thedeclaration of the constitutional validity of the Amendment Act,it is absolutely necessary that the NCLT and the NCLAT areBmanned with sufficient members to deal with litigation that mayarise under the Code generally, and from the real estate sectorin particular. For this purpose, Union of India to take steps inthis behalf. [Paras 87, 88] [529-E-G]

Nikhil Mehta and Sons (HUF) v. AMR InfrastructureCLtd.(Company Appeal (AT) (Insolvency) No. 07of 2017) ;Chitra Sharma & Ors. v. Union of India 2018(9) SCALE 490 ; Bikram Chatterji v. Union of India2018 (11) SCALE 129 – referred to.

Case Law Reference

Para 3

Para 4

Para 8

Para 25

Para 27

Para 29

Para 3038,39, 4548.55

relied on Paras 31,

[1959] SCR 279

relied on

Para 33,

34, 38, 39

Para 34

Para 38,39Para 39

PIONEER URBAN LAND AND INFRASTRUCTURE LTD.& ANR. v. UNION OF INDIA & ORS.

BCIVIL ORIGINAL/APPELLATE JURISDICTION: Writ Petition(Civil) No. 43 of 2019

Under Article 32 of the Constitution Of India

WITH

CWrit Petition (Civil) Nos. 99, 124, 121, 129, 130, 135, 201, 147,193, 156, 183, 166, 163, 194, 176, 205, 173, 189, 188, 185, 177, 214, 303,195, 197, 196, 243, 198, 199, 200, 309, 217, 230, 304, 258, 221, 229, 241,293, 310, 242, 280, 261, 263, 272, 362, 358, 281, 277, 311, 279, 283, 366,287, 284, 312, 294, 989, 320, 321, 319, 386, 396, 345, 328, 347, 344, 369,916, 350, 353, 355, 361, 354, 402, 412, 357, 411, 505, 374, 377, 389, 829,D640, 454, 409, 398, 407, 441, 426, 410, 418, 485, 425, 535, 437, 442, 468,491, 566, 457, 614, 544, 483, 669, 529, 492, 532, 540, 522, 503, 506, 513,530, 555, 634, 580, 587, 682, 585, 613, 571, 578, 600, 589, 610, 648, 673,629, 638, 597, 636, 632, 642, 644, 655, 643, 668, 671, 678, 702, 704, 694,822, 807, 713, 714, 990, 824, 739, 745, 806, 846, 904, 800, 808, 805, 821,E831, 950, 850, 830, 858, 840, 877, 868, 855, 871, 927, 861, 860, 878, 913,909, 905, 922, 918, 919, 941 of 2019, Civil Appeal No. 1486 of 2019.

Dr. Abhishek Manu Singhvi, Nikhil Nayyar, Neeraj Kishan Kaul,Dr. Bharat Bhushan Parsoon, Krishnan Venugopal, GopalSankaranarayanan, Arvind Dattar, Jayant Bhushan, Dr. A.M. Singhvi,FShyam Divan, Sr. Advs., Ms. Pritha Srikumar Iyer, Azeem Samuel,Ms. Vasudha Sharma, Ms. Neha Mathen, Naveen Hegde, Ms. MansiBinjrajka, Sumesh Dhawan, Ms. Vatsala Kak, Vivek Sibal, Ms. ApoorvaChowdhary, Ms. Geetika Sharma, Vikas Tiwari, Sunil Prakash Sharma,Kr. Deepraj, Rakesh Kumar-I, Ms. Arti Rathore, Anupam Sharma, JobyP. Varghese, Abhinav Ankit, Nipun Malhotra, Anshumaan Sahni, JitendraGKumar, P. V. Yogeswaran, Rishi Kapoor, Ashish Kumar Upadhyay,Devanshu Sajlan, Akash Lamba, Deepak Joshi, Pranaya Goyal, NikhilRanjan, Ms. Apoorva Kaushik, Dr. S. K. Verma, Mrs. Priya Puri, M. R.Shamshad, Aditya Samaddar, Ms. Sarah Haque, Yogesh Pachauri, UditArora, Sanjay Kumar Tyagi, Ms. B. Vijayalakshmi Menon, Pulkit Deora,

Udit Gupta, Sylvine Sarmah (for M/s. Udit Kishan and Associates),Ms. Archana Pathak Dave, Ms. Ankita Chaudhary, Virag Gupta, ManishSharma, Rajnish Singh, Piyush Kant Roy, Kunal Chatterji, Ms. VarshaBanerjee, Ashu Kansal, Ms. Stuti Vatsa, Milan Singh Negi, T. V.S. Raghavendra Sreyas, Mrigank Prabhakar, Nitin Wadhwa, Ms. MishaRohatgi Mohta, Dhruv Rohatgi, Nakul Motha, Ms. Sonam Priya, ShovitSingh, Anurag Singh, Rahul Mohan Gautam, Jeetender Gupta, SancharAnand, Rohan Gupta, Devendra Singh, Zorawar Singh, Vivek Kishore,Debo Preyo Pal, Sanyat Lodha, Ms. Sanjana Saddy, Ambuj Agarwal,Ms. Swati Chowdhary, Ms. Anindita Mitra, Yadav Narender Singh,Ashutosh Yadav, Jagdish Parshad, Rajiv Kumar Sharma, SenthilJagadeesan, Ms. Sonakshi Malhan, Ms. Suriti Chowdhary, Ms. MrinalKanwar, Abhimanyu Bhandari, Ms. Nattasha Garg, Arav Pandit,Ms. Aashima Singhal, Ms. Roohina Dua, Cheitanya Madan, SomeshTiwari, Naveen Kumar, Syed Mehdi Imam, Md. Nauman Ul Haq, VidehVaish, Mrs. Shamam Anis, Ms. Sheena Taqui, Mrs. Bina Gupta, KshitijVaibhav, Ms. Subarna Dubey, Ms. Kanishka Prasad, Ms. Vijiya Singh,Ms. Shruti Shivkumar, Prem Prakash, Ujjal Banerjee, Swapnil Gupta,Shivambika Sinha, Rajendra Gupta, Akash Khurana, Neelambika Singh,Rudrajit Ghosh, Ms. Ankita Sinha, Sameer Abhyankar, Shekhar Kumar,Tejas Patel, Rakesh K. Sharma, Raj Kamal, D.K. Sharma, GauravKejriwal, Mita Sharma, Sujit Keshri, Gaurav, Rohit Gupta, KaushikPoddar, Anshu Bhanot, Anuj Mirdha, Ms. Surbhi Mehta, Aman Vachher,Dhiraj, Ashutosh Dubey, Abhishek Chauhan, Mrs. Anshu Vachher, Mrs.Rajshree Dubey, Mrs. Madhurima Mridul, Arun Nagar, P. N. Puri, VivekSibal, Rahul Sharma, Yash Patel, P.N. Puri, Vikas Tiwari, DharmendraKumar Sinha, Kumar Deepraj, Ms. Charu Ambwani, Ms. Garima Goel,Ms. Aakanksha Nehra, Ms. Aditi Pundhir, Abhishek Agarwal, JitenderChaudhary, Ms. Shilpa Chohan, Rajesh Singh, Vivek Jain, Ms. SuchitraKumbhat, Rajat Joseph, Mayank Pandey, Abhinav Agrawal, Ninad Laud,Neeraj Matta, Ms. Ananyaa Mazumdar, Rajesh Ranjan, Karan Mathur,Joel, Abhimanyu Bhandari, Ms. Nattasha Garg, Arav Pandit, Ms. AashimaSinghal, Ms. Roohina Dua, Cheitanya Madan, Somesh Tiwari,Ms. Ranjeeta Rohatgi, Ms. Ruchi Kohli, Rameshwar Prasad Goyal,Anurag, Ankur Prakash, Amar Gupta, Daksh Ahluwalia, Manish Jha,Ms. Pallavi Kumar, Adhiraj Gupta, Divyam Agarwal, Puneet Singh Bindra,Rajnish Singh, Ms. Simran Jeet, Sanampreet Singh, Harish Pandey, ChiragM. Shroff, Ms. Mahima C. Shroff, Sanchit Garga, Rakshit Goyal, Sriram

AP., Sumeer Sodhi, Aman Nandrajog, Ms. Aarzoo Aneja, Ashish Tiwari,Shrutanjay Bharadwaj, C. George Thomas, A. Khanna, Santosh Kumar- I, Abhay Kumar, Mahesh Agarwal, Rishi Agrawala, Parminder Singh,Ms. Aastha Mehta, Ms. Shruti Arora, Ms. Sanam Tripathi, Simranjit H.Virk, Vinayak Bhandari, E. C. Agrawala, Shivendra Dwivedi, AkshaySharma, Vikas Sharma, Rajesh Mahale, Pramod Sachdeva, SaurabhBMishra, Onkar Singh, Arun Verma, Prateek Gupta, Krishna DevJagarlamudi, Ms. Riya Arora, Atul Sharma, Abhishek Sharma, AshlyCherian, Purva Kohli, Gautam Talukdar, Rakshit Goyal, Rajat Sehgal,Ruhitash Kumar Sharma, Sumit Sinha, Sinha Shrey Nikhlesh, NayanDubey, Swastik Verma, Vaibhav Gaggar, Sanchit Uppal, Ms. SumedhaCDang, Tushar Singh, Dr. Surender Singh Hooda, Ms. Pooja Dhar, SanjeevKumar, H.K. Naik, Ms. Padama Chaudhry, Rajnish, Prashant Katara,Rohit Mehra, Debasis Misra, M.P. Parthiban, Rajesh P., ManoranjanSharma, Prashant Jain, Kumar Mihir, Ms. Gunjan Sharma, MohitChaudhary, Ms. Puja Sharma, Kunal Sachdeva, Anup Mishra, BalwinderSingh Suri, Ms. Garima Sharma, Ms. Sristhi Gupta (for M/s. Kings AndDAlliance LLP), Satish Kumar, Pranab Prakash, Sumit Roy, Varun Pandey,Narender Singh Yadav, Santosh Kumar - I, M/s. Mitter & Mitter Co.,Ashutosh Jha, N. Deepak, Vijay Kumar, Rahul Kumar Singh, R.C.Sharma, Ms. Kamakshi S. Mehlwal, Ms. Sonia Dube, Ms. KanchanYadav, M/s. Legal Options, Sidharth Joshi, R. Maheswari, Gopal SinghEChauhan, S. Muthu Krishnan, Ms. Divya Chaudhary, Saurabh Trivedi,Manish Paliwal, Vikas Kumar, Ms. Vatsala Kak, Sumesh Dhawan (forM/s Corporate Legal Partners), Advs. for the Petitioners/Appellant.

K. K. Venugopal, Attorney General for India, Tushar Mehta, SG,Ms. Madhavi Diwan, ASG, R. Balasubramanian, Mukul Gupta, Ms. GeetaFLuthra, Sr. Advs., Ms. Shraddha Deshmukh, Kanu Agrawal, ChinmayeeChandra, Rajeev Ranjan, Rajan Kumar Chourasia, Sachin Sharma, ArvindKumar Sharma, Gargi K., Rajat Nair, Raj Bahadur, A. VenayagamBalan, V. Elanchezhiyan, Salim Inamdar, Ms. Pragya Baghel, RaviShehgal, Tejas Sanghrajka, Sunil Fernandes, Ms. Sujata Kurdukar,Ms. Rashi Bansal, P. Niroop, Chandan Kumar, Manoj C. Mishra,GShohit Chaudhry, Ms. Appabrita Saha, Pankaj Agarwal, VaibhavAggarwal, Ketan Paul, Mrs. Anil Katiyar, B. Karunakaran, Mohd.Tabishzia, S. Gowthaman, Ms. Neha Malik, Ms. Shalini Sinha, AmitKimothi, Vaibhav Kumar, Rajiv Kumar Sinha, Narendra Kumar,Ms. Radhika Gautam, Ms. Priyanka Arora, Ravindra S. Garia, KumarDushyant Singh, Krishna Kumar, Ms. Mridula Ray Bharadwaj, VikasMehta, Apoorv Khator, Rajesh Goyal, Dilpreet Singh, Mayank Goel,Monamshel, Piyush Singh, Aditya Parolia, Akshay Srivastava, NithinChandran, Zahid Hussain, Ms. Nivedita Grover, Varun Tandon, KumarPradyuman, Ms. Sumbul Ismail, Rishabh Gupta, Ms. Kashish Sareen,Ms. Harshita Chauhan, Prateek Vats, Rajesh Kumar, Gaurav Goel,Awanish Sinha, Naresh Kaushik, Vardhman Kaushik, Nishant Gautam,Dhruv Joshi, Omung Raj Gupta, Ritesh Kumar, Atul Sharma, R.K. Pandey,Ms.Nidhi Mohan Parashar, Soayib Qureshi, Devansh Jain, Dhruv Gupta,Shaishav Manu, Arjun Singh Bhati, Ms. S. Janani, Dr. (Mrs.) Vipin Gupta,Vaibhav Manu Srivastava, Vikpul Ganda, Satyajit A. Desai, Ms. AnaghaS. Desai, Ms. Astha Sharma, Ms. Dimple Nagpal, Pramod Dayal, AnnamVenkatesh, Rahul Mishra, Ms. Avni Sharma, Atul Sharma, Pramit Saxena,R.K. Pandey, Amit Gaurav Singh, Rahul Rathor, Ms. Priyanjali Singh,Karunesh Kumar Shukla, Sachin Mittal, Kanishk Khullar, Sunil Upadhyay,Vaibhav Sharma, Rahul Joshi, Nikilesh Ramachandran, Sunil Dalal, S.S.Ray, Ms. Rakhi Ray, Amit Agrawal, Aniket Deepak Agrawal, ParveenKumar Aggarwal, Abhishek Grover, Sanjay Jain, Ms. Preeti Singh,Sudhansu Palo, Gautam Dash, Ravin R. Dubey, Ms. Madhusmita Bora,Rohit Kumar Singh, Sumant De, Abhay Pratap Singh, Prithu Garg,Siddharth Mehta, Lzafeer Ahmad, Saji George, V. K. Biju, TasneemAhmadi, Sudhir Kumar Gupta, Manish Gupta, Satish Kumar, K. PaariVendhan, Charu Sangwan, Rajiv Shankar Dvivedi, Ms. Pallavi Mishra,Sanjay Sarin, Tarun Rana, Aditya Sarin, Dinkar Kalra, Vibhor Garg, DinkarKalra, Rajiv Ranjan Dwivedi, Ms. Mukti Chaudhry, Tarun Gupta, AtulKumar, Abhimanyu, P. V. Dinesh, Ms. Sindhu T.P., Mukund P. Unny,R.S. Lakshman, Bineesh K., Ashwin Kumar Singh (for M/s. Indialaw),Jatin Sehgal, Raymon Singh, Adhirath Singh, Snehasish Mukherjee, AzmatHayat Amanullah, Sarvam Ritam Khare, Urvi Kuthiala, Ms. VrindaKapoor, M/s. Ace Legal, Ms. Manjeet Kirpal, Chayan Sarkar, KaranBindra, Anzu. K. Varkey, Subhro Sanyal, Ms. Garima Bajaj, PradeepDhingra, Ms. Shalini Dhingra, Satya Ranjan Swain, Rajesh SinghChauhan, Liju V. Stephen, James P. Thomas, Md. Apzal Ansari,Ms. Indu Jacob, Mohd. Farhan Khan, Farah Hashmi, Md. Shahid Anwar,Advs. for the Respondents.

Respondent-in-person

414SUPREME COURT REPORTS

AThe Judgment of the Court was delivered by

R. F. NARIMAN, J. 1. The large number of writ petitions thathave been filed in this Court challenge the constitutional validity ofamendments made to the Insolvency and Bankruptcy Code, 2016(hereinafter referred to as “the Code”), pursuant to report preparedBby the Insolvency Law Committee dated26[th]March, 2018 (hereinafterreferred to as the “Insolvency Committee Report”).The amendmentsso made deem allottees of real estate projects to be “financial creditors”so that they may trigger the Code, under Section 7 thereof, against thereal estate developer. In addition, being financial creditors, they areentitled to be represented in the Committee of Creditors by authorisedCrepresentatives. The amendments so made to the Code are as follows:PROVISIONS OFTHE INSOLVENCYANDBANKRUPTCY CODE, 2016 BEING CHALLENGED

1. Explanation to Section 5(8)(f):

“5. Definitions

In this part, unless the context otherwise requires, –

(8) “financial debt” means debt along with interest, if any, whichis disbursed against the consideration for the time value of moneyand includes-

(f) any amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof borrowing;

Explanation.- For the purposes of this sub-clause,-F

(i) any amount raised from an allottee under real estate projectshall be deemed to be an amount having the commercialeffect of borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall havethe meanings respectively assigned to them in clauses (d)Gand (zn) of section 2 of the Real Estate (Regulation andDevelopment) Act, 2016 (16 of 2016);”

2. Section 21(6A)(b)

“21. Committee of creditors

(6A) Where financial debt-

(b)is owed to class of creditors exceeding the number as maybe specified, other than the creditors covered under clause (a) orsub-section (6), the interim resolution professional shall make anapplication to the Adjudicating Authority along with the list of allfinancial creditors, containing the name of an insolvencyprofessional, other than the interim resolution professional, to actas their authorised representative who shall be appointed by theAdjudicating Authority prior to the first meeting of the committeeof creditors; […]

and such authorised representative under clause (a) or clause (b)or clause (c) shall attend the meetings of the committee ofcreditors, and vote on behalf of each financial creditor to the extentof his voting share.”

3. Section 25A

“25A.Rights and duties of authorized representatives of financialcreditors –

(1) The authorised representative under sub-section (6) or sub-section (6A) of section 21 or sub-section (5) of section 24shall have the right to participate and vote in meetings of thecommittee of creditors on behalf of the financial creditor herepresents in accordance with the prior voting instructions ofsuch creditors obtained through physical or electronic means.

(2) It shall be the duty of the authorised representative tocirculate the agenda and minutes of the meeting of the com-mittee of creditors to the financial creditor he represents.

(3) The authorised representative shall not act against the interestof the financial creditor he represents and shall always act inaccordance with their prior instructions:

Provided that if the authorised representative represents several

financial creditors, then he shall cast his vote in respect ofeach financial creditor in accordance with instructions receivedfrom each financial creditor, to the extent of his voting share:

Provided further that if any financial creditor does not give

prior instructions through physical or electronic means, the

Aauthorised representative shall abstain from voting on behalfof such creditor.

(4) The authorised representative shall file with the committee ofcreditors any instructions received by way of physical orelectronic means, from the financial creditor he represents, forBvoting in accordance therewith, to ensure that the appropriatevoting instructions of the financial creditor he represents iscorrectly recorded by the interim resolution professional orresolution professional, as the case may be.

Explanation – For the purposes of this section, the “electronicCmeans” shall be such as may be specified.””

2. The Code was passed by the Parliament on 28[th] May, 2016.Several petitions were then filed against real estate developers underthe Code by allottees who had entered into “assured returns /committedreturns” agreements with these developers, whereby, upon payment ofDa substantial portion of the total sale consideration upfront at the time ofexecution of the agreement, the developer undertook to pay certainamount to allottees on monthly basis from the date of execution of theagreement till the date of handing over of possession to the allottees.TheNational Company Law Appellate Tribunal (hereinafter referred to as“NCLAT”)on 21[st] July, 2017 in Nikhil Mehtaand Sons (HUF) v. AMREInfrastructure Ltd., (Company Appeal (AT) (Insolvency) No. 07 of2017) held that amounts raised by developers under assured returnschemes had the “commercial effect of borrowing”, which becameclear from the developer’s annual returns in which the amount raisedwas shown as “commitment charges” under the head “financial costs”.FAs result, such allottees were held to be “financial creditors” withinthe meaning of Section 5(7) of the Code.

3. On 9[th] August, 2017, proceedings were initiated by IDBI Bankagainst large real estate developer, Jaypee Infratech Ltd. under Section7 of the Code before the National Company Law Tribunal (hereinafterGreferred to as “NCLT”) Allahabad Bench, alleging that Jaypee haddefaulted on loan of Rs.526.11 crores. On 11[th] September, 2017, anorder was passed by this Hon’ble Court in Chitra Sharma & Ors. v.Union of India (Writ Petition (Civil) No.744 of 2017) in the case ofJaypee Infratech Ltd. appointing representative of the home buyers,

i.e. the allottees, to participate in meetings of the Committee of Creditorsin order that their interests be protected.

4. While this order was passed in Chitra Sharma (supra), quaanother group of builders, namely, the Amrapali group, an order waspassed on 22[nd] November, 2017 by this Court in Bikram Chatterji v.Union of India (Writ Petition (Civil) No.940 of 2017) substantially onthe same lines as the order passed in Chitra Sharma (supra). Duringproceedings before this Hon’ble Court in Chitra Sharma (supra), thisCourt, vide order dated 21[st] March, 2018, recorded that it was onlyconcerned with those home buyers who intend to obtain refund ofamounts advanced by them, being 8% of the total home buyers/allotteesin Jaypee’s case. Given these orders by this Court, the InsolvencyCommittee Report suggested that amendments be made in the Codeseeking to clarify, as matter of law, that allottees of real estate projectsare financial creditors.It may be noted that three members of theInsolvency Law Committee, namely, ShriShardul Shroff, Shri S. Senand Shri B. Sriram, dissented with the rest of the Insolvency LawCommittee on the proposed amendments. On 6[th] June, 2018, pursuant tothis Report, the Insolvency and Bankruptcy Code AmendmentOrdinance, 2018 (hereinafter referred to as the “Amendment Ordinance”)was promulgated by which the three amendments (supra) to the Codewere inserted. On 17[th] August, 2018, the Parliament passed the Insolvencyand Bankruptcy Code(Second Amendment) Act, 2018(hereinafterreferred to as the “Amendment Act”) incorporating the aforesaidamendments as were provided for by the Amendment Ordinance.5. Dr. Abhishek Manu Singhvi, learned Senior Advocate, leadingthe charge on behalf of the real estate developers, has argued that thetreatment of allottees as financial creditors violates two facets of Article14. One, that the amendment is discriminatory inasmuch as it treatsunequals equally, and equals unequally, having no intelligible differentia;and two, that there is no nexus with the objects sought to be achieved bythe Code. In fact, according to the learned senior counsel the amendmentsfly in the face of the objects sought to be achieved by the Code, i.e. tomaximise value of assets so that the shareholders of corporate debtordo not suffer from bad management or poor management. In the factsof the present cases, according to Dr. Singhvi, the “bad eggs” alonehave been looked at, and entities like his client and many others before

Aus, who have completed building projects in time and are in every waycompliant with the law, can yet be jeopardised by Section 7 petitionsfiled under the Code to blackmail them into making payments whichwould divert funds which are otherwise to be used for the purpose ofthe project. According to the learned senior counsel, perfectly goodmanagement which has several projects on its hands can be removed atBthe instance of one allottee and either replaced – in which case themassive funds infused by the developer himself would be set at naught –or worse still, lead to commercial death, in that, if there are no resolutionplans or all resolution plans are rejected either by the Committee ofCreditors or by the authorities under the Code, perfectly solventCcompany would then be wound up, which would not be in the interest ofanybody, least of all the bulk of allottees themselves, who would wantpossession of flats/apartments. According to him, therefore, theseamendments are manifestly arbitrary, being excessive, disproportionate,irrational and without determining principle. For the same reason, the

Petitioners’ fundamental right under Article 19(1)(g) of the ConstitutionDof India is infracted, and the amendments, not being reasonablerestriction in the public interest under Article 19(6) would, therefore,have to be struck down. Equally, according to the learned senior counsel,the deeming fiction in the explanation to Section 5(8)(f) of the Code isinconsistent with the objects sought to be achieved by the Code and hasEbeen stretched to absurd limits, making it manifestly arbitrary. Also, theamendments made to Section 21 and the insertion of Section 25A of theCode do away with the collegiality and commercial wisdom of theCommittee of Creditors, and are manifestly arbitrary on this count. Hemade an impassioned plea that it was surprising that these amendmentswere even made, in view of the fact that there is specific legislation,Fnamely, the Real Estate (Regulation and Development) Act, 2016(hereinafter referred to as “RERA”), which deals in detail with the realestate sector, and provides for adjudication of disputes between allotteesand the developer, together with large number of safeguards in favourof the allottee, including agreements in statutory form, which wouldGreplace the agreements entered into between the developer and theallottees. According to him, therefore, reading of RERA would showthat all concerns of the allottees would be addressed by this sector-specific legislation and that the enactment of sledgehammer to kill agnat would render the impugned amendments excessive, disproportionateand violative of Articles 14 and 19(1)(g) of the Constitution on this scoreHalso. In addition, the learned senior counsel scoffed at the Union’s stand,in their counter affidavit before this Court, that the amendments madeare clarificatory in nature. According to Dr. Singhvi, by no stretch ofimagination could allottees who have parted with money as saleconsideration for an apartment be included within the definition of“financial creditor” as originally enacted by Section 5(7). In fact, thevery need for deeming fiction is so that Parliament brings in personswho are not financial creditors, by forcibly inserting square peg in around hole. He read to us this Court’s judgment in Swiss Ribbons v.Union of India (2019) 4 SCC 17, in copious detail, in order to drivehome the point that not single one of several characteristics of financialcreditors stated in that judgment would apply to allottees/homebuyers.On the contrary, if at all they could be assimilated to anybody, it wouldbe to operational creditors, in which event it would be enough to statethat there is pre-existing dispute between the parties, as result ofwhich the Code cannot get triggered. According to him, including allotteesof real estate projects - huge amorphous and disparate lot - as financialcreditors, would not only be unworkable, as thousands of petitions wouldflood the NCLT, but would also be both arbitrary and unworkable whenthis large number of disparate persons is represented on the Committeeof Creditors, many of whom would speak in different voices, beingconcerned only with their own investment, and having no concernwhatsoever for the financial betterment of the corporate debtor.

6. Shri Neeraj Kishan Kaul, learned Senior Advocate appearingon behalf of some of the Petitioners, has adopted the submissions of Dr.Singhvi. He cited judgments to buttress the Article 14 arguments madeby Dr. Singhvi, and added that an explanation cannot in any way interferewith or change the enactment or any part thereof. He also argued that itwould be wholly arbitrary to include allottees as financial creditors when,in fact, they possess none of the characteristics pointed out in SwissRibbons (supra) of banks and financial institutions.

7. Shri Shyam Divan, learned Senior Advocate appearing on behalfof some of the real estate developers, made an impassioned plea that inone of the writ petitions in which he appears, the real estate developerhas infused over Rs. 100 crores in particular project, through fundsthat are obtained from abroad. If in the case of entities like this developer,who complete projects on time and who have never defaulted, singleallottee can knock at the doors of the NCLT and obtain an admission

Aorder, the management of the corporate debtor would be removed andreplaced by either somebody else, or, if not possible, the company wouldbe wound up. According to him, not only would this be highly arbitraryand excessive, impacting the fundamental rights under Article 19(1)(g)and 300-A, but would also have the indirect effect of dissuading foreignersfrom investing in this country. He also argued that Article 14 interdictsBlegislation whose object is itself discriminatory, and cited judgments toprove his point. He argued with great vehemence, citing judgments tobuttress the proposition that deeming fiction cannot do away with whatare the essentials of being financial creditor. According to him, there isno “debt” as defined under the Code; there is no “borrowing” as there isCno temporary handing over of money which has then to be returned;there is no “disbursal” and no “sum raised” which has then to be handedback. Equally, the commercial effect of borrowing must be quatransactions in which money is later replaced by money. According tohim, in the present case, at the time that the agreement is made betweenthe allottee and the real estate developer, what is agreed is that in returnDfor money paid by the allottee, flat/apartment would be allotted. It isonly in the event of breach of the agreement on the part of the realestate developer that monies are to be refunded, which does not bringallottees within the definition of “financial creditor”. He also argued,adopting Dr. Singhvi’s arguments, that all other categories of financialEcreditors would involve these elements, and if read noscitur sociiswith the other clauses, Section 5(8) of the Code would also make it clearthat persons can only be included if there is borrowing, at the end ofwhich the borrowing is returned - with or without interest. He thus agreedwith Dr. Singhvi’s argument that what was sought to be inserted by theamendment is square peg in round hole.F

8. Shri Jayant Bhushan, learned Senior Advocate appearing onbehalf of some of the Petitioners, then followed. He stressed the factsof Writ Petition No.357 of 2019 to show that huge sums have beeninfused into large number of projects by the developers themselves, allsuch projects being constructed in accordance with RERA. AccordingGto him, if the amendments pass muster, as many as 5000 workers engagedacross these real estate projects together with 600 employees would bedirectly impacted. NCLT applications have been filed by allottees ofonly 14 units out of 19,062 units sold. According to him, his client has

never defaulted in repayment of amounts borrowed from banks/financialinstitutions and, in fact, upon initiation of the insolvency process, onaccount of one petition filed by one allottee, IDFC invoked standbyletter of credit and thereby recovered the entire amount due to thembeing approximately Rs. 100 crores prematurely. Therefore, large solventreal estate developers would be crippled if the Code were to be appliedin this fashion to them. Apart from buttressing arguments already madeon Articles 14 and 19(1)(g), he relied on judgments to show that claimfor unliquidated damages becomes debt only on adjudication, whichdoes not take place when Section 7 application is heard. According tohim, since the NCLT can only go into “default” and as the definition of“default” itself is vague and ambiguous, the said definition should bestruck down as being manifestly arbitrary. He also added, citing thesame judgment as Shri Neeraj Kaul, namely, S. Sundaram Pillai v.V.R. Pattabiraman (1985) 1 SCC 591, that an explanation cannot enlargethe scope of the original provision. He also made without-prejudiceargument that even if allottees are not permitted to trigger the Code,they may still be protected by making suitable amendments for theirinclusion in the Committee of Creditors, so that they may have voice inthe future of the corporate debtor, which will impact the flats/apartmentsto be given to them or refunds to be made, as the case may be.9. Shri Gopal Sankaranarayanan, learned Senior Advocate,followed Shri Bhushan and argued on the various facets of Articles 14and 19(1)(g). He also sought directions to recalcitrant States toimmediately set up the requisite authorities under RERA and made animpassioned plea that the words “claims as may be specified” in Section15(1)(c) of the Code be struck down. According to him, real estatedevelopers and borrowers are treated as equals when they are, in fact,unequals. Also, real estate developers are discriminated against whencompared with other entities supplying goods or services. Theamendments made are, therefore, excessive and disproportionate beingmanifestly arbitrary. He also buttressed Dr. Singhvi’s argument that asquare peg is fitted into round hole as none of the identifying traits offinancial creditors as explained in Swiss Ribbons (supra) are presentinsofar as allottees are concerned. He added that, in any case, RERAlooks after all possible difficulties of allottees, who may in addition, invokethe arbitration clause for resolution of disputes with the real estatedeveloper contained in most agreements.

A10. Shri Krishnan Venugopal, learned Senior Advocate, whofollowed Shri Gopal Sankaranarayanan, placed before us the GlobalDerivatives Study Group and extracts from Philip Wood’s Project Finance,Subordinated Debt and State Loans; and Principles of InternationalInsolvency by the same author. He then relied on ‘The ACT Borrower’sGuide to the LMA’s Investment Grade Agreements’ produced byBSlaughter & May to explain the genesis of Section 5(8) generally and5(8)(f) of the Code in particular. He then relied upon number ofjudgments, which according to him made it clear that deeming fictionis enacted when the position in reality is completely different, and hence,a deeming fiction is introduced when something is not otherwise coveredCunder the main provision. On this basis, he contended that the amendmentto Section 5(8)(f) of the Code was prospective in nature. He also citedjudgments to show that time for completion of project can never besaid to be of the essence of the agreement between the builder and theallottee, and this being so, builder cannot be said to be in default whenhe does not deliver flat/apartment within the time specified, but later.DAccording to him, since Section 5(8) of the Code is “means and includes”definition clause, it is exhaustive and therefore, to then introduce by wayof amendment something extra by means of deeming fiction wouldthus not be permissible in law. Shri Krishnan Venugopal also referred toextracts from various authorities to demonstrate that even qua creditEand conditional sale agreements, ultimately Section 5(8) is concernedonly with transactions in which finance is involved. He also pointed out,with reference to Chapter 11 Bankruptcy Proceedings in the UnitedStates, that once company has been stigmatised as being bankrupt orhaving gone into bankruptcy, several persons who earlier dealt with thecompany disengaged themselves, as result of which the Company’sFpower to do business gets severely hampered.

11. The tail of the arguments on behalf of the Petitioners thenwagged in the persona of several other counsel who added titbits hereand there. Shri Bhandari, appearing for one of the writ Petitioners, gavea chart of comparative analysis between the ‘UNCITRAL LegislativeGGuide on Insolvency Law’ (2005) (hereinafter referred to as the“UNCITRAL Legislative Guide”),which forms the basis of the Code,and the Bankruptcy Law Reforms Committee Report (2015), arguedthat the impugned amendments went against several features of thisUNCITRAL Legislative Guide. He contended that, first and foremost,

the fundamental difference between financial and operational creditorswas ignored. Secondly, he contended that by treating homebuyers, whoare in substance operational creditors, as financial creditors, infracts theprinciple of equitable treatment of similarly situated creditors. Further,the UNCITRAL Legislative Guide states that recognition of existingcreditor’s rights before the commencement of the insolvency proceedingsby the insolvency law is important. He contended that by treating ahome buyer as financial creditor, the Code creates rights which suchhomebuyer never had earlier. He further contended that by involvingsuch persons in the negotiation process by putting them on the Committeeof Creditors would infract the principle that, given their number and thediverse interests that they have, coupled with no knowledge or anycommercial expertise of the corporate debtor, they should not and oughtnot to be allowed to participate in the Committee of Creditors. Also,insolvency law and other laws should be harmoniously construed, whichharmony is disrupted when the Code is applied to cases which shouldreally fall under RERA. Shri Bhandari was followed by Shri J. Gupta,who argued that instead of deeming that allottees/homebuyers be regardedas financial creditors, they ought to be regarded as operational creditorsin which case, defences available in such cases would then beavailable.Shri Pulkit Deora then showed us accounting standards in whichit became clear that advances received from homebuyers by developerscannot, from an accounting perspective, be treated as financial liabilitiesand the amendments in doing so, therefore, violate the aforesaid standardsand become manifestly arbitrary. Also, after going into the definition of“claim”, “financial debt” and “operational debt”, he argued that financialdebt is crystallised claim which is due, as opposed to an operationaldebt which may simply be claim upon breach of contract that may bedisputed and therefore not due. On this basis he contended that to puthomebuyers in the financial creditor category, instead of the operationalcreditor category, would then blur this distinction and do away with avital defence available to the real estate developer in the case ofoperational debts. Shri Rana Mukherjee, appearing through Shri K.Poddar, argued that homebuyers would not fall within the category ofeither financial or operational creditors and should therefore be subsumedonly within RERA, which is complete code dealing with the real estateindustry. He further argued that RERA is special Act as opposed tothe Code, which is general Act and ought, therefore, to prevail. Also,

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Aas the adjudication process envisaged under RERA would be done awaywith if the Code is to be applied, the application of the Code to homebuyerswould be manifestly arbitrary. M/s. Kejriwal and P. Aggarwal have arguedthat on the facts of their cases, force majeure events occurred as aresult of which possession could not be handed over. They also pointedout that, from practical point of view, the NCLT in such cases does notBgo into defences which would demonstrate that delays in handing overpossession cannot be attributed to the developer, and being summaryproceeding, merely goes ahead and admits Section 7 petition despitethe fact that the developer is not at fault in not handing over the flat/apartment in time. Shri S. Malhotra repeated some of the submissionsCthat have already been noted hereinabove. Shri P.S. Bindra argued thatwe should apply the Amendment Act only prospectively, either from2018 itself or at the very earliest from 1[st] December, 2016. He alsoargued that if this Court were to uphold the vires of the Amendment Act,his clients ought to be at liberty to take various defences under theagreement between his client and allottees, which this Court should makeDclear in the event of allottees knocking at the doors of the NCLT.12. Mrs. Madhavi Divan, learned Additional Solicitor General,relying strongly upon Swiss Ribbons (supra), argued that theAmendment Act would clearly be covered by the ratio laid down by thisCourt in Swiss Ribbons(supra), which is that sufficient play in the jointsEmust be given to the legislature when it comes to economic legislation,and every experiment that the legislature bonafide undertakes shouldnot be interfered with by the Court. She referred copiously to theInsolvency Committee Report which led to the enactment of theAmendment Act, and stated that the real reason for including allotteesFas financial creditors is because, in substance, they finance the projectin which they will ultimately be given flats/apartments. She contendedthat cursory look at the agreement between developers and suchallottees would show that at every stage in the building process, certainamounts have to be paid which are then supposed to be utilised inconstructing the apartments/flats. This is what makes them differentGfrom other operational creditors. Also, in the case of operational creditors,it is the person who stands in the place of the developer, who either sellsgoods or renders service for which he is to be paid. The exact oppositeobtains in the case of homebuyers/allottees who in fact fund their ownflats/apartments. She was at great pains to point out that it must never

be forgotten that the Code is not recovery mechanism. When ahomebuyer approaches the NCLT, if his petition is admitted, he does notget his money back in the near foreseeable future and has to stand inline and await either the vagaries of resolution plan which gives himsome percentage of the monies owed to him, and/or completes the projectfor him. In the event of winding up, he has then to stand in line andreceive whatever is available. As opposed to this, homebuyers/allotteescan and do approach the authorities under RERA in which, upon showingbreach on the part of the real estate developer, they would be able toclaim whatever has been paid by them in full together with interest thereon.This being the case it is wholly incorrect to paint picture, as was doneby learned senior counsel appearing on behalf of the Petitioners, thattrigger-happy allottees malafide invoke the Code to put pressure ondevelopers to refund their money given as advances. Also, it is whollyincorrect to say that highly solvent companies would go in the red andthen be wound up under the Code. If in fact such companies are solvent,the Committee of Creditors may decide to continue the same managementor may decide to accept resolution plans from other developers so thatthe real estate development company continues as going concern.Winding up is only last resort, which will never really occur in the caseof well managed corporate entities. She referred in copious detail toNCLT and NCLAT judgments in which it was held that, save and exceptallottees who had agreements in which fixed monthly return wasguaranteed by the developer, allottees were held to be neither operationalnor financial creditors, resulting in great hardship to them. She took usthrough the various sections of the Code afresh and argued that Section5(8)(f), even read without the explanation, would, on its plain language,include real estate development agreements. For this purpose, she reliedupon the definition of “payment” which would include “recompense”and on the definition in Collin’s English dictionary of “borrow” which is“to obtain or receive money on loan for temporary use intending to giveeither money or something equivalent back to the lender”. In the factsof these cases, she contended that the “something equivalent” would bethe flat/apartment. She also relied upon the definition of “commercial”to show that the profit element is important. She stressed the fact thatthe “time value of money” is present qua both allottee and builder as theallottee would pay less than he would have to for complete flat/apartment, in which case the entire consideration for the flat/apartmentwould have to be paid upfront; as against instalments while it is being

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Acompleted. Qua the builder, she contended that the time value of moneywould be the money paid by way of advances by allottees which wouldbe used to finance the building of the flats/apartments in the project. Shealso relied strongly upon Section 18 of RERA to show that in order to bea financial creditor, it is enough that right recognised by Section 18 infavour of the allottee to payment would exist, and therefore, would beBincluded within the definition of “financial debt” read with “debt” containedin Section 5(8) and Section 3(11) of the Code respectively. She alsoreferred to and relied upon Section 4(2)(l)(D) of RERA to show that70% of advances received by the developer from allottees must be putinto an escrow account, which can only be used for the project at hand,Cshowing therefore that even statutorily, monies paid by way of advanceare in the nature of financing transaction. She then cited judgments toshow how the noscitur sociis principle cannot be used when expresswider language is used in one of the sub-clauses of particular provision,making it clear that it is meant to be read by itself, and not in conjunctionwith what precedes and succeeds it. She also cited judgments to showDthat the expression “deemed” is also to put certain matter beyonddoubt and argued that an explanation can be inserted by the legislatureas additional support to what is already contained in the main provision.She added that deeming fictions put in explanations are not somethingunknown to the law, and cited judgments to buttress her contention. SheEalso cited judgments to show that when “means” is used separatelyfrom “includes”, the definition clause would be inclusive, as opposed towhen “means and includes” is used, and therefore argued that sinceSection 5(8) is not exhaustive, the category of homebuyers could beadded therein. Also, according to her, “means” and “includes” wheninterpreted by courts, is different from the legislature itself amending theFprovision so as to add something therein. Legislative activity cannot beconfused with interpretational activity by the courts. She then argued,referring to the provisions of RERA in some detail, that completeinformation bank is provided by RERA, which is provided by the realestate developer himself, from which, like information utilities under theGCode, information, inter alia, as to defaults made by the real estatedeveloper would be available. According to her, therefore, all that theNCLT would have to be supplied with by the allottee in his Section 7petition would be this information, and, after receiving reply from thereal estate developer, would then easily be able to decide whether realestate developer owes money in the form of compensation payable forHlate completion of the project, and/or refund of money paid by the allottee.It would be open for the real estate developer in its defence to say thatno amount is due and payable from the allottee, in that, the allottee ishimself in breach of conditions laid down by the agreement read withthe RERA, and rules and regulations made thereunder. According toher, therefore, the NCLT would be able to decide such applications inthe same manner as would be decided in the case of banks and financialinstitutions. She also rebutted the argument that the collegiality of creditorswill be affected by inserting home buyers into their committee by statingthat home buyers, like banks and financial institutions, and unlike otheroperational creditors, are vitally concerned with the well-being of thecorporate debtor, as otherwise the real estate project would never cometo fruition. In rebutting the challenge to Section 21(6A) and Section 25A,she said there may be teething problems with regard to how an authorisedrepresentative is to vote on the Committee of Creditors, but stated thatthe legislature is in the process of ironing out these creases and referredto the recent Insolvency and Bankruptcy Code (Amendment) Bill, 2019which has just been passed by Parliament. She also argued thathomebuyers may themselves finance up to 100% of project, and incase they finance project by 100%, the Code would not work unlessthey were recognised as financial creditors as, not being financial oroperational creditors, no Committee of Creditors could be set up at all;andfor this purpose she relied upon the proviso to Section 21(8) of theCode, read with Regulation 16 of the Insolvency and Bankruptcy Boardof India(Insolvency Resolution Process for Corporate Persons)Regulations, 2016.She argued, therefore, that on point of fact, ifallottees of real estate projects were to be kept out of the Committeeof Creditors, that itself would be manifestly arbitrary as in most casesthey finance the project to the tune of at least 50%, going up to 100%.She also stated that each project was usually carried out by ‘specialpurpose vehicle’, being corporate entity on its own, and therefore, thebogey of destabilisation of management which has brought in largefunds for many projects, and which would be replaced for all projects,would not be correct.

13. Shri Tushar Mehta, learned Solicitor General of India broadlysupported the detailed arguments of Mrs. Madhavi Divan, learnedAdditional Solicitor General, by buttressing the same by citing variousjudgments and authorities. According to him also, given the fact that

ASwiss Ribbons (supra) gives the legislature free play in the joints whenit comes to economic legislation and experimentation in this sphere, SwissRibbons (supra) itself is more or less complete answer to allconstitutional challenges that may be made to the Amendment Act.

14. number of counsel then appeared for allottees in individualBcases. These counsel argued, by referring copiously to NCLT and NCLATorders, consumer forum judgments and High Court judgments, that theconsumer fora, and the authorities under RERA are not meaningfulremedies for allottees at all. According to them, loopholes made in therules by various States still allow one-sided agreements by real estatedevelopers to continue to govern the relationship between allottee andCreal estate developer long after RERA has come into force. This hasbeen done, for example, by defining ‘Completion Certificate’ to includepartial completion certificates of projects (or parts of projects), so thatsuch partial certificates given to the real estate developer before cominginto force of RERA would make the provisions of RERA inapplicable.DAlso, it has been pointed out that real estate developers have beensuccessful in arguing that RERA has now shut out the consumer fora sofar as allottees are concerned, and referred to stay orders by whichconsumer fora for long period of time were unable to proceed withcases filed by allottees before them, until the National Consumer DisputesRedressal Commission finally decided that the Consumer Protection Act,E1986 was an additional remedy and continued to be an additional remedyto the remedies provided under RERA. They also pointed out that theauthorities themselves under RERA jostled the allottees about, as whenan allottee went to the Real Estate Regulatory Authority and obtainedorders against developers, such orders were nullified by some AppellateFTribunal orders, stating that they should be sent to the adjudicating officerwho alone could decide disputes between allottees and real estatedevelopers. Separately, in answer to the argument that the admission ofa Section 7 application would be fatal to the management of the corporatedebtor, and that one single allottee could destabilise the management ofthe corporate debtor and not just the project undertaken by the corporateGdebtor, they pointed out that there were 5 stages at which it would beopen for the real estate developer to compromise with the allottee inquestion, before the sledgehammer under the Code comes down on theerstwhile management. They pointed out that settlements have takenplace at:(i) the stage of the Section 7 notice itself before replies wereH

filed by the real estate developer;(ii) after the NCLT issues notice on aSection 7 application and before admission; (iii) after the hearing andbefore the order admitting the matter; (iv) post-admission, and beforeappointment of the Committee of Creditors where both the NCLT andNCLAT use their inherent power to permit settlements; and (v)evenpost setting-up of the Committee of Creditors, whereby settlements canbe arrived at under Section 12A of the Code with the concurrence of90% of the creditors. On this basis, they pointed out that long before thechopper comes down on the management of the corporate debtor, allthese opportunities are given to the management of the corporate debtorto settle with the individual allottee, showing thereby that there is no realinfraction of Article 14, 19(1)(g) or 300-A of the Constitution. They alsoargued that the provisions of Section 7(4) of the Code giving the NCLT14 days within which to ascertain the existence of default is directoryas has been held in Surendra Trading Company v. Juggilal KamlapatJute Mills Company Limited and Ors.2017(16) SCC 143.They madean impassioned plea, relying upon the background to RERA, to arguethat if these beneficial amendments were to be struck down, they wouldbe back in the same position as they were before enactment of othermeasures, which have not really worked to afford them relief.The Legislature’s right to experiment in matters economic

15. In Swiss Ribbons(supra), this Court was at pains to pointout, referring, inter alia, to various American decisions in paragraphs17 to 24, that the legislature must be given free play in the joints when itcomes to economic legislation. Apart from the presumption ofconstitutionality which arises in such cases, the legislative judgment ineconomic choices must be given certain degree of deference by thecourts. In paragraph 120 of the said judgment, this Court held:

“120.The Insolvency Code is legislation which deals witheconomic matters and, in the larger sense, deals with the economyof the country as whole. Earlier experiments, as we have seen,in terms of legislations having failed, “trial” having led to repeated“errors”, ultimately led to the enactment of the Code. Theexperiment contained in the Code, judged by the generality of itsprovisions and not by so- called crudities and inequities that havebeen pointed out by the petitioners, passes constitutional muster.Tostay experimentation in things economic is grave responsibility,

Aand denial of the right to experiment is fraught with seriousconsequences to the nation. We have also seen that the workingof the Code is being monitored by the Central Government byExpert Committees that have been set up in this behalf.Amendments have been made in the short period in which theCode has operated, both to the Code itself as well as toBsubordinate legislation made under it. This process is an ongoingprocess which involves all stakeholders, including the petitioners.”

It is in this background that the constitutional challenge to theAmendment Act will have to be decided.

CRaison d’être forthe Insolvency Code (SecondAmendment)Act of 2018

16. The Insolvency Committee Report is of crucial importance inunderstanding why the legislature thought it fit to categorise homebuyersas financial creditors under the Code. The recommendations made byDthe said Insolvency Law Committee are set out hereinbelow in extenso:

“RECOMMENDATIONS PROPOSING AMENDMENTSTO THE CODE AND RELEVANT SUBORDINATELEGISLATION

1. DEFINITIONS

EFinancial debt

1.1 Section 5(8) of the Code defines ‘financial debt’ to mean adebt along with interest, if any, which is disbursed against theconsideration for the time value of money and inter alia includesmoney borrowed against payment of interest, etc. The Committee’sattention was drawn to the significant confusion regarding thestatus of buyers of under-construction apartments (“homebuyers”) as creditors under the Code. Multiple judgments havecategorised them as neither fitting within the definition of ‘finan-cial’ nor ‘operational’ creditors. In one particular case, they havebeen classified as ‘financial creditors’ due to the assured returnscheme in the contract, in which there was an arrangementwherein it was agreed that the seller of the apartments would pay‘assured returns’ to the home buyers till possession of propertywas given. It was held that such transaction was in the natureof loan and constituted ‘financial debt’ within the Code.

similar judgment was given in Anil Mahindroo & Anr v. EarthOrganics Infrastructure. But it must be noted that thesejudgments were given considering the terms of the contractsbetween the home buyers and the seller and are fact specific.Further, the IBBI issued claim form for “creditors other thanfinancial or operational creditors”, which gave an indication thathome buyers are neither financial nor operational creditors.

1.2 Non-inclusion of home buyers within either the definition of‘financial’ or ‘operational’ creditors may be cause for worrysince it deprives them of, first, the right to initiate the corporateinsolvency resolution process (“CIRP”), second, the right to beon the committee of creditors (“CoC”) and third, the guaranteeof receiving at least the liquidation value under the resolution plan.Recent cases like Chitra Sharma v. Union of India and BikramChatterji v. Union of India have evidenced the stance of theHon’ble Supreme Court in safeguarding the rights of homebuyers under the Code due to their current disadvantageousposition.

1.3 To completely understand the issue, it is imperative that thepeculiarity of the Indian real estate sector is highlighted. Delay incompletion of under-construction apartments has become com-mon phenomenon and the records indicate that out of 782 con-struction projects in India monitored by the Ministry of Statisticsand Programme Implementation, Government of India, total of215 projects are delayed with the time over-run ranging from 1 to261 months. Another study released by the Associated Chambersof Commerce and Industry of India, revealed that 826 housingprojects are running behind schedule across 14 states as of De-cember 2016.Further, the Committee agreed that it is well under-stood that amounts raised under home buyer contracts is signifi-cant amount, which contributes to the financing of construction ofan asset in the future.

1.4 The current definition of ‘financial debt’ under section 5(8) ofthe Code uses the words “includes”, thus the kinds of financialdebts illustrated are not exhaustive. The phrase “disbursedagainst the consideration for the time value of money” hasbeen the subject of interpretation only in handful of cases underthe Code. The words “time value” have been interpreted to mean

compensation or the price paid for the length of time for whichthe money has been disbursed. This may be in the form ofinterest paid on the money, or factoring of discount in thepayment.

1.5 On review of various financial terms of agreementsbetween home buyers and builders and the manner of utilisationof the disbursements made by home buyers to the builders, it isevident that the agreement is for disbursement of money by thehome buyer for the delivery of building to be constructed in thefuture. The disbursement of money is made in relation to futureasset, and the contracts usually span period of 4-5 years ormore. The Committee deliberated that the amounts so raised areused as means of financing the real estate project, and are thusin effect tool for raising finance, and on failure of the project,money is repaid based on time value of money. On plain readingof section 5(8)(f), it is clear that it is residuary entry to coverdebt transactions not covered under any other entry, and theessence of the entry is that “amount should have been raisedunder transaction having the commercial effect of aborrowing.” An example has been mentioned in the entry itselfi.e. forward sale or purchase agreement. The interpretation to beaccorded to forward sale or purchase agreement to have thetexture of financial contract may be drawn from an observationmade in the case of Nikhil Mehta and Sons (HUF) v. AMRInfrastructure Ltd.:“A forward contract to sell product at the end of specifiedperiod is not financial contract. It is essentially contractfor sale of specified goods. It is true that some time financialtransactions seemingly restructured as sale and repurchase.Any repurchase and reverse repo transaction are sometimesused as devices for raising money. In transaction of thisnature an entity may require liquidity against an asset andthe financer in return sell it back by way of forwardcontract. The difference between the two prices would implythe rate of return to the financer.”(emphasis supplied)

1.6 Thus, not all forward sale or purchase are financialtransactions, but if they are structured as tool or means forraising finance, there is no doubt that the amount raised may be

classified as financial debt under section 5(8)(f). Drawing ananalogy, in the case of home buyers, the amounts raisedunder the contracts of home buyers are in effect for thepurposes of raising finance, and are means of raisingfinance. Thus, the Committee deemed it prudent to clarifythat such amounts raised under real estate project from ahome buyer fall within entry (f) of section 5(8).

1.7 Further, it may be noted that the amount of money given byhome buyers as advances for their purchase is usually very high,and frequent delays in delivery of possession may thus, have ahuge impact. For example, in Chitra Sharma v. Union of Indiathe amount of debts owed to home buyers, which was paid bythem as advances, was claimed to be INR Fifteen ThousandCrore, more than what was due to banks. Despite this, banks arein more favourable position under the Code since they arefinancial creditors. Moreover, the general practice is that thesecontracts are structured unilaterally by construction companieswith little or no say of the home buyers. denial of the right of aclass of creditors based on technicalities within contract thatsuch creditor may not have had the power to negotiate, may notbe aligned with the spirit of the Code.

1.8 The Committee also discussed that section 30(2)(e) of theCode provides that all proposed resolution plans must notcontravene any provisions of law in force, and thus, theprovisions of Real Estate (Regulation and Development) Act, 2016(“RERA”) will need to be complied with and resolution plansunder the Code should be compliant with the said law.

1.9. Finally, the Committee concluded that the current definitionof ‘financial debt’ is sufficient to include the amounts raised fromhome buyers / allottees under real estate project, and hence,they are to be treated as financial creditors under the Code.However, given the confusion and multiple interpretations beingtaken, at this stage, it may be prudent to explicitly clarify that suchcreditors fall within the definition of financial creditor, by insertingan explanation to section 5(8)(f) of the Code. Accordingly, in CIRP,they will be part of the CoC and will be represented in themanner specified in paragraph 10 of this report, and in the eventof liquidation, they will fall within the relevant entry in the

liquidation waterfall under section 53. The Committee also agreedthat resolution plans under the Code must be compliant withapplicable laws, like RERA, which may be interpreted throughsection 30(2)(e) of the Code. It may be noted that there wasmajority support in the Committee for the abovementionedtreatment of home buyers. However, certain members of theCommittee, namely Sh. Shardul Shroff, Sh. Sudarshan Sen andSh. B. Sriram, differed on this matter.”

(emphasis supplied)

17. When it came to devising mechanism by which severalpersons may be represented by one authorised representative, theInsolvency Law Committee concluded:

“10.8 In light of the deliberation above, the Committee felt that amechanism requires to be provided in the Code to mandaterepresentation in meetings of security holders, deposit holders,and all other classes of financial creditors which exceed certainnumber, through an authorised representative. This can be doneby adding new provision to section 21 of the Code. Such arepresentative may either be trustee or an agent appointed underthe terms of the debt agreement of such creditors, otherwise aninsolvency professional may be appointed by the NCLT for eachsuch class of financial creditors. Additionally, the representativeshall act and attend the meetings on behalf of the respective classof financial creditors and shall vote on behalf of each of thefinancial creditor to the extent of the voting share of each suchcreditor, and as per their instructions. To ensure adequaterepresentation by the authorised representative of the financialcreditors, specific provision laying down the rights and duties ofsuch authorised representatives may be inserted. Further, therequisite threshold for the number of creditors and manner ofvoting may be specified by IBBI through regulations to enableefficient voting by the representative. Also, regulation 25 mayalso be amended to enable voting through electronic means suchas e-mail, to address any technical issues which may arise due toa large number of creditors voting at the same time.”

18. It can be seen that the Insolvency Law Committee found, asa matter of fact, that delay in completion of flats/apartments has become

common phenomenon, and that amounts raised from homebuyerscontributes significantly to the financing of the construction of such flats/apartments. This being the case, it was important, therefore, to clarifythat homebuyers are treated as financial creditors so that they can triggerthe Code under Section 7 and have their rightful place on the Committeeof Creditors when it comes to making important decisions as to the futureof the building construction company, which is the execution of the realestate project in which such homebuyers are ultimately to be housed.

19. Shri Shardul Shroff, whose dissent was provided to us in theform of an e-mail, after finding that self-financed homebuyers may befinancial creditors, but homebuyer who is borrower is not, then wenton to state:

“8. If the home buyers have taken loans from banks, then itis such lenders who should be on the table on the CoC asspecial status creditors.

9. Our report ought to be altered to the extent thathome buyers financiers should be treated as unsecuredfinancial creditors and they should berepresentatives of the home buyers. There should be no directright given to home buyers to be the CoC.”

Even the dissent of Shri Shroff recognises that in the case ofhomebuyers, who have taken loans from banks, such banks ought to beon the Committee of Creditors. If such banks ought to be on the Committeeof Creditors as representatives of the home buyers, and they are to voteonly in accordance with the homebuyer’s instructions, why should thehomebuyer himself then not be on the Committee of Creditors, and whyshould it make any difference as to whether he has borrowed moneyfrom banks in order to pay instalments under the agreement for sale orwhether he does it from his own finances? These matters have not beenaddressed by the dissenting view which in principle, as we have seen,supports homebuyers who have taken loans as against homebuyers whohave used their own finances. Perhaps the real reason for Shri Shroff’sdissent is the fact that unsecured, as opposed to secured, financial creditorsare being put on the Committee of Creditors. If there is otherwise goodreason as to why this particular group of unsecured creditors, like deposit

Aholders, should be part of the Committee of Creditors, it is difficult toappreciate how such group can be excluded.

The Real Estate (Regulation and Development) Act, 2016(RERA) and its impact on the real estate sector

20. The Statement of Objects and Reasons of RERA reads asBfollows:

STATEMENT OF OBJECTS AND REASONS

“1. The real estate sector plays catalytic role in fulfilling theneed and demand for housing and infrastructure in the country.CWhile the sector has grown significantly in recent years, it hasbeen largely unregulated, with absence of professionalism andstandardisation and lack of adequate consumer protection. Thoughthe Consumer Protection Act, 1986 is available as forum to thebuyers in the real estate market, the recourse is only curative andis not adequate to address all the concerns of buyers and promotersDin that sector. The lack of standardisation has been constraint tothe healthy and orderly growth of industry. Therefore, the needfor regulating the sector has been emphasised in various forums.

2. In view of the above, it becomes necessary to have Centrallegislation, namely, the Real Estate (Regulation and Development)Bill, 2013 in the interests of effective consumer protection,uniformity and standardisation of business practices andtransactions in the real estate sector. The proposed Bill providesfor the establishment of the Real Estate Regulatory Authority (theAuthority) for regulation and promotion of real estate sector andto ensure sale of plot, apartment or building, as the case may be,in an efficient and transparent manner and to protect the interestof consumers in real estate sector and establish the Real EstateAppellate Tribunal to hear appeals from the decisions, directionsor orders of the Authority.

3. The proposed Bill will ensure greater accountability towardsconsumers, and significantly reduce frauds and delays as also thecurrent high transaction costs. It attempts to balance the interestsof consumers and promoters by imposing certain responsibilitieson both. It seeks to establish symmetry of information betweenthe promoter and purchaser, transparency of contractual conditions,set minimum standards of accountability and fast-track dispute

resolution mechanism. The proposed Bill will induct professionalismand standardisation in the sector, thus paving the way foraccelerated growth and investments in the long run.”

21. It may be stated that Sections 2, 20 to 39, 41 to 58, 71 to 78and 81 to 92 of this statute were brought into force on 1[st] May, 2016.Sections 3 to 19 which deal with registration of real estate projects andreal estate agents; functions and duties of promoters; rights and dutiesof allottees, together with Section 40 which deals with recovery of interestor penalty or compensation and enforcement of orders qua the same;the Sections dealing with offences and penalties, viz., Sections 59 to 70and Sections 79 and 80 which bar the jurisdiction of Civil Courts anddeal with cognizance of offences under the RERA were all brought intoforce one year later i.e. on the 1[st] day of May, 2017. This was for thereason that the “appropriate Government” as defined in Section 2(g),which means the various State Governments and Union Territories, weregiven period of one year to establish/appoint the Real Estate RegulatoryAuthority, the adjudicating officer and the Appellate Tribunal, consequentupon which the aforesaid Sections were brought into force one yearlater - in the hope and expectation that the appropriate Governmentwould set up the aforesaid authorities within the period of one year from1[st] May, 2016. The relevant provisions of RERA are set out hereunder:

“2. Definitions. —In this Act, unless the context otherwiserequires, —

(a) “adjudicating officer” means the adjudicating officerappointed under sub-section (1) of section 71;

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(d) “allottee” in relation to real estate project, means the personto whom plot, apartment or building, as the case may be, hasbeen allotted, sold (whether as freehold or leasehold) orotherwise transferred by the promoter, and includes the personwho subsequently acquires the said allotment through sale,transfer or otherwise but does not include person to whomsuch plot, apartment or building, as the case may be, is given onrent;

(e) “apartment” whether called block, chamber, dwelling unit,flat, office, showroom, shop, godown, premises, suit, tenement,

unit or by any other name, means separate and self-containedpart of any immovable property, including one or more roomsor enclosed spaces, located on one or more floors or any partthereof, in building or on plot of land, used or intended to beused for any residential or commercial use such as residence,office, shop, showroom or godown or for carrying an anybusiness, occupation, profession or trade, or for any other typeof use ancillary to the purpose specified;

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(g) “appropriate Government” means in respect of matters relatingto, —

(i) the Union territory without Legislature, the CentralGovernment;

(ii) the Union territory of Puducherry, the Union territoryGovernment;

(iii) the Union territory of Delhi, the Central Ministry of UrbanDevelopment;

(iv) the State, the State Government;

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(i) “Authority” means the Real Estate Regulatory Authorityestablished under sub-section (1) of section 20;

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(s) “development” with its grammatical variations and cognateexpressions, means carrying out the development of immovableproperty, engineering or other operations in, on, over or under theland or the making of any material change in any immovableproperty or land and includes re-development;

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(zn) “real estate project” means the development of building ora building consisting of apartments, or converting an existingbuilding or part thereof into apartments, or the development ofland into plots or apartments, as the case may be, for the purposeof selling all or some of the said apartments or plots or building, as

the case may be, and includes the common areas, the developmentworks, all improvements and structures thereon, and all easement,rights and appurtenances belonging thereto;

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3. Prior registration of real estate project with Real EstateRegulatory Authority. —(1) No promoter shall advertise, market,book, sell or offer for sale, or invite persons to purchase in anymanner any plot, apartment or building, as the case may be, in anyreal estate project or part of it, in any planning area, withoutregistering the real estate project with the Real Estate RegulatoryAuthority established under this Act:

Provided that projects that are ongoing on the date ofcommencement of this Act and for which the completion certificatehas not been issued, the promoter shall make an application to theAuthority for registration of the said project within period ofthree months from the date of commencement of this Act:

Provided further that if the Authority thinks necessary, in the interestof allottees, for projects which are developed beyond the planningarea but with the requisite permission of the local authority, itmay, by order, direct the promoter of such project to register withthe Authority, and the provisions of this Act or the rules andregulations made thereunder, shall apply to such projects fromthat stage of registration.

(2) Notwithstanding anything contained in sub-section (1), noregistration of the real estate project shall be required—

(a) where the area of land proposed to be developed does notexceed five hundred square meters or the number of apartmentsproposed to be developed does not exceed eight inclusive of allphases:

Provided that, if the appropriate Government considers it necessary,it may, reduce the threshold below five hundred square meters oreight apartments, as the case may be, inclusive of all phases, forexemption from registration under this Act;

(b) where the promoter has received completion certificate for areal estate project prior to commencement of this Act;

(c) for the purpose of renovation or repair or re-development whichdoes not involve marketing, advertising selling or new allotmentof any apartment, plot or building, as the case may be, under thereal estate project.

Explanation. —For the purpose of this section, where the realestate project is to be developed in phases, every such phase shallbe considered standalone real estate project, and the promotershall obtain registration under this Act for each phase separately.

4. Application for registration of real estate projects. —(1) Every promoter shall make an application to the Authority forregistration of the real estate project in such form, manner, withinsuch time and accompanied by such fee as may be prescribed bythe regulations made by the Authority.

(2) The promoter shall enclose the following documents alongwith the application referred to in sub-section (1), namely: —

(a) brief details of his enterprise including its name, registeredaddress, type of enterprise (proprietorship, societies, partnership,companies, competent authority), and the particulars of registration,and the names and photographs of the promoter;

(b) brief detail of the projects launched by him, in the past fiveyears, whether already completed or being developed, as the casemay be, including the current status of the said projects, any delayin its completion, details of cases pending, details of type of landand payments pending;

(c) an authenticated copy of the approvals and commencementcertificate from the competent authority obtained in accordancewith the laws as may be applicable for the real estate projectmentioned in the application, and where the project is proposed tobe developed in phases, an authenticated copy of the approvalsand commencement certificate from the competent authority foreach of such phases;

(d) the sanctioned plan, layout plan and specifications of theproposed project or the phase thereof, and the whole project assanctioned by the competent authority;

(e) the plan of development works to be executed in the proposedproject and the proposed facilities to be provided thereof includingfirefighting facilities, drinking water facilities, emergencyevacuation services, use of renewable energy;

(f) the location details of the project, with clear demarcation ofland dedicated for the project along with its boundaries includingthe latitude and longitude of the end points of the project;

(g) proforma of the allotment letter, agreement for sale, and theconveyance deed proposed to be signed with the allottees;

(h) the number, type and the carpet area of apartments for sale inthe project along with the area of the exclusive balcony or verandahareas and the exclusive open terrace areas apartment with theapartment, if any;

(i) the number and areas of garage for sale in the project;

(j) the names and addresses of his real estate agents, if any, forthe proposed project;

(k) the names and addresses of the contractors, architect, structuralengineer, if any and other persons concerned with the developmentof the proposed project;

(l) declaration, supported by an affidavit, which shall be signedby the promoter or any person authorised by the promoter,stating:—

(A) that he has legal title to the land on which the developmentis proposed along with legally valid documents withauthentication of such title, if such land is owned by anotherperson;

(B) that the land is free from all encumbrances, or as the casemay be details of the encumbrances on such land including anyrights, title, interest or name of any party in or over such landalong with details;

(C) the time period within which he undertakes to complete theproject or phase thereof, as the case may be;

(D) that seventy per cent. of the amounts realised for the realestate project from the allottees, from time to time, shall bedeposited in separate account to be maintained in scheduledbank to cover the cost of construction and the land cost andshall be used only for that purpose:

Provided that the promoter shall withdraw the amounts fromthe separate account, to cover the cost of the project, in proportionto the percentage of completion of the project:

Provided further that the amounts from the separate accountshall be withdrawn by the promoter after it is certified by anengineer, an architect and chartered accountant in practice thatthe withdrawal is in proportion to the percentage of completion ofthe project:

Provided also that the promoter shall get his accounts auditedwithin six months after the end of every financial year by achartered accountant in practice, and shall produce statementof accounts duly certified and signed by such chartered accountantand it shall be verified during the audit that the amounts collectedfor particular project have been utilised for that project and thewithdrawal has been in compliance with the proportion to thepercentage of completion of the project.

Explanation.— For the purpose of this clause, the term “schedulebank” means bank included in the Second Schedule to theReserve Bank of India Act, 1934;

(E) that he shall take all the pending approvals on time, fromthe competent authorities;

(F) that he has furnished such other documents as may beprescribed by the rules or regulations made under this Act; and

(m) such other information and documents as may be prescribed.

(3) The Authority shall operationalise web based online systemfor submitting applications for registration of projects within aperiod of one year from the date of its establishment.

5. Grant of registration.— On receipt of the application undersub-section (1) of section 4, the Authority shall within period ofthirty days.

(a) grant registration subject to the provisions of this Act andthe rules and regulations made thereunder, and provide aregistration number, including Login Id and password to theapplicant for accessing the website of the Authority and to createhis web page and to fill therein the details of the proposedproject; or

(b) reject the application for reasons to be recorded in writing,if such application does not conform to the provisions of thisAct or the rules or regulations made thereunder:

Provided that no application shall be rejected unless the applicanthas been given an opportunity of being heard in the matter.

(2) If the Authority fails to grant the registration or reject theapplication, as the case may be, as provided under sub-section(1), the project shall be deemed to have been registered, and theAuthority shall within period of seven days of the expiry of thesaid period of thirty days specified under sub-section (1), providea registration number and Login Id and password to the promoterfor accessing the website of the Authority and to create his webpage and to fill therein the details of the proposed project.

(3) The registration granted under this section shall be valid for aperiod declared by the promoter under sub-clause (C) of clause(1) of sub-section (2) of section 4 for completion of the project orphase thereof, as the case may be.

6. Extension of registration.— The registration granted undersection 5 may be extended by the Authority on an applicationmade by the promoter due to force majeure, in such form and onpayment of such fee as may be prescribed:

Provided that the Authority may in reasonable circumstances,without default on the part of the promoter, based on the facts ofeach case, and for reasons to be recorded in writing, extend theregistration granted to project for such time as it considersnecessary, which shall, in aggregate, not exceed period of oneyear:

Provided further that no application for extension of registrationshall be rejected unless the applicant has been given an opportunityof being heard in the matter.

Explanation.— For the purpose of this section, the expression“force majeure” shall mean case of war, flood, drought, fire,cyclone, earthquake or any other calamity caused by natureaffecting the regular development of the real estate project.

7.Revocation of registration.— (1) The Authority may, on receiptof complaint or suo motu in this behalf or on the recommendationof the competent authority, revoke the registration granted undersection 5, after being satisfied that—

(a) the promoter makes default in doing anything required byor under this Act or the rules or the regulations made thereunder;

(b) the promoter violates any of the terms or conditions of theapproval given by the competent authority;

(c) the promoter is involved in any kind of unfair practice orirregularities.

Explanation.—For the purposes of this clause, the term “unfairpractice” means practice which, for the purpose of promotingthe sale or development of any real estate project adopts anyunfair method or unfair or deceptive practice including any of thefollowing practices, namely:—

(A) the practice of making any statement, whether in writingor by visible representation which,—

(i) falsely represents that the services are of particularstandard or grade;

(ii) represents that the promoter has approval or affiliationwhich such promoter does not have;

(iii) makes false or misleading representation concerningthe services;

(B) the promoter permits the publication of any advertisementor prospectus whether in any newspaper or otherwise of servicesGthat are not intended to be offered;

(d) the promoter indulges in any fraudulent practices.

(2) The registration granted to the promoter under section 5 shallnot be revoked unless the Authority has given to the promoter notless than thirty days notice, in writing, stating the grounds on which

it is proposed to revoke the registration, and has considered anycause shown by the promoter within the period of that noticeagainst the proposed revocation.

(3) The Authority may, instead of revoking the registration undersub-section (1), permit it to remain in force subject to such furtherterms and conditions as it thinks fit to impose in the interest of theallottees, and any such terms and conditions so imposed shall bebinding upon the promoter.

(4) The Authority, upon the revocation of the registration,—

(a) shall debar the promoter from accessing its website in relationto that project and specify his name in the list of defaulters anddisplay his photograph on its website and also inform the otherReal Estate Regulatory Authority in other States and Unionterritories about such revocation or registration;

(b) shall facilitate the remaining development works to be carriedout in accordance with the provisions of section 8;

(c) shall direct the bank holding the project back account, specifiedunder sub clause (D) of clause (I) of sub-section (2) of section 4,to freeze the account, and thereafter take such further necessaryactions, including consequent de-freezing of the said account,towards facilitating the remaining development works inaccordance with the provisions of section 8;

(d) may, to protect the interest of allottees or in the public interest,issue such directions as it may deem necessary.

8. Obligation of Authority consequent upon lapse of or onrevocation of registration.—Upon lapse of the registration oron revocation of the registration under this Act, the Authority,may consult the appropriate Government to take such action as itmay deem fit including the carrying out of the remainingdevelopment works by competent authority or by the associationof allottees or in any other manner, as may be determined by theAuthority:

Provided that no direction, decision or order of the Authorityunder this section shall take effect until the expiry of the period ofappeal provided under the provisions of this Act:

Provided further that in case of revocation of registration of aproject under this Act, the association of allottees shall have thefirst right of refusal for carrying out of the remaining developmentworks.

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11. Functions and duties of promoter.—(1) The promoter shall,upon receiving his Login Id and password under clause (a) ofsub-section (1) or under sub-section (2) of section 5, as the casemay be, create his web page on the website of the Authority andenter all details of the proposed project as provided under sub-section (2) of section 4, in all the fields as provided, for publicviewing, including—

(a) details of the registration granted by the Authority;

(b) quarterly up-to-date the list of number and types ofapartments or plots, as the case may be, booked;

(c) quarterly up-to-date the list of number of garages booked;

(d) quarterly up-to-date the list of approvals taken and theapprovals which are pending subsequent to commencementcertificate;

(e) quarterly up-to-date status of the project; and

(f) such other information and documents as may be specifiedby the regulations made by the Authority.

(2) The advertisement or prospectus issued or published by thepromoter shall mention prominently the website address of theAuthority, wherein all details of the registered project have beenentered and include the registration number obtained from theAuthority and such other matters incidental thereto.

(3) The promoter at the time of the booking and issue of allotmentletter shall be responsible to make available to the allottee, thefollowing information, namely:—

(a) sanctioned plans, layout plans, along with specifications,approved by the competent authority, by display at the site or

such other place as may be specified by the regulations madeby the Authority;

(b) the stage wise time schedule of completion of the project,including the provisions for civic infrastructure like water,sanitation and electricity.

(4) The promoter shall—

(a) be responsible for all obligations, responsibilities and functionsunder the provisions of this Act or the rules and regulationsmade thereunder or to the allottees as per the agreement forsale, or to the association of allottees, as the case may be, tillthe conveyance of all the apartments, plots or buildings, as thecase may be, to the allottees, or the common areas to theassociation of allottees or the competent authority, as the casemay be:

Provided that the responsibility of the promoter, with respect tothe structural defect or any other defect for such period as isreferred to in sub-section (3) of section 14, shall continue evenafter the conveyance deed of all the apartments, plots orbuildings, as the case may be, to the allottees are executed.

(b) be responsible to obtain the completion certificate or theoccupancy certificate, or both, as applicable, from the relevantcompetent authority as per local laws or other laws for thetime being in force and to make it available to the allotteesindividually or to the association of allottees, as the case maybe;

(c)be responsible to obtain the lease certificate, where the realestate project is developed on leasehold land, specifying theperiod of lease, and certifying that all dues and charges in regardto the leasehold land has been paid, and to make the leasecertificate available to the association of allottees;

(d) be responsible for providing and maintaining the essentialservices, on reasonable charges, till the taking over of themaintenance of the project by the association of the allottees;

(e) enable the formation of an association or society or co-operative society, as the case may be, of the allottees, or afederation of the same, under the laws applicable:

Provided that in the absence of local laws, the association ofallottees, by whatever name called, shall be formed within aperiod of three months of the majority of allottees having bookedtheir plot or apartment or building, as the case may be, in theproject;

(f) execute registered conveyance deed of the apartment,plot or building, as the case may be, in favour of the allotteealong with the undivided proportionate title in the common areasto the association of allottees or competent authority, as thecase may be, as provided under section 17 of this Act;

(g) pay all outgoings until he transfers the physical possessionof the real estate project to the allottee or the associations ofallottees, as the case may be, which he has collected from theallottees, for the payment of outgoings (including land cost,ground rent, municipal or other local taxes, charges for wateror electricity, maintenance charges, including mortgage loanand interest on mortgages or other encumbrances and suchother liabilities payable to competent authorities, banks andfinancial institutions, which are related to the project):Provided that where any promoter fails to pay all or any of theoutgoings collected by him from the allottees or any liability,mortgage loan and interest thereon before transferring the realestate project to such allottees, or the association of the allottees,as the case may be, the promoter shall continue to be liable,even after the transfer of the property, to pay such outgoingsand penal charges, if any, to the authority or person to whomthey are payable and be liable for the cost of any legalproceedings which may be taken therefor by such authority orperson;

(h) after he executes an agreement for sale for any apartment,plot or building, as the case may be, not mortgage or create acharge on such apartment, plot or building, as the case may be,and if any such mortgage or charge is made or created thennotwithstanding anything contained in any other law for the

time being in force, it shall not affect the right and interest ofthe allottee who has taken or agreed to take such apartment,plot or building, as the case may be;

(5) The promoter may cancel the allotment only in terms of theagreement for sale:

Provided that the allottee may approach the Authority for relief, ifhe is aggrieved by such cancellation and such cancellation is notin accordance with the terms of the agreement for sale, unilateraland without any sufficient cause.

(6) The promoter shall prepare and maintain all such other detailsas may be specified, from time to time, by regulations made bythe Authority.

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13. No deposit or advance to be taken by promoter withoutfirst entering into agreement for sale. (1) promoter shallnot accept sum more than ten per cent of the cost of theapartment, plot, or building as the case may be, as an advancepayment or an application fee, from person without first enteringinto written agreement for sale with such person and registerthe said agreement for sale, under any law for the time being inforce.

(2) The agreement for sale referred to in sub-section (1) shall bein such form as may be prescribed and shall specify the particularsof development of the project including the construction of buildingand apartments, along with specifications and internal developmentworks and external development works, the dates and the mannerby which payments towards the cost of the apartment, plot orbuilding, as the case may be, are to be made by the allottees andthe date on which the possession of the apartment, plot or buildingis to be handed over, the rates of interest payable by the promoterto the allottee and the allottee to the promoter in case of default,and such other particulars, as may be prescribed.

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18. Return of amount and compensation —(1) If the promoterfails to complete or is unable to give possession of an apartment,plot or building,—

(a) in accordance with the terms of the agreement for sale or,as the case may be, duly completed by the date specified therein;or

(b) due to discontinuance of his business as developer on accountof suspension or revocation of the registration under this Act orfor any other reason,

he shall be liable on demand to the allottees, in case the allotteewishes to withdraw from the project, without prejudice to anyother remedy available, to return the amount received by him inrespect of that apartment, plot, building, as the case may be, withinterest at such rate as may be prescribed in this behalf includingcompensation in the manner as provided under this Act:

Provided that where an allottee does not intend to withdraw fromthe project, he shall be paid, by the promoter, interest for everymonth of delay, till the handing over of the possession, at suchrate as may be prescribed.

(2) The promoter shall compensate the allottees in case of anyloss caused to him due to defective title of the land, on which theproject is being developed or has been developed, in the manneras provided under this Act, and the claim for compensation underthis subsection shall not be barred by limitation provided underany law for the time being in force.

(3) If the promoter fails to discharge any other obligations imposedon him under this Act or the rules or regulations made thereunderor in accordance with the terms and conditions of the agreementfor sale, he shall be liable to pay such compensation to the allottees,in the manner as provided under this Act.

19. Rights and duties of allottees —(1) The allottee shall beentitled to obtain the information relating to sanctioned plans, layoutplans along with the specifications, approved by the competentauthority and such other information as provided in this Act or therules and regulations made thereunder or the agreement for salesigned with the promoter.

(2) The allottee shall be entitled to know stage-wise time scheduleof completion of the project, including the provisions for water,

sanitation, electricity and other amenities and services as agreedto between the promoter and the allottee in accordance with theterms and conditions of the agreement for sale.

(3) The allottee shall be entitled to claim the possession ofapartment, plot or building, as the case may be, and the associationof allottees shall be entitled to claim the possession of the commonareas, as per the declaration given by the promoter under sub-clause (C) of clause (I) of sub-section (2) of section 4.

(4) The allottee shall be entitled to claim the refund of amountpaid along with interest at such rate as may be prescribed andcompensation in the manner as provided under this Act, from thepromoter, if the promoter fails to comply or is unable to givepossession of the apartment, plot or building, as the case may be,in accordance with the terms of agreement for sale or due todiscontinuance of his business as developer on account ofsuspension or revocation of his registration under the provisionsof this Act or the rules or regulations made thereunder.

(5) The allottee shall be entitled to have the necessary documentsand plans, including that of common areas, after handing over thephysical possession of the apartment or plot or building as thecase may be, by the promoter.

(6) Every allottee, who has entered into an agreement or sale totake an apartment, plot or building as the case may be, undersection 13, shall be responsible to make necessary payments inthe manner and within the time as specified in the said agreementfor sale and shall pay at the proper time and place, the share ofthe registration charges, municipal taxes, water and electricitycharges, maintenance charges, ground rent, and other charges, ifany.

(7) The allottee shall be liable to pay interest, at such rate as maybe prescribed, for any delay in payment towards any amount orcharges to be paid under sub-section (6).

(8) The obligations of the allottee under sub-section (6) and theliability towards interest under sub-section (7) may be reducedwhen mutually agreed to between the promoter and such allottee.

(9) Every allottee of the apartment, plot or building as the casemay be, shall participate towards the formation of an associationor society or cooperative society of the allottees, or federationof the same.

(10) Every allottee shall take physical possession of the apartment,plot or building as the case may be, within period of two monthsof the occupancy certificate issued for the said apartment, plot orbuilding, as the case may be.

(11) Every allottee shall participate towards registration of theconveyance deed of the apartment, plot or building, as the casemay be, as provided under sub-section (1) of section 17 of thisAct.

20. Establishment and incorporation of Real EstateRegulatory Authority — (1) The appropriate Government shall,within period of one year from the date of coming into force ofthis Act, by notification, establish an Authority to be known as theReal Estate Regulatory Authority to exercise the powers conferredon it and to perform the functions assigned to it under this Act:

Provided that the appropriate Government of two or more Statesor Union territories may, if it deems fit, establish one singleAuthority:

Provided further that, the appropriate Government may, if it deemsfit, establish more than one Authority in State or Union territory,as the case may be:

Provided also that until the establishment of Regulatory Authorityunder this section, the appropriate Government shall, by order,designate any Regulatory Authority or any officer preferably theSecretary of the department dealing with Housing, as theRegulatory Authority for the purposes under this Act:

Provided also that after the establishment of the RegulatoryAuthority, all applications, complaints or cases pending with theRegulatory Authority designated, shall stand transferred to theRegulatory Authority so established and shall be heard from thestage such applications, complaints or cases are transferred.

(2) The Authority shall be body corporate by the name aforesaidhaving perpetual succession and common seal, with the power,

subject to the provisions of this Act, to acquire, hold and disposeof property, both movable and immovable, and to contract, andshall, by the said name, sue or be sued.

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31. Filing of complaints with the Authority or the adjudicatingofficer.— (1) Any aggrieved person may file complaint with theAuthority or the adjudicating officer, as the case may be, for anyviolation or contravention of the provisions of this Act or the rulesand regulations made thereunder against any promoter allottee orreal estate agent, as the case may be.

Explanation.—For the purpose of this sub-section “person” shallinclude the association of allottees or any voluntary consumerassociation registered under any law for the time being in force.

(2) The form, manner and fees for filing complaint undersub-section (1) shall be such as may be prescribed.

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34. Functions of Authority —The functions of the Authorityshall include—

(a) to register and regulate real estate projects and real estateagents registered under this Act;

(b) to publish and maintain website of records, for publicviewing, of all real estate projects for which registration hasbeen given, with such details as may be prescribed, includinginformation provided in the application for which registrationhas been granted;

(c) to maintain database, on its website, for public viewing,and enter the names and photographs of promoters as defaultersincluding the project details, registration for which has beenrevoked or have been penalised under this Act, with reasonstherefor, for access to the general public;

(d) to maintain database, on its website, for public viewing,and enter the names and photographs of real estate agentswho have applied and registered under this Act, with such detailsas may be prescribed, including those whose registration hasbeen rejected or revoked;

(e) to fix through regulations for each areas under its jurisdictionthe standard fees to be levied on the allottees or the promoteror the real estate agent, as the case may be;

(f) to ensure compliance of the obligations cast upon thepromoters, the allottees and the real estate agents under thisAct and the rules and regulations made thereunder;

(g) to ensure compliance of its regulations or orders or directionsmade in exercise of its powers under this Act;

(h) to perform such other functions as may be entrusted to theAuthority by the appropriate Government as may be necessaryto carry out the provisions of this Act.

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36. Power to issue interim orders. —Where during an inquiry,the Authority is satisfied that an act in contravention of this Act,or the rules and regulations made thereunder, has been committedand continues to be committed or that such act is about to becommitted, the Authority may, by order, restrain any promoter,allottee or real estate agent from carrying on such act until theconclusion of such inquiry of until further orders, without givingnotice to such party, where the Authority deems it necessary.

37. Powers of Authority to issue directions. —The Authoritymay, for the purpose of discharging its functions under theprovisions of this Act or rules or regulations made thereunder,issue such directions from time to time, to the promoters or allotteesor real estate agents, as the case may be, as it may considernecessary and such directions shall be binding on all concerned.

38. Powers of Authority. —(1) The Authority shall have powersto impose penalty or interest, in regard to any contravention ofobligations cast upon the promoters, the allottees and the real estateagents, under this Act or the rules and the regulations madethereunder.

(2) The Authority shall be guided by the principles of natural justiceand, subject to the other provisions of this Act and the rules madethereunder, the Authority shall have powers to regulate its ownprocedure.

(3) Where an issue is raised relating to agreement, action, omission,practice or procedure that—

(a) has an appreciable prevention, restriction or distortion ofcompetition in connection with the development of real estateproject; or

(b) has effect of market power of monopoly situation beingabused for affecting interest of allottees adversely,

then the Authority, may suo motu, make reference in respectof such issue to the Competition Commission of India.

39. Rectification of orders. —The Authority may, at any timewithin period of two years from the date of the order madeunder this Act, with view to rectifying any mistake apparentfrom the record, amend any order passed by it, and shall makesuch amendment, if the mistake is brought to its notice by theparties:

Provided that no such amendment shall be made in respect of anyorder against which an appeal has been preferred under this Act:

Provided further that the Authority shall not, while rectifying anymistake apparent from record, amend substantive part of its orderpassed under the provisions of this Act.

40. Recovery of interest or penalty or compensation andenforcement of order, etc.-

(1) If promoter or an allottee or real estate agent, as thecase may be, fails to pay any interest or penalty or compensationimposed on him, by the adjudicating officer or the RegulatoryAuthority or the Appellate Authority, as the case may be, underthis Act or the rules and regulations made thereunder, it shallbe recoverable from such promoter or allottee or real estateagent, in such manner as may be prescribed as an arrears ofland revenue.

(2) If any adjudicating officer or the Regulatory Authority orthe Appellate Tribunal, as the case may be, issues any order ordirects any person to do any act, or refrain from doing any act,which it is empowered to do under this Act or the rules orregulations made thereunder, then in case of failure by any

person to comply with such order or direction, the same shallbe enforced, in such manner as may be prescribed.

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43. Establishment of Real Estate Appellate Tribunal— (1)The appropriate Government shall, within period of one yearfrom the date of coming into force of this Act, by notification,establish an Appellate Tribunal to be known as the — (name ofthe State/Union territory) Real Estate Appellate Tribunal.

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44. Application for settlement of disputes and appeals toAppellate Tribunal— (1) The appropriate Government or thecompetent authority or any person aggrieved by any direction ororder or decision of the Authority or the adjudicating officer mayprefer an appeal to the Appellate Tribunal.

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58. Appeal to High Court. —(1) Any person aggrieved by anydecision or order of the Appellate Tribunal, may, file an appeal tothe High Court, within period of sixty days from the date ofcommunication of the decision or order of the Appellate Tribunal,to him, on any one or more of the grounds specified in section 100of the Code of Civil Procedure, 1908 (5 of 1908):

Provided that the High Court may entertain the appeal after theexpiry of the said period of sixty days, if it is satisfied that theappellant was prevented by sufficient cause from preferring theappeal in time.

Explanation.—The expression “High Court” means the High Courtof State or Union territory where the real estate project issituated.

(2) No appeal shall lie against any decision or order made bythe Appellate Tribunal with the consent of the parties.

59. Punishment for non registration under section 3.— (1)If any promoter contravenes the provisions of section 3, he shallbe liable to penalty which may extend up to ten per cent of theestimated cost of the real estate project as determined by theAuthority.

(2) If any promoter does not comply with the orders, decisionsor directions issued under sub-section (1) or continues to violatethe provisions of section 3, he shall be punishable withimprisonment for term which may extend up to three yearsor with fine which may extend up to further ten per cent ofthe estimated cost of the real estate project, or with both.

60. Penalty for contravention of section 4. —If any promoterprovides false information or contravenes the provisions of section4, he shall be liable to penalty which may extend up to five percent. of the estimated cost of the real estate project, as determinedby the Authority.

61. Penalty for contravention of other provisions of thisAct.— If any promoter contravenes any other provisions of thisAct, other than that provided under section 3 or section 4, or therules or regulations made thereunder, he shall be liable to penaltywhich may extend up to five per cent. of the estimated cost of thereal estate project as determined by the Authority.

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71. Power to adjudicate.— (1) For the purpose of adjudgingcompensation under sections 12, 14, 18 and section 19, theAuthority shall appoint in consultation with the appropriateGovernment one or more judicial officer as deemed necessary,who is or has been District Judge to be an adjudicating officerfor holding an inquiry in the prescribed manner, after giving anyperson concerned reasonable opportunity of being heard:

Provided that any person whose complaint in respect of matterscovered under sections 12, 14, 18 and section 19 is pending beforethe Consumer Disputes Redressal Forum or the ConsumerDisputes Redressal Commission or the National ConsumerRedressal Commission, established under section 9 of theConsumer Protection Act, 1986, (68 of 1986), on or before thecommencement of this Act, he may, with the permission of suchForum or Commission, as the case may be, withdraw the complaintpending before it and file an application before the adjudicatingofficer under this Act.

(2) The application for adjudging compensation under sub-section (1), shall be dealt with by the adjudicating officer asexpeditiously as possible and dispose of the same within periodof sixty days from the date of receipt of the application:

Provided that where any such application could not be disposedof within the said period of sixty days, the adjudicating officershall record his reasons in writing for not disposing of theapplication within that period.

(3) While holding an inquiry the adjudicating officer shall havepower to summon and enforce the attendance of any personacquainted with the facts and circumstances of the case togive evidence or to produce any document which in the opinionof the adjudicating officer, may be useful for or relevant to thesubject matter of the inquiry and if, on such inquiry, he is satisfiedthat the person has failed to comply with the provisions of anyof the sections specified in sub-section (1), he may direct topay such compensation or interest, as the case may be, as hethinks fit in accordance with the provisions of any of thosesections.

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72. Factors to be taken into account by the adjudicatingofficer.— While adjudging the quantum of compensation orinterest, as the case may be, under section 71, the adjudicatingofficer shall have due regard to the following factors, namely:—

(a) the amount of disproportionate gain or unfair advantage,wherever quantifiable, made as result of the default;

(b) the amount of loss caused as result of the default;

(c) the repetitive nature of the default;

(d) such other factors which the adjudicating officer considersnecessary to the case in furtherance of justice.

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79. Bar of jurisdiction. —No civil court shall have jurisdiction toentertain any suit or proceeding in respect of any matter whichthe Authority or the adjudicating officer or the Appellate Tribunal

is empowered by or under this Act to determine and no injunctionshall be granted by any court or other authority in respect of anyaction taken or to be taken in pursuance of any power conferredby or under this Act.

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88. Application of other laws not barred— The provisions ofthis Act shall be in addition to, and not in derogation of, the provisionsof any other law for the time being in force.

89. Act to have overriding effect.— The provisions of this Actshall have effect, notwithstanding anything inconsistent therewithcontained in any other law for the time being in force.”

22. perusal of the aforesaid provisions would show that, on andfrom the coming into force of the RERA, all real estate projects (asdefined) would first have to be registered with the Real Estate RegulatoryAuthority, which, before registering such projects, would look into allrelevant details, including delay in completion of other projects by thedeveloper. Importantly, the promoter is now to make declarationsupported by an affidavit, that he undertakes to complete the projectwithin certain time period, and that 70% of the amounts realised forthe project from allottees, from time to time, shall be deposited in aseparate account, which would be spent only to defray the cost ofconstruction and land cost for that particular project. Registration isgranted by the authority only when it is satisfied that the promoter is abonafide promoter who is likely to perform his part of the bargainsatisfactorily. Registration of the project enures only for certain periodand can only be extended due to force majeure events for maximumperiod of one year by the authority, on being satisfied that such eventshave, in fact, taken place. Registration once granted, may be revoked ifit is found that the promoter defaults in complying with the various statutoryrequirements or indulges in unfair practices or irregularities. Importantly,upon revocation of registration, the authority is to facilitate the remainingdevelopment work, which can then be carried out either by the“competent authority” as defined by the RERA or by the association ofallottees or otherwise. The promoter at the time of booking and issue ofallotment letters has to make available to the allottees information, interalia, as to the stage-wise time schedule of completion of the project.Deposits or advances beyond 10% of the estimated cost as advance

Apayment cannot be taken without first entering into an agreement forsale. Importantly, the agreement for sale will now no longer be one-sided contract of adhesion, but in such form as may be prescribed, whichbalances the rights and obligations of both the promoter and the allottees.Importantly, under Section 18, if the promoter fails to complete or isunable to give possession of an apartment, plot or building in accordanceBwith the terms of the agreement for sale, he must return the amountreceived by him in respect of such apartment etc. with such interest asmay be prescribed and must, in addition, compensate the allottee in caseof any loss caused to him. Under Section 19, the allottee shall be entitledto claim possession of the apartment, plot or building, as the case mayCbe, or refund of amount paid along with interest in accordance with theterms of the agreement for sale. In addition, all allottees are to beresponsible for making necessary payments in instalments within thetime specified in the agreement for sale and shall be liable to pay interestat such rate as may be prescribed for any delay in such payment. UnderSection 31, any aggrieved person may file complaint with the authorityDor the adjudicating officers set up by such authority against any promoter,allottee or real estate agent, as the case may be, for violation orcontravention of the RERA, and rules and regulations made thereunder.Also, if after adjudication promoter, allottee or real estate agent fails topay interest, penalty or compensation imposed on him by the authoritiesEunder the RERA, the same shall be recoverable as arrears of landrevenue. Appeals may be filed to the Real Estate Appellate Tribunalagainst decisions or orders of the authority or the adjudicating officer.From orders of the Appellate Tribunal, appeals may thereafter be filedto the High Court. Stiff penalties are to be awarded for breach and/orcontravention of the provisions of the RERA. Importantly, under SectionF72, the adjudicating officer must first determine that the complainant hasestablished “default” on the part of the respondent, after whichconsequential orders may then follow. Under Section 88, the provisionsof RERA are in addition to and not in derogation of the provisions of anyother law for time being in force and under Section 89, RERA is to haveGeffect notwithstanding anything inconsistent contained in any other lawfor the time being in force.

The Insolvency and Bankruptcy Code, 2016 vis-à-vis theReal Estate (Regulation and Development) Act, 2016

23.Section 238 of the Code reads as follows:H

“238. The provisions of this Code shall have effect,notwithstanding anything inconsistent therewith contained in anyother law for the time being in force or any instrument havingeffect by virtue of any such law.”

24. It is significant to note that there is no provision similar to thatof Section 88 of RERA in the Code, which is meant to be completeand exhaustive statement of the law insofar as its subject matter isconcerned. Also, the non-obstante clause of RERA came into force on1[st] May, 2016, as opposed to the non-obstante clause of the Code whichcame into force on 1[st] December, 2016. Further, the amendment withwhich we are concerned has come into force only on 6[th] June, 2018.Given these circumstances, it is little difficult to accede to argumentsmade on behalf of learned senior counsel for the Petitioners, that RERAis special enactment which deals with real estate development projectsand must, therefore, be given precedence over the Code, which is only ageneral enactment dealing with insolvency generally. From theintroduction of the explanation to Section 5(8)(f) of the Code, it is clearthat Parliament was aware of RERA, and applied some of its definitionprovisions so that they could apply when the Code isto be interpreted.The fact that RERA is in addition to and not in derogation of the provisionsof any other law for the time being in force, also makes it clear that theremedies under RERA to allottees were intended to be additional andnot exclusive remedies. Also, it is important to remember that as theauthorities under RERA were to be set up within one year from 1[st] May,2016, remedies before those authorities would come into effect only onand from 1[st] May, 2017 making it clear that the provisions of the Code,which came into force on 1[st] December, 2016, would apply in addition tothe RERA.

25. In KSL & Industries Ltd. v. Arihant Threads Ltd. (2015)1 SCC 166, Three Judge Bench of this Court held that the Sick IndustriesCompanies (Special Provisions) Act, 1985 (hereinafter referred to asthe “Sick Act”) would prevail over the Recovery of Debts Due to Banksand Financial Institutions Act, 1993 (hereinafter referred to as the“Recovery Act”) - both statutes containing non-obstante clauses. Aftergoing into the scheme of both the statutes, this Court referred in particularto Section 34(2) of the Recovery Act and then held as follows:

“35. This special law, which deals with the recovery of debts dueto banks and financial institutions, makes the procedure for

recovery of such debts exclusive and even unique. The nonobstante clause in sub-section (1) confers an overriding effect onthe provisions of the RDDB Act notwithstanding anything incon-sistent therewith contained in any other law for the time being inforce. Sub-section (2), however, makes the RDDB Act additionalto and not in derogation or annulment of the five Acts mentionedtherein i.e. the Industrial Finance Corporation Act, 1948; the StateFinancial Corporations Act, 1951; the Unit Trust of India Act,1963; the Industrial Reconstruction Bank of India Act, 1984 andthe Sick Industrial Companies (Special Provisions) Act, 1985.

36. Sub-section (2) was added to Section 34 of the RDDB Actw.e.f. 17-1-2000 by Act 1 of 2000. There is no doubt that whenan Act provides, as here, that its provisions shall be in addition toand not in derogation of another law or laws, it means that thelegislature intends that such an enactment shall coexist along withthe other Acts. It is clearly not the intention of the legislature, insuch case, to annul or detract from the provisions of other laws.The term “in derogation of” means “in abrogation or repealof”. The Black’s Law Dictionary sets forth the followingmeaning for “derogation”:“derogation.—The partial repeal or abrogation of law by alater Act that limits its scope or impairs its utility and force.”

It is clear that sub-section (1) contains non obstante clause,which gives the overriding effect to the RDDB Act. Sub-section(2) acts in the nature of an exception to such an overriding effect.It states that this overriding effect is in relation to certain lawsand that the RDDB Act shall be in addition to and not inabrogation of, such laws. SICA is undoubtedly one such law.

37. The effect of sub-section (2) must necessarily be to preservethe powers of the authorities under SICA and save theproceedings from being overridden by the later Act i.e. the RDDBAct.

38. We, thus, find harmonious scheme in relation to theproceedings for reconstruction of the company under SICA, whichincludes the reconstruction of debts and even the sale or lease ofthe sick company’s properties for the purpose, which may or maynot be part of the security executed by the sick company infavour of bank or financial institution on the one hand, and the

provisions of the RDDB Act, which deal with recovery of debtsdue to banks or financial institutions, if necessary by enforcingthe security charged with the bank or financial institution, on theother.

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48. In view of the observations of this Court in the decisionsreferred to and relied on by the learned counsel for the parties wefind that, the purpose of the two enactments is entirely different.As observed earlier, the purpose of one is to provide ameliorativemeasures for reconstruction of sick companies, and the purposeof the other is to provide for speedy recovery of debts of banksand financial institutions. Both the Acts are “special” in this sense.However, with reference to the specific purpose ofreconstruction of sick companies, SICA must be held to be aspecial law, though it may be considered to be general law inrelation to the recovery of debts. Whereas, the RDDB Act maybe considered to be special law in relation to the recovery ofdebts and SICA may be considered to be general law in thisregard. For this purpose we rely on the decision in LIC v. VijayBahadur [(1981) 1 SCC 315 : 1981 SCC (L&S) 111] . Normallythe latter of the two would prevail on the principle that the legisla-ture was aware that it had enacted the earlier Act and yet choseto enact the subsequent Act with non obstante clause. In thiscase, however, the express intendment of Parliament in the nonobstante clause of the RDDB Act does not permit us to take that

view. Though the RDDB Act is the later enactment, sub-section(2) of Section 34 thereof specifically provides that the provisionsof the Act or the Rules made thereunder shall be in addition to,and not in derogation of, the other laws mentioned thereinincluding SICA.

49. The term “not in derogation” clearly expresses the intentionof Parliament not to detract from or abrogate the provisions ofSICA in any way. This, in effect must mean that Parliament in-tended the proceedings under SICA for reconstruction of sickcompany to go on and for that purpose further intended that allthe other proceedings against the company and its properties shouldbe stayed pending the process of reconstruction. While the term“proceedings” under Section 22 of SICA did not originally includethe RDDB Act, which was not there in existence. Section 22covers proceedings under the RDDB Act.”

A26. In view of Section 34(2) of the Recovery Act, this Court heldthat despite the fact that the non-obstante clause contained in theRecovery Act is later in time than the non-obstante clause contained inthe Sick Act, in the event of conflict, the Recovery Act i.e. the laterAct must give way to the Sick Act i.e. the earlier Act. Several judgmentswere referred to in which ordinarily later Act containing non-obstanteBclause must be held to have primacy over an earlier Act containing anon-obstante clause, as Parliament must be deemed to be aware of thefact that the later Act is intended to override all earlier statutes includingthose which contained non-obstante clauses. This statement of the lawwas departed from in KSL & Industries (supra)only because of theCpresence of Section like Section 88 of RERA contained in the RecoveryAct, which makes it clear that the Act is meant to be in addition to andnot in derogation of other statutes. In the present case, it is clear thatboth tests are satisfied, namely, that the Code as amended, is both laterin point of time than RERA, and must be given precedence over RERA,given Section 88 of RERA.D

27. In fact, in Bank of India v. Ketan Parekh (2008) 8 SCC148, this Court held that Section 9A of the Special Court (Trial of OffencesRelating to Transactions in Securities) Act, 1992 (hereinafter referred toas the “Special Court Act”) must be considered to be legislation that issubsequent to the Recovery Act, since Section 9A was introduced byEamendment, into the Special Court Act after the Recovery Act. Needlessto add, both statutes contained non-obstante clauses. This Court held:

“28. In the present case, both the two Acts i.e. the Act of 1992and the Act of 1993 start with the non obstante clause. Section 34of the Act of 1993 starts with non obstante clause, likewiseFSection 9-A (sic 13) of the Act of 1992. But incidentally, in thiscase Section 9-A came subsequently i.e. it came on 25-1-1994.Therefore, it is subsequent legislation which will have theoverriding effect over the Act of 1993. But cases might arisewhere both the enactments have the non obstante clause then inGthat case, the proper perspective would be that one has to see thesubject and the dominant purpose for which the specialenactment was made and in case the dominant purpose iscovered by that contingencies, then notwithstanding that the Actmight have come at later point of time still the intention can beascertained by looking to the objects and reasons. However, soHfar as the present case is concerned, it is more than clear that

Section 9-A of the Act of 1992 was amended on 25-1-1994whereas the Act of 1993 came in 1993. Therefore, the Act of1992 as amended to include Section 9-A in 1994 beingsubsequent legislation will prevail and not the provisions of theAct of 1993.”

(emphasis supplied)

28. It is clear, therefore, that even by process of harmoniousconstruction, RERA and the Code must be held to co-exist, and, in theevent of clash, RERA must give way to the Code. RERA, therefore,cannot be held to be special statute which, in the case of conflict,would override the general statute, viz. the Code.

29. As matter of fact, the Code and RERA operate in completelydifferent spheres. The Code deals with proceeding in rem in which thefocus is the rehabilitation of the corporate debtor. This is to take placeby replacing the management of the corporate debtor by means of aresolution plan which must be accepted by 66% of the Committee ofCreditors, which is now put at the helm of affairs, in deciding the fate ofthe corporate debtor. Such resolution plan then puts the same or anothermanagement in the saddle, subject to the provisions of the Code, so thatthe corporate debtor may be pulled out of the woods and may continueas going concern, thus benefitting all stakeholders involved. It is onlyas last resort that winding up of the corporate debtor is resorted to, sothat its assets may be liquidated and paid out in the manner provided bySection 53 of the Code.On the other hand, RERA protects the interestsof the individual investor in real estate projects by requiring the promoterto strictly adhere to its provisions. The object of RERA is to see that realestate projects come to fruition within the stated period and to see thatallottees of such projects are not left in the lurch and are finally able torealise their dream of home, or be paid compensation if such dream isshattered, or at least get back monies that they had advanced towardsthe project with interest. At the same time, recalcitrant allottees are notto be tolerated, as they must also perform their part of the bargain, namely,to pay instalments as and when they become due and payable. Giventhe different spheres within which these two enactments operate, differentparallel remedies are given to allottees – under RERA to see that theirflat/apartment is constructed and delivered to them in time, barring whichcompensation for the same and/or refund of amounts paid together withinterest atthe very least comes their way. If, however, the allottee wants

Athat the corporate debtor’s management itself be removed and replaced,so that the corporate debtor can be rehabilitated, he may prefer Section7 application under the Code. That another parallel remedy is availableis recognised by RERA itself in the proviso to Section 71(1), by whichan allottee may continue with an application already filed before theConsumer Protection fora, he being given the choice to withdraw suchBcomplaint and file an application before the adjudicating officer underRERA read with Section 88.In similar circumstances, this Court in SwarajInfrastructure Private Limited v. Kotak Mahindra Bank Limited(2019) 3 SCC 620 has held that Debt Recovery Tribunal proceedingsunder the Recovery of Debts Due to Banks and Financial InstitutionsCAct, 1993 and winding up proceedings under the Companies Act, 1956can carry on in parallel streams(see paragraphs 21 and 22 therein).

Financial and Operational Creditors

30. In Innoventive Industries v. ICICI Bank & Anr. (2018)1 SCC 407, this Court after setting out some of the sections of the Code,Dlaid down the Scheme of the Code when it came to financial andoperational creditors triggering the Code against Corporate debtor.This Court held:

“27. The scheme of the Code is to ensure that when defaulttakes place, in the sense that debt becomes due and is not paid,Ethe insolvency resolution process begins. Default is defined inSection 3(12) in very wide terms as meaning non-payment of adebt once it becomes due and payable, which includesnon-payment of even part thereof or an instalment amount. Forthe meaning of “debt”, we have to go to Section 3(11), which inFturn tells us that debt means liability of obligation in respect ofa “claim” and for the meaning of “claim”, we have to go back toSection 3(6) which defines “claim” to mean right to paymenteven if it is disputed. The Code gets triggered the moment defaultis of rupees one lakh or more (Section 4). The corporateinsolvency resolution process may be triggered by the corporateGdebtor itself or financial creditor or operational creditor. Adistinction is made by the Code between debts owed to financialcreditors and operational creditors. financial creditor has beendefined under Section 5(7) as person to whom financial debtis owed and financial debt is defined in Section 5(8) to mean

debt which is disbursed against consideration for the time valueof money. As opposed to this, an operational creditor means aperson to whom an operational debt is owed and an operationaldebt under Section 5(21) means claim in respect of provision ofgoods or services.

28. When it comes to financial creditor triggering the process,Section 7 becomes relevant. Under the Explanation to Section7(1), default is in respect of financial debt owed to anyfinancial creditor of the corporate debtor — it need not be debtowed to the applicant financial creditor. Under Section 7(2), anapplication is to be made under sub-section (1) in such form andmanner as is prescribed, which takes us to the Insolvency andBankruptcy (Application to Adjudicating Authority) Rules, 2016.Under Rule 4, the application is made by financial creditor inForm 1 accompanied by documents and records required therein.Form 1 is detailed form in 5 parts, which requires particulars ofthe applicant in Part I, particulars of the corporate debtor in PartII, particulars of the proposed interim resolution professional inPart III, particulars of the financial debt in Part IV anddocuments, records and evidence of default in Part V. Under Rule4(3), the applicant is to dispatch copy of the application filedwith the adjudicating authority by registered post or speed post tothe registered office of the corporate debtor. The speed, withinwhich the adjudicating authority is to ascertain the existence of adefault from the records of the information utility or on the basisof evidence furnished by the financial creditor, is important.Thisit must do within 14 days of the receipt of the application. It is atthe stage of Section 7(5), where the adjudicating authority is to besatisfied that default has occurred, that the corporate debtor isentitled to point out that default has not occurred in the sensethat the “debt”, which may also include disputed claim, is notdue. debt may not be due if it is not payable in law or in fact.The moment the adjudicating authority is satisfied that defaulthas occurred, the application must be admitted unless it isincomplete, in which case it may give notice to the applicant torectify the defect within 7 days of receipt of notice from theadjudicating authority. Under sub-section (7), the adjudicatingauthority shall then communicate the order passed to the financial

creditor and corporate debtor within 7 days of admission orrejection of such application, as the case may be.

29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on theoccurrence of default, to first deliver demand notice of theunpaid debt to the operational debtor in the manner provided inSection 8(1) of the Code. Under Section 8(2), the corporate debtorcan, within period of 10 days of receipt of the demand notice orcopy of the invoice mentioned in sub-section (1), bring to thenotice of the operational creditor the existence of dispute or therecord of the pendency of suit or arbitration proceedings, whichis pre-existing— i.e. before such notice or invoice was receivedby the corporate debtor. The moment there is existence of such adispute, the operational creditor gets out of the clutches of theCode.

30. On the other hand, as we have seen, in the case of acorporate debtor who commits default of financial debt, theadjudicating authority has merely to see the records of theinformation utility or other evidence produced by the financialcreditor to satisfy itself that default has occurred. It is of nomatter that the debt is disputed so long as the debt is “due” i.e.payable unless interdicted by some law or has not yet becomedue in the sense that it is payable at some future date. It is onlywhen this is proved to the satisfaction of the adjudicatingauthority that the adjudicating authority may reject an applicationand not otherwise.”

(emphasis supplied)

31. Likewise, in Swiss Ribbons (supra), this Court while repellinga challenge to the constitutional validity of the Code based on purportedinfraction of Article 14, differentiated between financial and operationalcreditors. In so doing, it made it clear that the context of the decisiondealt with banks and financial institutions as financial creditors as opposedto operational creditors who could be corporations or individuals to whommonies were owed for goods and/or services. In certain circumstances,financial creditors could also be individuals, such as debenture holdersand fixed deposit holders, who were then spoken of as follows:

“42. perusal of the definition of “financial creditor” and“financial debt” makes it clear that financial debt is debttogether with interest, if any, which is disbursed against theconsideration for time value of money. It may further be moneythat is borrowed or raised in any of the manners prescribed inSection 5(8) or otherwise, as Section 5(8) is an inclusivedefinition. On the other hand, an “operational debt” would includea claim in respect of the provision of goods or services, includingemployment, or debt in respect of payment of dues arisingunder any law and payable to the Government or any localauthority.43. financial creditor may trigger the Code either by itself orjointly with other financial creditors or such persons as may benotified by the Central Government when “default” occurs. TheExplanation to Section 7(1) also makes it clear that the Code maybe triggered by such persons in respect of default made to anyother financial creditor of the corporate debtor, making it clearthat once triggered, the resolution process under the Code is acollective proceeding in rem which seeks, in the first instance, torehabilitate the corporate debtor. Under Section 7(4), theadjudicating authority shall, within the prescribed period,ascertain the existence of default on the basis of evidencefurnished by the financial creditor; and under Section 7(5), theadjudicating authority has to be satisfied that default hasoccurred, when it may, by order, admit the application, or dismissthe application if such default has not occurred. On the otherhand, under Sections 8 and 9, an operational creditor may, on theoccurrence of default, deliver demand notice which mustthen be replied to within the specified period. What is important isthat at this stage, if an application is filed before the adjudicatingauthority for initiating the corporate insolvency resolution process,the corporate debtor can prove that the debt is disputed. Whenthe debt is so disputed, such application would be rejected.

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46. However, the Insolvency Law Committee (ILC), in itsReport of March 2018 dealt with debenture-holders and fixeddeposit-holders, who are also financial creditors, and arenumerous. The Report then went on to state:

“10.6. For certain securities, trustee or an agent may already beappointed as per the terms of the security instrument. Forexample, debenture trustee would be appointed if debenturesexceeding 500 have been issued [Section 71(5), Companies Act,2013] or if secured debentures are issued [Rule 18(1)(c),Companies (Share Capital and Debenture) Rules, 2014]. Suchcreditors may be represented through such pre-appointedtrustees or agents. For other classes of creditors which exceed acertain threshold in number, like home buyers or security-holdersfor whom no trustee or agent has already been appointed under adebt instrument or otherwise, an insolvency professional (otherthan IRP) shall be appointed by NCLT on the request of IRP. It isto be noted that as the agent or trustee or insolvency professionali.e. the authorised representative for the creditors discussed aboveand executors, guarantors, etc. as discussed in Para 9 of thisReport, shall be part of the CoC, they cannot be related partiesto the corporate debtor in line with the spirit of proviso to Section21(2).

10.8. In light of the deliberation above, the Committee felt that amechanism requires to be provided in the Code to mandaterepresentation in meetings of security-holders, deposit-holders, andall other classes of financial creditors which exceed certainnumber, through an authorised representative. This can be doneby adding new provision to Section 21 of the Code. Such arepresentative may either be trustee or an agent appointedunder the terms of the debt agreement of such creditors,otherwise an insolvency professional may be appointed by NCLTfor each such class of financial creditors. Additionally, therepresentative shall act and attend the meetings on behalf of therespective class of financial creditors and shall vote on behalf ofeach of the financial creditors to the extent of the voting share ofeach such creditor, and as per their instructions. To ensureadequate representation by the authorised representative of thefinancial creditors, specific provision laying down the rights andduties of such authorised representatives may be inserted.Further, the requisite threshold for the number of creditors andmanner of voting may be specified by IBBI through regulations toenable efficient voting by the representative. Also, Regulation 25may also be amended to enable voting through electronic meanssuch as e-mail, to address any technical issues which may arisedue to large number of creditors voting at the same time.”

47. Given this Report, the Code was amended and Sections 21(6-A) and 21(6-B) were added, which are set out hereinbelow:

“21. Committee of Creditors. —

(1)-(6) * * *

(6-A) Where financial debt—

(a) is in the form of securities or deposits and the terms of thefinancial debt provide for appointment of trustee or agent to actas authorised representative for all the financial creditors, suchtrustee or agent shall act on behalf of such financial creditors;

(b) is owed to class of creditors exceeding the number as maybe specified, other than the creditors covered under clause (a) orsub-section (6), the interim resolution professional shall make anapplication to the adjudicating authority along with the list of allfinancial creditors, containing the name of an insolvencyprofessional, other than the interim resolution professional, to actas their authorised representative who shall be appointed by theadjudicating authority prior to the first meeting of the Committeeof Creditors;

(c) is represented by guardian, executor or administrator, suchperson shall act as authorised representative on behalf of suchfinancial creditors,

and such authorised representative under clause (a) or clause (b)or clause (c) shall attend the meetings of the Committee ofCreditors, and vote on behalf of each financial creditor to theextent of his voting share.

(6-B) The remuneration payable to the authorisedrepresentative—

(i) under clauses (a) and (c) of sub-section (6-A), if any, shall beas per the terms of the financial debt or the relevantdocumentation; and

(ii) under clause (b) of sub-section (6-A) shall be as specifiedwhich shall form part of the insolvency resolution process costs.”

48. Also, Regulations 16-A and 16-B of the Insolvency andBankruptcy Board of India (Insolvency Resolution Process forCorporate Persons) Regulations, 2016 (the CIRP Regulations)were added, with effect from 4-7-2018, as follows:

“16-A. Authorised representative.—(1) The interim resolutionprofessional shall select the insolvency professional, who is thechoice of the highest number of financial creditors in the class inForm CA received under sub-regulation (1) of Regulation 12, toact as the authorised representative of the creditors of therespective class:

Provided that the choice for an insolvency professional to act asauthorised representative in Form CA received undersub-regulation (2) of Regulation 12 shall not be considered.

(2) The interim resolution professional shall apply to theadjudicating authority for appointment of the authorisedrepresentatives selected under sub-regulation (1) within two daysof the verification of claims received under sub-regulation (1) ofRegulation 12.

(3) Any delay in appointment of the authorised representative forany class of creditors shall not affect the validity of any decisiontaken by the committee.

(4) The interim resolution professional shall provide the list ofcreditors in each class to the respective authorised representativeappointed by the adjudicating authority.

(5) The interim resolution professional or the resolutionprofessional, as the case may be, shall provide an updated list ofcreditors in each class to the respective authorised representativeas and when the list is updated.

Clarification: The authorised representative shall have no role inreceipt or verification of claims of creditors of the class herepresents.

(6) The interim resolution professional or the resolutionprofessional, as the case may be, shall provide electronic means

of communication between the authorised representative and thecreditors in the class.

(7) The voting share of creditor in class shall be in proportionto the financial debt which includes an interest at the rate of eightper cent per annum unless different rate has been agreed tobetween the parties.

(8) The authorised representative of creditors in class shall beentitled to receive fee for every meeting of the committeeattended by him in the following manner, namely:

(9) The authorised representative shall circulate the agenda tocreditors in class and announce the voting window at leasttwenty-four hours before the window opens for votinginstructions and keep the voting window open for at least twelvehours.

16-B. Committee with only creditors in class. — Where thecorporate debtor has only creditors in class and no otherfinancial creditor eligible to join the committee, the committee shallconsist of only the authorised representative(s).”

49. It is obvious that debenture-holders and persons with homeloans may be numerous and, therefore, have been statutorily dealtwith by the aforesaid change made in the Code as well as theRegulations. However, as general rule, it is correct to say thatfinancial creditors, which involve banks and financial institutions,would certainly be smaller in number than operational creditors ofa corporate debtor.

xxx xxxxxx

61. Insofar as set-off and counterclaim is concerned, set-off ofamounts due from financial creditors is rarity. Usually, financialdebts point only in one way—amounts lent have to be repaid.However, it is not as if legitimate set-off is not to be considered

474SUPREME COURT REPORTS

at all. Such set-off may be considered at the stage of filing ofproof of claims during the resolution process by the resolutionprofessional, his decision being subject to challenge before theadjudicating authority under Section 60.”

The Article 14 Challenge (I): DiscriminationB

B32. Learned counsel for the Petitioners have emphasised thattreating allottees to be financial creditors is discriminatory inasmuch asunequals are treated equally, equals are treated unequally, and both arewithout any intelligible differentia having any nexus with the objects ofthe Code. It is argued that discrimination arises, equals being treated asCunequal, as real estate developers are differentiated from other entitieswho supply goods or services and would, therefore, be discriminatedagainst as, in the case of real estate developers, all that an allottee wouldhave to show is that debt is due to him, whereas in the cases of personssupplying goods or services if there exists any pre-existing disputebetween the operational debtor and the person who purchases the goodsDor avails of the services, the operational debtor would be outside theclutches of the Code. It was also argued that unequals are treated asequals as banks and financial institutions are completely different fromreal estate developers, as has been recognised in Swiss Ribbons (supra),and to treat these unequals as equals by making real estate developersEfinancial debtors, again infracts Article 14.

33. When Article 14 is alleged to have been infracted by legislationwhich is economic in nature, it is important to first restate fewfundamental principles. In Ram Krishna Dalmia v. Justice S.R.Tendolkar (1959) SCR 279, this Court laid down the oft quotedprinciples that apply when challenges on the ground of discriminationFare made to statutes. This Court held:

“…The principle enunciated above has been consistently adoptedand applied in subsequent cases. The decisions of this Courtfurther establish—

(a) that law may be constitutional even though it relates to asingle individual if, on account of some special circumstances orreasons applicable to him and not applicable to others, that singleindividual may be treated as class by himself;

(b) that there is always presumption in favour of theconstitutionality of an enactment and the burden is upon him whoattacks it to show that there has been clear transgression of theconstitutional principles;

(c) that it must be presumed that the legislature understands andcorrectly appreciates the need of its own people, that its laws aredirected to problems made manifest by experience and that itsdiscriminations are based on adequate grounds;

(d) that the legislature is free to recognise degrees of harm andmay confine its restrictions to those cases where the need is deemedto be the clearest;

(e) that in order to sustain the presumption of constitutionality thecourt may take into consideration matters of common knowledge,matters of common report, the history of the times and mayassume every state of facts which can be conceived existing atthe time of legislation; and

(f) that while good faith and knowledge of the existing conditionson the part of legislature are to be presumed, if there is nothingon the face of the law or the surrounding circumstances broughtto the notice of the court on which the classification mayreasonably be regarded as based, the presumption of constitu-tionality cannot be carried to the extent of always holding thatthere must be some undisclosed and un-known reasons forsubjecting certain individuals or corporations to hostile ordiscriminating legislation.(at page 297, 298)”

34. This principle has been re-iterated by this Court in State ofBihar v. Shree Baidyanath Ayurved Bhawan (P) Ltd. (2005) 2 SCC762 at 783 and more recently in Karnataka Live Band RestaurantsAssn. v. State of Karnataka (2018) 4 SCC 372 at 393 where thisCourt re-iterated the principles to test legislation on the touchstone ofArticle 14 as laid down by this Court in Ram Krishna Dalmia (supra),wherein as extracted above, this Court held that the legislature is free torecognise degrees of harm and confine its application to those caseswhere the need is deemed to be the clearest.

35. In State of Gujarat and Anr. v. Shri Ambica Mills Ltd.,Ahmedabad, etc.(1974) 4 SCC 656, this Court dealt with classifications

Athat are under-inclusive and held, particularly with regard to economiclegislation, that such under-inclusion would not result in the death-knellof such laws on the anvil of Article 14. This Court put it thus:

“53. The equal protection of the laws is pledge of the protectionof equal laws. But laws may classify. And the very idea ofclassification is that of inequality. In tackling this paradox the Courthas neither abandoned the demand for equality nor denied thelegislative right to classify. It has taken middle course. It hasresolved the contradictory demands of legislative specializationand constitutional generality by doctrine of reasonableclassification. [See Joseph Tussman and Jacobusten Brook TheEqual Protection of the Law, 37 California Rev 341]

54. reasonable classification is one which includes all who aresimilarly situated and none who are not. The question then is:what does the phrase “similarly situated” mean? The answer tothe question is that we must look beyond the classification to thepurpose of the law. reasonable classification is one whichincludes all persons who are similarly situated with respect to thepurpose of the law. The purpose of law may be either theelimination of public mischief or the achievement of somepositive public good.

55. classification is under-inclusive when all who are includedin the class are tainted with the mischief but there are others alsotainted whom the classification does not include. In other words,a classification is bad as under-inclusive when State benefits orburdens persons in manner that furthers legitimate purposebut does not confer the same benefit or place the same burden onothers who are similarly situated. classification isover-inclusive when it includes not only those who are similarlysituated with respect to the purpose but others who are not sosituated as well. In other words, this type of classificationimposes burden upon wider range of individuals than areincluded in the class of those attended with mischief at which thelaw aims. Herod ordering the death of all male children born on aparticular day because one of them would someday bring abouthis downfall employed such classification.

56. The first question, therefore, is, whether the exclusion ofestablishments carrying on business or trade and employing lessthan 50 persons makes the classification under-inclusive, when itis seen that all factories employing 10 or 20 persons, as the casemay be, have been included and that the purpose of the law is toget in unpaid accumulations for the welfare of the labour. Sincethe classification does not include all who are similarly situatedwith respect to the purpose of the law, the classification mightappear, at first blush, to be unreasonable. But the Court hasrecognised the very real difficulties under which legislaturesoperate — difficulties arising out of both the nature of thelegislative process and of the society which legislation attemptsperennially to re-shape — and it has refused to strike downindiscriminately all legislation embodying classificatory inequalityhere under consideration. Mr Justice Holmes, in urging toleranceof under-inclusive classifications, stated that such legislation shouldnot be disturbed by the Court unless it can clearly see that there isno fair reason for the law which would not require with equalforce its extension to those whom it leaves untouched. [ Missouri,K&T Rly v. May, 194 US 267, 269] What, then, are the fairreasons for non-extension? What should court do when it isfaced with law making an under-inclusive classification in areasrelating to economic and tax matters? Should it, by its judgment,force the legislature to choose between inaction or perfection?

xxx xxxxxx

66. That the legislation is directed to practical problems, that theeconomic mechanism is highly sensitive and complex, that manyproblems are singular and contingent that laws are not abstractpropositions and do not relate to abstract units and are not to bemeasured by abstract symmetry, that exact wisdom and niceadaption of remedies cannot be required, that judgment is largelya prophecy based on meagre and uninterpreted experience, shouldstand as reminder that in this area the Court does not take theequal protection requirement in pedagogic manner [See“General Theory of Law and State”, p. 161] .

67. In the utilities, tax and economic regulation cases, there aregood reasons for judicial self-restraint if not judicial deference to

ABCDE

legislative judgment. The legislature after all has the affirmativeresponsibility. The Courts have only the power to destroy, not toreconstruct. When these are added to the complexity of economicregulation, the uncertainty, the liability to error, the bewilderingconflict of the experts, and the number of times the judges havebeen overruled by events — self-limitation can be seen to be thepath to judicial wisdom and institutional prestige and stability. [See“General Theory of Law and State”, p. 161]

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71. The Court must be aware of its own remoteness and lack offamiliarity with local problems. Classification is dependent on thepeculiar needs and specific difficulties of the community. The needsand difficulties of the community are constituted out of facts andopinions beyond the easy ken of the Court [ See “General Theoryof Law and State”, p. 161] . It depends to great extent upon anassessment of the local condition of these concerns which thelegislature alone was competent to make.”

36. In V.C. Shukla v.State (Delhi Administration) 1980 Supp.SCC 249, this Court further elaborated:

“11. In diverse society and large democracy such as ourswhere the expanding needs of the nation change with the temperof the times, it is extremely difficult for any legislation to makelaws applicable to all persons alike. Some amount ofclassification is, therefore, necessary to administer various spheresof the activities of the State. It is well settled that in applyingArticle 14 mathematical precision or nicety or perfect equanimityare not required. Similarity rather than identity of treatment isenough. The courts should not make doctrinaire approach inconstruing Article 14 so as to destroy or frustrate any beneficiallegislation. What Article 14 prohibits is hostile discrimination andnot reasonable classification for the purpose of legislation.Furthermore, the legislature which is in the best position tounderstand the needs and requirements of the people must begiven sufficient latitude for making selection or differentiation andso long as such selection is not arbitrary and has rational basishaving regard to the object of the Act, Article 14 would not beattracted. That is why this Court has laid down that presumption

is always in favour of the constitutionality of an enactment andthe onus lies upon the person who attacks the statute to show thatthere has been an infraction of the constitutional concept of equality.It has also been held that in order to sustain the presumption ofconstitutionality, the court is entitled to take into considerationmatters of common knowledge, common report, the history of thetimes and all other facts which may be existing at the time of thelegislation. Similarly, it cannot be presumed that theadministration of particular law would be done with an “evil eyeand an unequal hand”. Finally, any person invoking Article 14 ofthe Constitution must show that there has been discriminationagainst person who is similarly situate or equally circumstanced.In the case of State of U.P. v. Deoman Upadhyaya [AIR 1960SC 1125 : (1961) 1 SCR 14 : (1961) 2 SCJ 334] Subba Rao, J.,observed as follows:

“No discrimination can be made either in the privileges conferredor in the liabilities imposed. But these propositions conceived inthe interests of the public, if logically stretched too far, may notachieve the high purpose behind them. In society of unequalbasic structure, it is wellnigh impossible to make laws suitable intheir application to all the persons alike. So, reasonableclassification is not only permitted but is necessary if society shouldprogress.”

37. Equally, it is important to note that classification need not beperfect. In Venkateshwara Theatre v. State of A.P. (1993) 3 SCC677 this Court held:

“20. Article 14 enjoins the State not to deny to any personequality before the law or the equal protection of the laws. Thephrase “equality before the law” contains the declaration ofequality of the civil rights of all persons within the territories ofIndia. It is basic principle of republicanism. The phrase “equalprotection of laws” is adopted from the Fourteenth Amendmentto the U.S. Constitution. The right conferred by Article 14postulates that all persons similarly circumstanced shall be treatedalike both in privileges conferred and liabilities imposed. Since theState, in exercise of its governmental power, has, of necessity, tomake laws operating differently on different groups of persons

Awithin its territory to attain particular ends in giving effect to itspolicies, it is recognised that the State must possess the power ofdistinguishing and classifying persons or things to be subjected tosuch laws. It is, however, required that the classification mustsatisfy two conditions, namely, (i) it is founded on an intelligibledifferentia which distinguishes those that are grouped togetherBfrom others; and (ii) the differentia must have rational relationto the object sought to be achieved by the Act. It is not therequirement that the classification should be scientifically perfector logically complete. Classification would be justified if it is notpalpably arbitrary. (See : Re, Special Courts Bill, 1978 [(1979)C1 SCC 380 : (1979) 2 SCR 476, 534-36] .) If there is equality anduniformity within each group, the law will not be condemned asdiscriminative, though due to some fortuitous circumstancearising out of peculiar situation some included in class get anadvantage over others, so long as they are not singled out forspecial treatment. (See: Khandige Sham Bhat v. AgriculturalDI.T.O. [(1963) 3 SCR 809, 817: AIR 1963 SC 591: (1963) 48 ITR21])

(emphasis supplied)

xxx xxxxxx

23. Just as difference in the treatment of persons similarlysituate leads to discrimination, so also discrimination can arise ifpersons who are unequals, i.e. differently placed, are treatedsimilarly. In such case failure on the part of the legislature toclassify the persons who are dissimilar in separate categories andapplying the same law, irrespective of the differences, brings aboutthe same consequence as in case where the law makes adistinction between persons who are similarly placed. lawproviding for equal treatment of unequal objects, transactions orpersons would be condemned as discriminatory if there isabsence of rational relation to the object intended to be achievedby the law.

xxx xxxxxx

29. In the instant case, we find that the legislature has prescribeddifferent rates of tax by classifying theatres into different classes,namely, air-conditioned, air-cooled, ordinary (other than

air-conditioned and air-cooled), permanent and semi-permanentand touring and temporary. The theatres have further beencategorised on the basis of the type of the local area in whichthey are situate. It cannot, therefore, be said that there has beenno attempt on the part of the legislature to classify the cinematheatres taking into consideration the differentiating circumstancesfor the purpose of imposition of tax. The grievance of theappellants is that the classification is not perfect. What they wantis that there should have been further classification amongst thetheatres falling in the same class on the basis of the location ofthe theatre in each local area. We do not think that such acontention is well founded.”

38. Also, in Mardia Chemicals Ltd. v. Union of India (2004) 4SCC 311, this Court held that Parliamentary intent cannot be thwartedeven if it operates bit harshlyon small section of the public, if otherwisemade in the larger public interest. This Court said:

“74. reference has also been made for similar observations inSrinivasa Enterprises v. Union of India [(1980) 4 SCC 507] atSCC pp. 513-14 and in Jalan Trading Co. (P) Ltd. v. MillMazdoor Sabha [AIR 1967 SC 691 : (1967) 1 SCR 15] at SCRp. 36. While referring to the observations made in Collector ofCustoms v. Nathella Sampathu Chetty [AIR 1962 SC 316 : (1962)3 SCR 786 : (1962) 1 Cri LJ 364] at SCR pp. 829-30 it issubmitted that the intent of Parliament shall not be defeated merelyfor the reason that it may operate bit harshly on small sectionof public where it may be necessary to make such provisions ofachieving the desired objectives to ensure that the nefariousactivities of smuggling, etc. had to be necessarily curbed. InFatehchand Himmatlal [(1977) 2 SCC 670] where debts of theagriculturists were wiped off, this Court observed:

“44. Every cause claims its martyr and if the law, necessitated bypractical considerations, makes generalizations which hurt few,it cannot be helped by the Court. Otherwise, the enforcement ofthe Debt Relief Act will turn into an enquiry into scrupulous andunscrupulous creditors, frustrating through endless litigation, theinstant relief to the indebted which is the promise of thelegislature.” (SCC p. 689, para 44)”

AThe principle contained in Swiss Ribbons (supra), that far greaterdeference is accorded to economic legislation, as the legislature is givenfree play in the joints and is at liberty to conduct economic experimentsin public interest, finds an early application in Shri Ambica Mills (supra),and applies on all fours in this case. Sub-paras (b), (c), (d) and (f) ofRam Krishna Dalmia(supra) are all also attracted in the present case.B

39. It is also important to remember that the Code is not meant tobe debt recovery mechanism [see paragraph 28 of Swiss Ribbons(supra)]. It is proceeding in rem which, after being triggered, goescompletely outside the control of the allottee who triggers it. Thus, anyallottee/homebuyer who prefers an application under Section 7 of theCCode takes the risk of his flat/apartment not being completed in the nearfuture, in the event of there being breach on the part of the developer.Under the Code, he may never get refund of the entire principal, letalone interest. This is because, the moment petition is admitted underSection 7, the resolution professional must first advertise for and find aDresolution plan by somebody, usually another developer, which has thento pass muster under the Code, i.e. that it must be approved by at least66% of the Committee of Creditors and must further go through challengesbefore NCLT and NCLAT before the new management can take overand either complete construction, or pay out or refund amounts. Dependingon the kind of resolution plan that is approved, such homebuyer/allotteeEmay have to wait for very long period for the successful completion ofthe project. He may never get his full money back together with interestin the event that no suitable resolution plan is forthcoming, in whichcase, winding up of the corporate debtor alone would ensue. On theother hand, if such allottee were to approach the Real Estate RegulatoryFAuthority under RERA, it is more than likely that the project would becompleted early by the persons mentioned therein, and/or full amount ofrefund and interest together with compensation and penalty, if any, wouldbe awarded. Thus, given the bonafides of the allottee who moves anapplication under Section 7 of the Code, it is only such allottee who hascompletely lost faith in the management of the real estate developerGwho would come before the NCLT under the Code hoping that someother developer takes over and completes the project, while always takingthe risk that if no one were to come forward, corporate death mustensue and the allottee must then stand inline to receive whatever isgiven to him in winding up. Given the reasons of the Insolvency Committee

Report, which show that experience of the real estate sector in thiscountry has not been encouraging, in that huge amounts are advancedby ordinary people to finance housing projects which end up in massivedelays on the part of the developer or even worse, i.e. failure of theproject itself, and given the state of facts which was existing at the timeof the legislation, as adverted to by the Insolvency Committee Report, itis clear that any alleged discrimination has to meet the tests laid down inRam Krishna Dalmia (supra), V.C. Shukla (supra),Shri AmbicaMills(supra),Venkateshwara Theatre(supra) and Mardia Chemicals(supra).40. It is impossible to say that classifying real estate developers isnot founded upon an intelligible differentia which distinguishes them fromother operational creditors, nor is it possible to say that such classificationis palpably arbitrary having no rational relation to the objects of the Code.It was vehemently argued by learned counsel on behalf of the Petitionersthat if at all real estate developers were to be brought within the clutchesof the Code, being like operational debtors, at best they could have beenbrought in under this rubric and not as financial debtors. Here again,what is unique to real estate developers vis-à-vis operational debts, isthe fact that, in operational debts generally, when person supplies goodsand services, such person is the creditor and the person who has to payfor such goods and services is the debtor. In the case of real estatedevelopers, the developer who is the supplier of the flat/apartment is thedebtor inasmuch as the home buyer/allottee funds his own apartment bypaying amounts in advance to the developer for construction of thebuilding in which his apartment is to be found. Another vital differencebetween operational debts and allottees of real estate projects is that anoperational creditor has no interest in or stake in the corporate debtor,unlike the case of an allottee of real estate project, who is vitallyconcerned with the financial health of the corporate debtor, for otherwise,the real estate project may not be brought to fruition. Also, in such event,no compensation, nor refund together with interest, which is the otheroption, will be recoverable from the corporate debtor. One other importantdistinction is that in an operational debt, there is no consideration for thetime value of money – the consideration of the debt is the goods orservices that are either sold or availed of from the operational creditor.Payments made in advance for goods and services are not made to fundmanufacture of such goods or provision of such services. Examples

Agiven of advance payments being made for turnkey projects and capitalgoods, where customisation and uniqueness of such goods are importantby reason of which advance payments are made, are wholly inappositeas examples vis-à-vis advance payments made by allottees. In real estateprojects, money is raised from the allottee, being raised againstconsideration for the time value of money. Even the total considerationBagreed at time when the flat/apartment is non-existent or incomplete,is significantly less than the price the buyer would have to pay for aready/complete flat/apartment, and therefore, he gains the time value ofmoney.Likewise, the developer who benefits from the amounts disbursedalso gains from the time value of money. The fact that the allottee makesCsuch payments in instalments which are co-terminus with phases ofcompletion of the real estate project does not any the less make suchpayments as payments involving “exchange”, i.e. advances paid only inorder to obtain flat/apartment. What is predominant, insofar as the realestate developer is concerned, is the fact that such instalment paymentsare used as means of finance qua the real estate project. One otherDvital difference with operational debts is the fact that the documentaryevidence for amounts being due and payable by the real estate developeris there in the form of the information provided by the real estate developercompulsorily under RERA. This information, like the information frominformation utilities under the Code, makes it easy for home buyers/Eallottees to approach the NCLT under Section 7 of the Code to triggerthe Code on the real estate developer’s own information given on itswebpage as to delay in construction, etc. It is these fundamentaldifferences between the real estate developer and the supplier of goodsand services that the legislature has focused upon and included realestate developers as financial debtors. This being the case, it is clearFthat there cannot be said to be any infraction of equal protection of thelaws.41. Shri Shyam Divan relying upon Nagpur Improvement Trustand Anr. v. Vithal Rao and Ors. (1973) 1 SCC 500 at paragraph 26and Subramanian Swamy v. Director, Central Bureau ofGInvestigation and Anr. (2014) 8 SCC 682 at paragraphs 44, 58 and 68argued that the object of the amendment is itself discriminatory in that itseeks to insert into “means and includes” definition category whichdoes not fit therein, namely, real estate developers who do not, in theclassical sense, borrow monies like banks and financial institutions.HAccording to him, therefore, the object itself being discriminatory, the

inclusion of real estate developers as financial debtors should be struckdown.We have already pointed out how real estate developers are, insubstance, persons who avail finance from allottees who then fund thereal estate development project. The object of dividing debts into twocategories under the Code, namely, financial and operational debts, isbroadly to sub-divide debts into those in which money is lent and thosewhere debts are incurred on account of goods being sold or servicesbeing rendered. We have no doubt that real estate developers fall squarelywithin the object of the Code as originally enacted insofar as they arefinancial debtors and not operational debtors, as has been pointed outhereinabove. So far as unequals being treated as equals is concerned,home buyers/allottees can be assimilated with other individual financialcreditors like debenture holders and fixed deposit holders, who haveadvanced certain amounts to the corporate debtor. For example, fixeddeposit holders, though financial creditors, would be like real estateallottees in that they are unsecured creditors. Financial contracts in thecase of these individuals need not involve large sums of money. Debentureholders and fixed deposit holders, unlike real estate holders, are involvedin seeing that they recover the amounts that are lent and are thus notdirectly involved or interested in assessing the viability of the corporatedebtors. Though not having the expertise or information to be in positionto evaluate feasibility and viability of resolution plans, such individuals,by virtue of being financial creditors, have right to be on the Committeeof Creditors to safeguard their interest. Also, the question that is to beasked when debenture holder or fixed deposit holder prefers Section7 application under the Code will be asked in the case of allottees of realestate developers – is debt due in fact or in law? Thus, allottees, beingindividual financial creditors like debenture holders and fixed depositholders and classified as such, show that they within the larger class offinancial creditors, there being no infraction of Article 14 on this score.

42. The presumption that the legislature has understood andcorrectly appreciated the need of its people and that the amendment tothe Code is directed to problems made manifest by experience, as waspointed out by the Insolvency Law Committee findings(supra)demonstrates that the presumption of constitutionality that attaches tothe Amendment Act has not been displaced by the Petitioners.

43. It was also argued with reference to Regulation 9A of theInsolvency and Bankruptcy Board of India (Insolvency Resolution

ABC

AProcess for Corporate Persons)Regulations, 2016 that homebuyers wouldreally fall within “other creditors” as residuary class, who would haveto stand in line with their claims which would be made to the resolutionprofessional once the Code is triggered. Regulation 9A reads as follows:

“9A. Claims by other creditors.

(1) person claiming to be creditor, other than those coveredunder regulations 7, 8, or 9, shall submit proof of its claim to theinterim resolution professional or resolution professional inperson, by post or by electronic means in Form of the Schedule.

(2) The existence of the claim of the creditor referred to inCsub-section (1) may be proved on the basis of –

(a) the records available in an information utility, if any, or

(b) other relevant documents sufficient to establish the claim, in-cluding any or all of the following:—

(i) documentary evidence demanding satisfaction of the claim;

(ii) bank statements of the creditor showing non-satisfaction ofclaim;

(iii) an order of court or tribunal that has adjudicated uponnon-satisfaction of claim, if any.”E

We have already held that given the fact that homebuyers/allotteesgive advances to the real estate developer and thereby finance the realestate project at hand, are really financial creditors. Given this finding,this plea of the Petitioners must also be rejected. This challenge mustalso, therefore, fail.FTheArticle 14 Challenge (II):Manifest arbitrariness;Article19(1)(g) and Article 300-A

44. Counsel for the Petitioners argued that square peg has beenfitted in round hole and have thus stated that doing so would not onlyGbe contrary to the objects sought to achieved by the Code, but would bedirectly contrary to Swiss Ribbons(supra) in that every characteristicof financial creditors vis-à-vis operational creditors would show that realestate developers are assimilated to operational and not financial debtors.For this purpose, in the written argument presented by Dr. Singhvi, relyingupon Swiss Ribbons(supra) it is stated that:H

“FINDINGS IN SWISS RIBBONS P. LTD. V. UOI, (2019) 4 SCC17 ON NATURE OFOPERATIONALCREDITORS (OCs)/FINANCIAL CREDITORS (FCs) VIS-À-VIS ALLOTTEES

3.Regarding role and involvement ofFCs vis-à-vis OCs: Allottees are interested in securing their “financial creditors are, from the very single time investment, and not the beginning, involved with assessing the financial well-being of, or ensuring the viability of the corporate debtor. They continuity of, the corporate debtor as can, and therefore do, engage in going-concern. Further, allottees in restructuring of the loan as well as different real estate projects of reorganization of the corporate debtor’s corporate debtor, may have different business when there is financial stress, interests confined only to that particular which are things operational creditors do development, with no interest in the not and cannot do. Thus, preserving the overall well-being or rearrangement or corporate debtor as going concern, viability of the Company. If such while ensuring maximum recovery for allottees are vested with decision making all creditors being the objective of the powers concerning the business of the Code, financial creditors are clearly enterprise as whole, it is unlikely that different from operational creditors and sound financial decisions will be taken therefore, there is obviously an having regard to the overall status of the intelligible differentia between the two entity which will undoubtedly defeat the which has direct relation to the objects very purpose and objective of the CIRP sought to be achieved by the Code.” process. [Para 45]4. Regarding participation in the COCmeetings: Allottees do not have the expertise or “Under the Code, the committee of information to be in position to evaluate creditors is entrusted with the primary the feasibility and viability of resolution responsibility of financial restructuring. plans keeping in mind the business of the They are required to assess the viability corporate debtor as whole. Expecting of corporate debtor by taking into allottees to carry out such function and account all available information as well role is entirely impractical. as to evaluate all alternative investment opportunities that are available. The Allottees are interested in securing their committee of creditors is required to single time investment, and not the evaluate the resolution plan on the basis financial well-being of, or ensuring the of feasibility and viability.” continuity of, the corporate debtor as going-concern. “Since the financial creditors are in the business of money lending, banks and Allottees in different real estate projects financial institutions are best equipped to of corporate debtor, may have different assess viability and feasibility of the interests confined only to that particular business of the corporate debtor. Even development, with no interest in overall at the time of granting loans, these banks well-being or rearrangement or viability and financial institutions undertake of the Company. If such allottees are detailed market study which includes vested with decision making powers techno-economic valuation report, concerning the business of the enterprise evaluation of business, financial as whole, it is unlikely that sound projection, etc. Since this detailed study financial decisions will be taken having has already been undertaken before regard to the overall status of the entity sanctioning loan, and since financial

Acreditors have trained employees which will undoubtedly defeat the very purpose to assess viability and feasibility, and objective of the CIRP process. Interests of they are in good position to other stakeholders, including other financial evaluate the contents of creditors, suppliers, small creditors, labour, etc. are resolution plan. On the other unlikely to be considered appropriately. hand, operational creditors, who provide goods and services, are involved only in recovering Bamounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business.” [Para 67, 69] C5. Regarding process for initiationof corporate insolvencyresolution process:•Information with respect to debt incurred by•In practice, real estate allottees do not financial debtors: upload information in respect of amounts owed to them by developers with the D“It is clear from these Information Utilities. Sections that information in respect of debts •Most of the sources evidencing incurred by financial financial debt as listed do not apply to debtors is easily real-estate allottees. available through information utilities which, under the EInsolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 [“Information Utilities Regulations”], are to satisfy themselves that information Fprovided as to the debt is accurate. This is done by giving notice to the corporate debtor who then has an opportunity to correct such information. GH

45. As has been pointed out by us hereinabove, it is clear that thecontext of Swiss Ribbons(supra) was challenge under Article 14Estating that financial creditors have been discriminated against becausethere is no real difference between financial and operational creditors,and that such artificial distinction made by the Code, not having beenmade anywhere else in the world, would be discriminatory, having norational relation with the object sought to be achieved by the Code andwould have, therefore, to be struck down under Article 14. As has beenFpointed out by us hereinabove, the context of this argument was financialinstitutions and banks on the one hand vis-à-vis operational creditors i.e.those who supply goods and services, on the other. It is in this contextthat the various differences that have been pointed out hereinabove weremade. However, the judgment itself recognises - as has been pointedGout by us hereinabove - in paragraphs 46 to 49, that it was not dealingwith individual financial creditors, such as debenture holders, fixed depositholders and home buyers. To apply judgment rendered in whollydifferent context to the facts in the present cases would itself be anarbitrary exercise. What has been stated hereinabove as to allotteesbeing individual financial creditors like deposit holders and debentureH

state the urred on is nt of other lt, in the ancel the nd of have

holders, applies on all fours to repel this argument based on anotherfacet of Article 14. In fact, the object of the Code, as originally set out inparagraphs 27 and 28 of Swiss Ribbons (supra) is as follows:

“27. As is discernible, the Preamble gives an insight into what issought to be achieved by the Code. The Code is first andforemost, Code for reorganisation and insolvency resolution ofcorporate debtors. Unless such reorganisation is effected in atime-bound manner, the value of the assets of such persons willdeplete. Therefore, maximisation of value of the assets of suchpersons so that they are efficiently run as going concerns isanother very important objective of the Code. This, in turn, willpromote entrepreneurship as the persons in management of thecorporate debtor are removed and replaced by entrepreneurs.When, therefore, resolution plan takes off and the corporatedebtor is brought back into the economic mainstream, it is able torepay its debts, which, in turn, enhances the viability of credit inthe hands of banks and financial institutions. Above all, ultimately,the interests of all stakeholders are looked after as the corporatedebtor itself becomes beneficiary of the resolution scheme—workers are paid, the creditors in the long run will be repaid in full,and shareholders/investors are able to maximise their investment.Timely resolution of corporate debtor who is in the red, by aneffective legal framework, would go long way to support thedevelopment of credit markets. Since more investment can bemade with funds that have come back into the economy, businessthen eases up, which leads, overall, to higher economic growthand development of the Indian economy. What is interesting tonote is that the Preamble does not, in any manner, refer toliquidation, which is only availed of as last resort if there iseither no resolution plan or the resolution plans submitted are notup to the mark. Even in liquidation, the liquidator can sell thebusiness of the corporate debtor as going concern. (See ArcelorMittal [Arcelor Mittal (India) (P) Ltd. v. Satish Kumar Gupta,(2019) 2 SCC 1] at para 83, fn 3).

28. It can thus be seen that the primary focus of the legislation isto ensure revival and continuation of the corporate debtor byprotecting the corporate debtor from its own management andfrom corporate death by liquidation. The Code is thus

Abeneficial legislation which puts the corporate debtor back on itsfeet, not being mere recovery legislation for creditors. Theinterests of the corporate debtor have, therefore, been bifurcatedand separated from that of its promoters/those who are inmanagement. Thus, the resolution process is not adversarial tothe corporate debtor but, in fact, protective of its interests. TheBmoratorium imposed by Section 14 is in the interest of thecorporate debtor itself, thereby preserving the assets of thecorporate debtor during the resolution process. The timelines withinwhich the resolution process is to take place again protects thecorporate debtor’s assets from further dilution, and also protectsCall its creditors and workers by seeing that the resolution processgoes through as fast as possible so that another management can,through its entrepreneurial skills, resuscitate the corporate debtorto achieve all these ends.”

reading of these paragraphs will show these very objects areDsub-served by treating allottees as financial creditors. The Code is thusa beneficial legislation which can be triggered to put the corporate debtorback on its feet in the interest of unsecured creditors like allottees, whoare vitally interested in the financial health of the corporate debtor, sothat replaced management may then carry out the real estate project

as originally envisaged and deliver the flat/apartment as soon as possibleEand/or pay compensation in the event of late delivery, or non-delivery, orrefund amounts advanced together with interest. Thus, applying theShayara Bano v. Union of India (2017)9 SCC 1test,it cannot be saidthat square peg has been forcibly fixed into round hole so as torender Section 5(8)(f) manifestly arbitrary i.e. excessive, disproportionateFor without adequate determining principle. For the same reason, it cannotbe said that Article 19(1)(g) has been infracted and not saved by Article19(6) as the Amendment Act is made in public interest, and it cannot besaid to be an unreasonable restriction on the Petitioner’s fundamentalright under Article 19(1)(g). Also, there is no infraction of Article 300-Aas no person is deprived of its property without authority of aGconstitutionally valid law.

46. It was also argued that the UNCITRAL Legislative Guide,from which most of the provisions of the Code derive their succour,have also been breached. This is for the reason that financial contractsbeing different from operational contracts, the one should not be confusedH

with the other. Also, treatment of similarly situated creditors should bethe same, and as allottees are like operational creditors, they should notbe treated as financial creditors. We have already answered thesequestions in the context of discrimination and manifest arbitrariness andhave found that, in point of fact, real estate allottees are really in thenature of financial creditors, and thus the UNCITRAL Legislative Guidehas been followed, and not breached. Equally, it was argued that creatingnew creditors’ rights in Insolvency Law, as opposed to recognising existingcreditors’ rights, will infract the UNCITRAL Legislative Guide. As willbe pointed out hereinbelow, since allottees of real estate projects havealways been subsumed within Section 5(8)(f), no new rights or claimshave been created. It was also contended that since allottees are thensaid to have no expertise or knowledge in the working of the corporatedebtor, they cannot participate effectively in the Committee of Creditors,and should therefore be kept out. The same answer as has been givenhereinabove, i.e. that allottees, like individual financial creditors who arealready on the Committee of Creditors, are to have voice in determiningthe corporate debtor and their own future. This contention, therefore,also fails.47. One other argument that is made on behalf of the counsel forthe Petitioners is that allottees of flats/apartments who do not want refunds,but who want their flats/apartments constructed so that they may occupyand live in their flats/apartments, will be jeopardised, as single allotteewho does not want the flat/apartments, but wants refund of amountspaid for reasons best known to him, can trigger the Code and upset theconstruction and handing over of such flats/apartments to the vast bulkof allottees of project who may be genuine buyers who wish to occupysuch flats/apartments as roofs over their heads. Another facet of thisargument is that the bulk of such persons will never be on the Committeeof Creditors, as they may not be persons who trigger the Code at all.These arguments are met by the fact that all the allottees of the projectin question can either join together under the explanation to Section 7(1)of the Code, or file their own individual petitions after the Code getstriggered by single allottee, stating that in addition to the constructionof their flat/apartment, they are also entitled to compensation under RERAand/or under the general law, and would thus be persons who have a“claim”, i.e. right to remedy for breach of contract which gives rise toa right to compensation, whether or not such right is reduced to judgment,

Aand would therefore be persons to whom liability or obligation in respectof “claim” is due. Such persons would, therefore, have voice in theCommittee of Creditors as to future plans for completion of the project,and compensation for late delivery of the flat/apartment. This contentiontherefore also has no legs to stand upon.B48. It was then argued that placing allottees as financial creditors

B48. It was then argued that placing allottees as financial creditorsis directly contrary to the object of the Code in maximising the value ofassets and putting the corporate debtor back on its feet. We may onlystate that if Section 7 application is admitted in favour of an allottee,and if the management of the corporate debtor is in fact strong andstable one, nothing debars the same erstwhile management from offeringCa resolution plan, subject to Section 29A of the Code, which may well beaccepted by the Committee of Creditors in which home buyers nowhave voice. Equally, to assume that the moment the insolvency resolutionprocess starts, corporate death must ensue is wholly incorrect. If thereal estate project is otherwise viable, resolution plans from others mayDwell be accepted and the best of these would then work in order tomaximise the value of the assets of the corporate debtor. Corporatedeath, as has been stated in Swiss Ribbons (supra) is the last resortunder the Code after all other available options have failed. This argumentagain need not deter us further.

E49. It was then stated that there will be flood of petitions beforethe NCLT, and as the NCLT has to decide within period of 14 days,there will only be summary decision in which complicated agreemententered into between home buyer and real estate developer will not begone into in order to discover whether debt is due and payable. Coupledwith this argument, is the alternative argument that, given the fact thatFRERA adequately looks after the rights and interests of allottees, toapply the Code would then be manifestly arbitrary, as managementwhich may have infused large funds to develop the real estate projectwould then be summarily removed. supplementary argument was madethat this would also infract Article 19(1)(g) and 300-A, as person whoGinvests huge sum of money from its own resources or borrowedresources, would then be left in the lurch the moment the insolvencyresolution process is admitted.

50. The answer to these contentions is provided by reading someof the provisions of RERA. Under paragraph 3 of the Statement of

Objects and Reasons of RERA, one of the important reasons for enactingthe RERA is to “establish symmetry of information between the promoterand purchaser”. This is achieved through Section 4, where every promoterin its application to the authority for registration under sub-clause (2)(b),has to include the current status of the project, any delay in its completion,details of cases pending, payments pending etc. Equally, under sub-clause(g), the proforma of the allotment letter, agreement for sale andconveyance deed proposed to be signed with the allottee are all to befurnished. Also, under sub-clause (l)(C), the time period within which heundertakes to complete the project is also to be stated. Above all, underSection 4(3) read with Section 11, the authority is to operationalise aweb-based online system in which the promoter shall, upon receiving hisLogin Id and password, create webpage on the website of the authorityto enter all details as required by Section 4(2), including quarterly updateof the status of the project and the stage-wise time schedule of completionof the project. Also, under Section 7, the Authority may revoke registrationfor various reasons, and under Section7(4)(a) shall debar the promoterfrom accessing its website in relation to that project, and thereafter specifyits name in the list of defaulters and display its photograph on the websiteand inform other Real Estate Regulatory Authorities in other States andUnion Territories about such revocation. Equally, under Section 13(2),the prescribed agreement for sale, which is to be entered into betweenthe promoter and allottee, must clearly state the date on which possessionof the apartment, plot or building is to be handed over, the rates of interestpayable by the promoter to the allottee in the case of default and suchother particulars, as may be prescribed. We were then referred to the‘Andaman and Nicobar Islands Real Estate (Regulation andDevelopment) (General) Rules, 2016’ to give us flavour of what isactually prescribed by the Rules made by States and Union Territoriesunder RERA. Here, Rule 14 of these Rules speaks of details to bepublished on the website; and among other details, Rule 14(1)(d) statesthat the following details shall be uploaded by the promoter:

“14. Details to be published on the website.- (1) TheAuthority shall ensure the following information, as applicable,shall be made available on its website in respect of each projectregistered under the Act, namely –

xxx xxxxxx

DEF

A(d) the promoter shall upload the following updates on the webpagefor the project, within fifteen days from the expiry of eachquarter, namely:-

(i) list of number and types of apartments or plots, booked;

(ii) list of number of garages booked;

(iii) status of the project-

(A) Status of construction of each building with photographs;

(B) Status of construction of each floor with photographs;

(C) Status of construction of internal infrastructure andcommon areas with photographs.

(iv) status of approvals,-

(A) Approvals received;

(B) Approvals applied and expected date of receipt;

(C) Approvals to be applied and date planed for application;

(D) Modifications, amendment or revisions, if any, issued bythe competent authority with regard to any sanctionedplans, layout plans, specifications, license, permit orapproval for the project;”

Also, Rules 15 and 16 provide for interest payable by the promoterand timelines for refund as follows:

“15.Interest payable by promoter and allottee- The rate ofinterest payable by the promoter to the allottee or by the allotteeFto the promoter, as the case may be, shall be the State Bank ofIndia highest Marginal Cost of Lending Rate plus two per cent.

Provided that in case the State Bank of India Marginal Cost ofLending Rate is not in use it would be replaced by suchbenchmark lending rates which the State Bank of India may fixfrom time to time for lending to the general public.

16.Timelines for refund- Any refund of monies along with theapplicable interest and compensation, if any, payable by thepromoter in terms of the Act or the rules and regulations madethereunder, shall be payable by the promoter to the allottee within

forty-five days from the date on which such refund along withapplicable interest and compensation, as the case may be,become due.”

It can thus be seen that just as information utilities provide thekind of information as to default that banks and financial institutions areprovided under Sections 214 to 216 of the Code read with Regulations25 and 27 of the Insolvency and Bankruptcy Board of India (InformationUtilities) Regulations, 2017, allottees of real estate projects can comearmed with the same kind of information, this time provided by thepromoter or real estate developer itself, on the basis of which, primafacie at least, “default” relating to amounts due and payable to theallottee is made out in an application under Section 7 of the Code. Wemay mention here that once this prima facie case is made out, the burdenshifts on the promoter/real estate developer to point out in their replyand in the hearing before the NCLT, that the allottee is himself defaulterand would, therefore, on reading of the agreement and the applicableRERA Rules and Regulations, not be entitled to any relief includingpayment of compensation and/or refund, entailing dismissal of the saidapplication. At this stage also, it is important to point out, in answer tothe arguments made by the Petitioners, that under Section 65 of theCode, the real estate developer can also point out that the insolvencyresolution process under the Code has been invoked fraudulently, withmalicious intent, or for any purpose other than the resolution of insolvency.This the real estate developer may do by pointing out, for example, thatthe allottee who has knocked at the doors of the NCLT is speculativeinvestor and not person who is genuinely interested in purchasing aflat/apartment. They can also point out that in real estate market whichis falling, the allottee does not, in fact, want to go ahead with its obligationto take possession of the flat/apartment under RERA, but wants to jumpship and really get back, by way of this coercive measure, monies alreadypaid by it. Given the above, it is clear that it is very difficult to accede tothe Petitioners’ contention that wholly one-sided and futile hearing willtake place before the NCLT by trigger-happy allottees who would beable to ignite the process of removal of the management of the realestate project and/or lead the corporate debtor to its death.

51. At this juncture it is necessary to deal with the argument ofthe Petitioners that as the NCLT is given only 14 days in which toadjudicate on “default”, the NCLT cannot, in such summary proceeding,

Agive detailed findings based on arguments raised by the allottees whichare then countered with reference to large number of documents andcomplicated statutory provisions, and which entail detailed arguments,which are then put forward by real estate developers.

52. This Court, while dealing with timelines provided qua operationalBcreditors, in Surendra Trading Company(supra), held that the timelinescontained in the provisos to Section 7(5), Section 9(5) and Section 10(4)of the Code are all directory and not mandatory. This is for the obviousreason that no consequence is provided if the periods so mentioned areexceeded. Though this decision is not in the context of the 14-day periodprovided by Section 7(4), we are of the view that this judgment wouldCapply squarely on all fours so that the period of 14 days given to theNCLT for decision under Section 7(4) would be directory. We areconscious of the fact that under Section 64(1) of the Code, the NCLTPresident or the Chairperson of the NCLAT may, after taking into accountreasons by the NCLT or NCLAT for exceeding the period mentioned byDstatute, extend the period of 14 days by period not exceeding 10 days.We may note that even this provision is directory, in that no consequenceis provided either if the period is not extended, or after the extensionexpires. This is also for the good reason that an act of the court cannotharm the litigant before it. Unfortunately, both the NCLT and NCLAT

do not have sufficient members to deal with the flood of applications andEappeals that is before them. The time taken in the queue by applicantswho knock at their doors cannot, for no fault of theirs, be put againstthem. This Court, in State of Bihar v. Bihar Rajya Bhumi Vikas BankSamiti (2018) 9 SCC 472, has held in the context of Section 34(5) of theArbitration and Conciliation Act, 1996, that the absence of anyFconsequences for infraction of procedural provision implies that sucha provision must be interpreted as being directory and not mandatory.The Court held thus:

“19. It will thus be seen that Section 34(5) does not deal with thepower of the Court to condone the non-compliance thereof. It isGimperative to note that the provision is procedural, the objectbehind which is to dispose of applications under Section 34expeditiously. One must remember the wise observation containedin Kailash [Kailash v. Nanhku, (2005) 4 SCC 480] , where theobject of such provision is only to expedite the hearing and not

to scuttle the same. All rules of procedure are the handmaids ofjustice and if, in advancing the cause of justice, it is made clearthat such provision should be construed as directory, then so be it.

xxx xxxxxx

21. Section 80, though procedural provision, has been held to bemandatory as it is conceived in public interest, the public purposeunderlying it being the advancement of justice by giving theGovernment the opportunity to scrutinise and take immediateaction to settle just claim without driving the person who hasissued notice having to institute suit involving considerableexpenditure and delay. This is to be contrasted with Section 34(5),also procedural provision, the infraction of which leads to noconsequence. To construe such provision as being mandatorywould defeat the advancement of justice as it would provide theconsequence of dismissing an application filed without adheringto the requirements of Section 34(5), thereby scuttling theprocess of justice by burying the element of fairness.”

This argument must also therefore be rejected.

Challenge to Section 21(6A) and 25A of the Code

53. In the challenge to Section 21(6A) and Section 25A of theCode, it has been argued by learned counsel for the Petitioners that theallottees would fall in the following five categories and cannot be said,therefore, to be homogenous class. glance at the five categorieswould show, they argue, that they have, in fact, conflicting interests.These five categories are stated to be as follows:

a) “Those who have taken possession and have executed saledeeds, with or without further claims for delaycompensation;

b) Those who have taken possession but are yet to executesale deeds, with or without further claims for delaycompensation;

c) Those who are yet to receive possession and seekpossession, with or without delay compensation; or

BCD

Ad) Those who are yet to receive possession and seek to obtainrefunds of sale consideration with interest.

e) Each of the above may be without or without NCDRC/RERA orders/decrees.”

54. It has been argued that different instructions may be given byBdifferent allottees making it difficult for the authorised representativesto vote on the Committee of Creditors and that in any case, the collegialityof the secured creditors will be disturbed. To this the answer is that likeother financial creditors, be they banks and financial institutions, or otherindividuals, all persons who have advanced monies to the corporate debtorCshould have the right to be on the Committee of Creditors. True, allotteesare unsecured creditors, but they have vital interest in amounts thatare advanced for completion of the project, maybe to the extent of 100%of the project being funded by them alone. As has been correctly arguedby the learned Additional Solicitor General, under the proviso to Section21(8) of the Code if the corporate debtor has no financial creditors, thenDunder Regulation 16 of the Insolvency and Bankruptcy Board ofIndia(Insolvency Resolution Process for Corporate Persons)Regulations, 2016, up to 18 operational creditors then become theCommittee of Creditors or, if there are more than 18 operational creditors,the highest in order of debt owed to operational creditors to the extent ofEthe first 18 are then represented on the Committee of Creditors together,with representative of the workers. If allottees who have funded areal estate project of the corporate debtor to the extent of 100% areneither financial creditors nor operational creditors, the mechanism ofthe Committee of Creditors, who is now to take decisions after the Codeis triggered as to the future of the corporate debtor, will be non-existentFin case where there are no operational creditors and no securedcreditors, because 100% of the project is funded by the allottees. Evenotherwise, as correctly argued by the learned Additional Solicitor General,it would in fact be manifestly arbitrary to omit allottees from the Committeeof Creditors when they are vitally interested in the future of the corporateGdebtor as they have funded anywhere from 50% to 100% of the projectin most cases.

55. On this point, we were referred to the Insolvency andBankruptcy Code (Amendment) Bill, 2019, which has just passed through

the Parliament, to amend the provisions of the Code in various aspects.What is interesting is the insertion of Section 25A(3A) as follows:

“5. In section 25A of the principal Act, after sub-section (3), thefollowing sub-section shall be inserted, namely-

“(3A) Notwithstanding anything to the contrary contained insub-section (3), the authorised representative under sub-section(6A) of section 21 shall cast his vote on behalf of all the financialcreditors he represents in accordance with the decision taken bya vote of more than fifty per cent of the voting share of thefinancial creditors he represents, who have cast their vote:

Provided that for vote to be cast in respect of an applicationunder section 12A, the authorised representative shall cast hisvote in accordance with the provisions of sub-section (3).”

Given the fact that allottees may not be homogenous group, yetthere are only two ways in which they can vote on the Committeeof Creditors – either to approve or to disapprove of proposedresolution plan. Sub-section (3A) goes long way to ironing outany creases that may have been felt in the working of Section25A in that the authorised representative now casts his vote onbehalf of all financial creditors that he represents. If decisiontaken by vote of more than 50% of the voting share of thefinancial creditors that he represents is that particular plan beeither accepted or rejected, it is clear that the minority of thosewho vote, and all others, will now be bound by this decision. Ashas been stated by us in Swiss Ribbons (supra), the legislaturemust be given free play in the joints to experiment. Minor hiccupsthat may arise in implementation can always be sorted out later.Thus, any challenge to the machinery provisions contained inSections 21(6A) and 25A of the Code must be repelled.

The doctrine of ‘Reading Down’

56. Several counsel appearing on behalf of the Petitioners madealternative submissions stating that if the Constitutional validity of theimpugned provisions is to be upheld, then the amendment to the Codeneeds to be read-down so as to make it conform with Article 14 and19(1)(g) and 300-A. Different suggestions were given as to reading

Adown these provisions by different counsel. According to some of them,before an order admitting Section 7 application is made, all the financialcreditors of the corporate debtor could be called to the NCLT so that theNCLT can then ascertain their views. If the vast majority of them wereto state that they would prefer to remain outside the Code, then theSection 7 application filed by single allottee ought to be dismissed.BAnother learned counsel stated that there should be threshold limit bywhich at least 25% of the total number of allottees of the project shouldbe reached before they could trigger the Code. Other learned counselsuggested that at the stage of the Section 7 application, an inquiry bemade to see if the corporate debtor is otherwise well-managed and isCsolvent, in which case the Section 7 application ought to be dismissed.Shri Jayant Bhushan, learned Senior Advocate appearing on behalf ofsome of the Petitioners, also suggested that allottees ought not to beallowed to trigger the Code at all, but that if the Code is otherwisetriggered, they can be members of the Committee of Creditors to takedecisions that will be beneficial to them. It was also suggested that,Dbefore the Code is triggered by an allottee, there should be finding of“default” from the authorities under RERA. This is not unknown to law,and this Court has itself stated, in another context, that jurisdictionalfinding by the Telecom Regulatory Authority of India must first beobtained before the Competition Commission of India gives finding onEunfair competition in the telecom sector, and the case of CompetitionCommission of India v. Bharti Airtel Limited and Ors. (2019) 2SCC 521 was relied upon for this purpose. All these arguments werereally made based on the presumption that some allottees who may nowwant to back out of the transaction and get return of their moneyowing to factors which may be endemic to them, or owing to the factFthat the market may have slumped as result of which the investmentmade by them in the flat/apartment would fall flat requiring them to pullout of the transaction, would then be able to trigger the Code malafide,and reading down of these provisions would, therefore, obviate suchproblem. All these arguments have been refuted in detail earlier in thisGjudgment. In Section 7 application made by an allottee, the NCLT’s‘satisfaction’ will be with both eyes open – the NCLT will not turn aNelson’s eye to legitimate defences by real estate developer, as outlinedby us hereinabove. There is, therefore, no necessity to read into or readdown any of these provisions. Also, in Cellular Operators Association

of India v. TRAI (2016) 7 SCC 703, this Court held that when provisionis cast in definite and unambiguous language, it is not permissible eitherto mend or bend it, even if such recasting is in accord with good reasonand conscience. This Court said:

“50. But it was said that the aforesaid Regulation should be readdown to mean that it would apply only when the fault is that of theservice provider. We are afraid that such course is not open tous in law, for it is well settled that the doctrine of reading downwould apply only when general words used in statute orregulation can be confined in particular manner so as not toinfringe constitutional right. This was best exemplified in one ofthe earliest judgments dealing with the doctrine of reading down,namely, the judgment of the Federal Court in Hindu Women’sRights to Property Act, 1937, In re [Hindu Women’s Rights toProperty Act, 1937, In re, 1941 SCC OnLine FC 3 : AIR 1941FC 72] . In that judgment, the word “property” in Section 3 of theHindu Women’s Rights to Property Act was read down so as notto include agricultural land, which would be outside the CentralLegislature’s powers under the Government of India Act, 1935.This is done because it is presumed that the legislature did notintend to transgress constitutional limitations. While so readingdown the word “property”, the Federal Court held: (SCC OnLineFC)

“… If the restriction of the general words to purposes within thepower of the legislature would be to leave an Act with nothing ornext to nothing in it, or an Act different in kind, and not merelyin degree, from an Act in which the general words were giventhe wider meaning, then it is plain that the Act as whole must beheld invalid, because in such circumstances it is impossible to assertwith any confidence that the legislature intended the general wordswhich it has used to be construed only in the narrower sense:Owners of SS Kalibia v. Wilson [Owners of SS Kalibia v.Wilson, (1910) 11 CLR 689 (Aust)] , Vacuum Oil Co. Pty. Ltd. v.Queensland [Vacuum Oil Co. Pty. Ltd.v. Queensland, (1934)51 CLR 677 (Aust)] , R. v. Commonwealth Court ofConciliation and Arbitration, ex p Whybrow & Co.[R. v. Commonwealth Court of Conciliation and Arbitration,

ex p Whybrow & Co., (1910) 11 CLR 1 (Aust)] and BritishImperial Oil Co. Ltd. v. Federal Commr. of Taxation [BritishImperial Oil Co. Ltd. v. Federal Commr. of Taxation, (1925) 35CLR 422 (Aust)] .”

(emphasis in original)

51. This judgment was followed by Constitution Bench of thisCourt in DTC v. Mazdoor Congress [DTC v. MazdoorCongress, 1991 Supp (1) SCC 600 : 1991 SCC (L&S) 1213] . Inthat case, question arose as to whether particular regulationwhich conferred power on an authority to terminate the servicesof permanent and confirmed employee by issuing noticeterminating his services, or by making payment in lieu of suchnotice without assigning any reasons and without any opportunityof hearing to the employee, could be said to be violative of theappellants’ fundamental rights. Four of the learned Judges whoheard the case, the Chief Justice alone dissenting on this aspect,decided that the regulation cannot be read down, and must,therefore, be held to be unconstitutional. In the lead judgment onthis aspect by Sawant, J., this Court stated: (SCC pp. 728-29,para 255)“255. It is thus clear that the doctrine of reading down or ofrecasting the statute can be applied in limited situations. It isessentially used, firstly, for saving statute from being struck downon account of its unconstitutionality. It is an extension of theprinciple that when two interpretations are possible—one rendering it constitutional and the other making itunconstitutional, the former should be preferred. Theunconstitutionality may spring from either the incompetence ofthe legislature to enact the statute or from its violation of any ofthe provisions of the Constitution. The second situation whichsummons its aid is where the provisions of the statute are vagueand ambiguous and it is possible to gather the intentions of thelegislature from the object of the statute, the context in which theprovision occurs and the purpose for which it is made. However,when the provision is cast in definite and unambiguouslanguage and its intention is clear, it is not permissible eitherto mend or bend it even if such recasting is in accord withgood reason and conscience. In such circumstances, it is not

possible for the court to remake the statute. Its only duty is tostrike it down and leave it to the legislature if it so desires, toamend it. What is further, if the remaking of the statute by thecourts is to lead to its distortion that course is to be scrupulouslyavoided. One of the situations further where the doctrine cannever be called into play is where the statute requires extensiveadditions and deletions. Not only it is no part of the court’s duty toundertake such exercise, but it is beyond its jurisdiction to do so.”

(emphasis in original)

57. Given the fact that the Amendment Act has been held to beconstitutionally valid, and considering that its language is clear andunambiguous, it is not possible to accede to the contentions of thePetitioners to read down the clear provisions of the Amendment Act inthe manner suggested by them.

Interpretation of Section 5(8)(f) of the Code

58. Section 5(8)(f) of the Code has been set out in the beginningof this judgment. What has been argued by learned counsel on behalf ofthe Petitioners is that Section 5(8)(f), as it originally stood, is an exhaustiveprovision which must be read noscitur sociis, and if so read,sub-clause (f) must take colour from the other clauses of the provision,all of which show that the sine qua non of “financial debt” is loan ofmoney made with or without interest, which must then be returned asmoney. This, according to the learned counsel for the Petitioners, is clearfrom even cursory reading of Section 5(8). Secondly, according tolearned counsel for the Petitioners, by no stretch of imagination, couldan allottee under real estate project fall within Section 5(8)(f), as itoriginally stood and the explanation must then be read prospectively i.e.only on and from the date of the Amendment Act. Several sub-argumentswere made on the effect of deeming fictions generally and on the functionsof an explanation to Section. Let us address all of these arguments.

59. First and foremost, financial debt is defined as meaning a“debt”. “Debt” is defined by Section 3(11) of the Code as follows:

“3. Definitions.- In this Code, unless the context otherwiserequires, -xxx xxxxxx

[2019] 10 S.C.R.

(11) “debt” means liability or obligation in respect of claimwhich is due from any person and includes financial debt andoperational debt;

This definition in turn takes us to the definition of “claim” in Section3(6) and “default” in Section 3(12) of the Code which read as follows:

“(6) “claim” means-

(a) right to payment, whether or not such right is reduced tojudgment, fixed, disputed, undisputed, legal, equitable, secured orunsecured;

(b) right to remedy for breach of contract under any law for thetime being in force, if such breach gives rise to right to payment,whether or not such right is reduced to judgment, fixed, matured,unmatured, disputed, undisputed, secured or unsecured;

xxx xxxxxx

(12) “default” means non-payment of debt when whole or anypart of the instalment of the amount of debt has become due andpayable and is not paid by the debtor or the corporate debtor, asthe case may be;”

60. Thus, in order to be “debt”, there ought to be liability orobligation in respect of “claim” which is due from any person. “Claim”then means either right to payment or right to payment arising out ofbreach of contract, and this claim can be made whether or not such rightto payment is reduced to judgment. Then comes “default”, which in turnFrefers to non-payment of debt when whole or any part of the debt hasbecome due and payable and is not paid by the corporate debtor. Learnedcounsel for the Petitioners relied upon the judgment in Union of Indiav. Raman Iron Foundry (1974) 2 SCC 231, and, in particular reliedstrongly upon the sentence reading:

“11....Now the law is well settled that claim for unliquidateddamages does not give rise to debt until the liability isadjudicated and damages assessed by decree or order of courtor other adjudicatory authority.”

It is precisely to do away with judgments such as Raman IronFoundry(supra) that “claim” is defined to mean right to payment or aright to remedy for breach of contract whether or not such right is reducedto judgment. What is clear, therefore, is that debt is liability or obligationin respect of right to payment, even if it arises out of breach of contract,which is due from any person, notwithstanding that there is no adjudicationof the said breach, followed by judgment or decree or order. Theexpression “payment” is again an expression which is elastic enough toinclude “recompense”, and includes repayment. For this purpose, seeHimachal Pradesh Housing and Urban Development Authorityand Anr. v. Ranjit Singh Rana (2012) 4 SCC 505 (at paragraphs 13and 14 therein), where the Webster’s Comprehensive Dictionary(International Edn.) Vol. 2 and the Law Lexicon by P. Ramanatha Aiyar(2[nd]Edn., Reprint) are quoted.

61. The definition of “financial debt” in Section 5(8) then goes onto state that “debt” must be “disbursed” against the consideration fortime value of money.”Disbursement” is defined in Black’s Law Dictionary(10[th] ed.) to mean:

“1. The act of paying out money, commonly from fund or insettlement of debt or account payable. 2. The money so paid;an amount of money given for particular purpose.”

In the present context, it is clear that the expression “disburse”would refer to the payment of instalments by the allottee to the realestate developer for the particular purpose of funding the real estateproject in which the allottee is to be allotted flat/apartment. Theexpression “disbursed” refers to money which has been paid againstconsideration for the “time value of money”. In short, the “disbursal”must be money and must be against consideration for the “time value ofmoney”, meaning thereby, the fact that such money is now no longerwith the lender, but is with the borrower, who then utilises the money.Thus far, it is clear that an allottee “disburses” money in the form ofadvance payments made towards construction of the real estate project.We were shown the ‘Dictionary of Banking Terms’ (Second edition) byThomas P. Fitch in which “time value for money” was defined thus:

“present value: today’s value of payment or stream ofpayment amount due and payable at some specified future date,

510SUPREME COURT REPORTS

Adiscounted by compound interest rate of DISCOUNT RATE.Also called the time value of money. Today’s value of streamof cash flows is worth less than the sum of the cash flows to bereceived or saved over time. Present value accounting is widelyused in DISCOUNTED CASH FLOW analysis.”

BThat this is against consideration for the time value of money isalso clear as the money that is “disbursed” is no longer with the allottee,but, as has just been stated, is with the real estate developer who islegally obliged to give money’s equivalent back to the allottee, havingused it in the construction of the project, and being at discounted valueso far as the allottee is concerned (in the sense of the allottee having toCpay less by way of instalments than he would if he were to pay for theultimate price of the flat/apartment).

62. Shri Krishnan Venugopal took us to the ACT Borrower’s Guideto the LMA’s Investment Grade Agreements by Slaughter and May(Fifth Edition, 2017). In this book “financial indebtedness” is definedDthus:

“Definition of Financial Indebtedness (Investment GradeAgreements)

“Financial Indebtedness” means any indebtedness for or inrespect of:

(a) moneys borrowed;

(b) any amount raised by acceptance under any acceptance creditfacility or dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility orFthe issue of bonds, notes, debentures, loan stock or any similarinstrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which would, in accordance with GAAP,be treated as balance sheet liability [(other than any liabilityGin respect of lease or hire purchase contract which would, inaccordance with GAAP in force [ prior to 1 January 2019] /[prior to [ ]] /[ ] have been treated as an operating lease)];

(e) receivables sold or discounted (other than any receivables tothe extent they are sold on non -recourse basis);

(f) any amount raised under any other transaction (including anyforward sale or purchase agreement) of type not referred toin any other paragraph of this definition having the commercialeffect of borrowing;

(g) any derivative transaction entered into in connection withprotection against or benefit form fluctuation in any rate orprice (and, when calculating the value of any derivativetransaction, only the marked to market value (or, if any actualamount is due as result of the termination or close-out of thatderivative transaction, that amount) shall be taken into account);

(h) any counter-indemnity obligation in respect of guarantee,indemnity, bond, standby or documentary letter of credit orany other instrument issued by bank or financial institution;and

(i) the amount of any liability in respect of any guarantee orindemnity for any of the items referred to in paragraphs (a) to(h) above.”

63. When compared with Section 5(8), it is clear that Section 5(8)seems to owe its genesis to the definition of “financial indebtedness”that is contained for the purposes of Investment Grade Agreements.Shri Venugopal argued that even insofar as derivative transactions areconcerned, it is clear that money alone is given against consideration fortime value of money and transaction which is pure sale agreementbetween “borrowers” and “lender” cannot possibly be said to fit withinany of the categories mentioned in Section 5(8).He relied strongly onthe passage in Slaughter and May’s book which are extractedhereinbelow:

“Any amount raised having the “commercial effect of aborrowing”

wide range of transactions can be caught by paragraph (f),including for example forward purchases and sales of currency

Aand repo agreements. Conditional and credit sale arrangementscould also be covered here as could certain redeemable shares.

The precise scope of this limb can be uncertain. Ideally, from theBorrower’s perspective, if there are additional categories of debtwhich should be included in “Financial Indebtedness”, these shouldBbe described specifically and this catch- all paragraph, deleted. Afew strong Borrowers do achieve that position. Most, howeverare required to accept the “catch-all” and will therefore need toconsider which of their liabilities might be caught by it, and whetherspecific exclusions might be required.”

C64. What is clear from what Shri Venugopal has read to us is thata wide range of transactions are subsumed by paragraph (f) and that theprecise scope of paragraph (f) is uncertain. Equally, paragraph (f) seemsto be “catch all” provision which is really residuary in nature, andwhich would subsume within it transactions which do not, in fact, fallunder any of the other sub-clauses of Section 5(8).D

65. And now to the precise language of Section 5(8)(f). First andforemost, the sub-clause does appear to be residuary provision whichis “catch all” in nature. This is clear from the words “any amount” and“any other transaction” which means that amounts that are “raised”under “transactions” not covered by any of the other clauses, wouldEamount to financial debt if they had the commercial effect of aborrowing. The expression “transaction” is defined by Section 3(33) ofthe Code as follows:

(33) “transaction” includes an agreement or arrangement inwriting for the transfer of assets, or funds, goods or services,Ffrom or to the corporate debtor;

As correctly argued by the learned Additional Solicitor General,the expression “any other transaction” would include an arrangement inwriting for the transfer of funds to the corporate debtor and would thusclearly include the kind of financing arrangement by allottees to realGestate developers when they pay instalments at various stages ofconstruction, so that they themselves then fund the project either partiallyor completely.

66. Sub-clause (f) Section 5(8) thus read would subsume within itamounts raised under transactions which are not necessarily loan

transactions, so long as they have the commercial effect of borrowing.We were referred to Collins English Dictionary& Thesaurus (SecondEdition, 2000) for the meaning of the expression “borrow” and the meaningof the expression “commercial”. They are set out hereinbelow:

“borrow-vb 1.to obtain or receive (something, such as money)on loan for temporary use, intending to give it, or somethingequivalent back to the lender. 2. to adopt (ideas, words, etc.) fromanother source; appropriate. 3. Not standard. to lend. 4.(intr) Golf.To putt the ball uphill of the direct path to the hole: make sure youborrow enough.”

xxx xxxxxx

“commercial. -adj. 1. of or engaged in commerce. 2. sponsoredor paid for by an advertiser: commercial television. 3.having profitas the main aim: commercial music. 4. (of chemicals, etc.)unrefined and produced in bulk for use in industry.5. commercially sponsored advertisement on radio ortelevision.”

67. perusal of these definitions would show that even thoughthe Petitioners may be right in stating that “borrowing” is loan ofmoney for temporary use, they are not necessarily right in stating thatthe transaction must culminate in money being given back to the lender.The expression “borrow” is wide enough to include an advance given bythe home buyers to real estate developer for “temporary use” i.e. foruse in the construction project so long as it is intended by the agreementto give “something equivalent” to money back to the home buyers. The“something equivalent” in these matters is obviously the flat/apartment.Also of importance is the expression “commercial effect”. “Commercial”would generally involve transactions having profit as their main aim.Piecing the threads together, therefore, so long as an amount is “raised”under real estate agreement, which is done with profit as the main aim,such amount would be subsumed within Section 5(8)(f) as the saleagreement between developer and home buyer would have the“commercial effect” of borrowing, in that, money is paid in advancefor temporary use so that flat/apartment is given back to the lender.Both parties have “commercial” interests in the same – the real estatedeveloper seeking to make profit on the sale of the apartment, and theflat/apartment purchaser profiting by the sale of the apartment. Thus

Aconstrued, there can be no difficulty in stating that the amounts raisedfrom allottees under real estate projects would, in fact, be subsumedwithin Section 5(8)(f) even without adverting to the explanation introducedby the Amendment Act.

68. However, Dr. Singhvi strongly relied upon the report of theBBankruptcy Law Reforms Committee of November, 2015 and inparticular paragraph 3 of ‘Box 5.2 – Trigger for IRP’ which states thatfinancial creditors are persons where the liability to the debtor arisesfrom “solely” financial transaction. This Committee report, which ledto the enactment of the Code, is an important guide in understanding theprovisions of the Code. However, where the provisions of the Code, asCconstrued in the light of the objects of the Code, are clear, the fact thatfrom huge report one word is picked up to indicate that all financialcreditors must have debtors who owe money “solely” from financialtransactions cannot possibly have the effect of negating the plain languageof Section 5(8)(f) of the Code. In fact, what is important is that the

Dthreshold limit to trigger the Code is purposely kept low –at only onelakh rupees – making it clear that small individuals may also trigger theCode as financial creditors(as financial creditors include debenture holdersand bond holders), along with banks and financial institutions to whomcrores of money may be due.

E69. That this amendment is in fact clarificatory is also made clearby the Insolvency Committee Report, which expressly uses the word“clarify”, indicating that the Insolvency Law Committee also thoughtthat since there were differing judgments and doubts raised on whetherhome buyers would or would not be included within Section 5(8)(f), itwas best to set these doubts at rest by explicitly stating that they wouldFbe so covered by adding an explanation to Section 5(8)(f). Incidentally,the Insolvency Law Committee itself had no doubt that given the‘financing’ of the project by the allottees, they would fall within Section5(8)(f) of the Code as originally enacted.70. And now some of the other arguments on behalf of theGPetitioners need to be met. According to learned counsel for thePetitioners, the expression “means and includes” would indicate thatthat the definition section is exhaustive, and this being so, alien subjectmatter such as home buyers cannot be inserted therein. For thisproposition, they relied upon P. Kasilingam and Ors. v. P.S.G. College

of Technology and Ors. (1995) Supp (2) SCC 348 at paragraph 19where this Court held as under:

“19. We will first deal with the contention urged by Shri Raobased on the provisions of the Act and the Rules. It is no doubttrue that in view of clause (3) of Section 1 the Act applies to allprivate colleges. The expression ‘college’ is, however, notdefined in the Act. The expression “private college” is defined inclause (8) of Section 2 which can, in the absence of anyindication of contrary intention, cover all colleges includingprofessional and technical colleges. An indication about such anintention is, however, given in the Rules wherein the expression‘college’ has been defined in Rule 2(b) to mean and include Artsand Science College, Teachers’ Training College, PhysicalEducation College, Oriental College, School of Institute of SocialWork and Music College. While enumerating the various types ofcolleges in Rule 2(b) the rule-making authority has deliberatelyrefrained from including professional and technical colleges in thesaid definition. It has been urged that in Rule 2(b) the expression“means and includes” has been used which indicates that thedefinition is inclusive in nature and also covers categories whichare not expressly mentioned therein. We are unable to agree. Aparticular expression is often defined by the Legislature by usingthe word ‘means’ or the word ‘includes’. Sometimes the words‘means and includes’ are used. The use of the word ‘means’indicates that “definition is hard-and-fast definition, and no othermeaning can be assigned to the expression than is put down indefinition”. (See : Gough v. Gough [(1891) 2 QB 665 : 60 LJ QB726] ; Punjab Land Development and Reclamation Corpn.Ltd. v. Presiding Officer, Labour Court [(1990) 3 SCC 682, 717: 1991 SCC (L&S) 71] .) The word ‘includes’ when used,enlarges the meaning of the expression defined so as tocomprehend not only such things as they signify according to theirnatural import but also those things which the clause declares thatthey shall include. The words “means and includes”, on the otherhand, indicate “an exhaustive explanation of the meaning which,for the purposes of the Act, must invariably be attached to thesewords or expressions”. (See : Dilworth v. Commissioner ofStamps [1899 AC 99, 105-106 : (1895-9) All ER Rep Ext 1576]

A(Lord Watson); Mahalakshmi Oil Mills v. State of A.P. [(1989)1 SCC 164, 169 : 1989 SCC (Tax) 56] The use of the words“means and includes” in Rule 2(b) would, therefore, suggest thatthe definition of ‘college’ is intended to be exhaustive and notextensive and would cover only the educational institutions fallingin the categories specified in Rule 2(b) and other educationalBinstitutions are not comprehended. Insofar as engineering collegesare concerned, their exclusion may be for the reason that theopening and running of the private engineering colleges arecontrolled through the Board of Technical Education and Trainingand the Director of Technical Education in accordance with theCdirections issued by the AICTE from time to time. As noticedearlier the Grants-in-Aid Code contains provisions which, in manyrespects, cover the same field as is covered by the Act and theRules. The Director of Technical Education has been entrustedwith the functions of proper implementation of those provisions.There is nothing to show that the said arrangement was not workingDsatisfactorily so as to be replaced by the system sought to beintroduced by the Act and the Rules. Rule 2(d), on the other hand,gives an indication that there was no intention to disturb theexisting arrangement regarding private engineering collegesbecause in that rule the expression ‘Director’ is defined to meanEthe Director of Collegiate Education. The Director of TechnicalEducation is not included in the said definition indicating that theinstitutions which are under the control of Directorate of CollegeEducation only are to be covered by the Act and the Rules andtechnical educational institutions in the State of Tamil Nadu whichare controlled by the Director of Technical Education are not soFcovered.”

71. On the other hand, the learned Additional Solicitor Generalcountered this submission by reference to Krishi Utpadan Mandi Samitiv. Shankar Industries (1993) Supp (3) SCC 361 (2), where, atparagraphs 5 and 12, this Court held:

“5. Section 2(a) of the Act defines ‘agricultural produce’ and readsas under:

“2. (a) ‘agricultural produce’ means such items of produce ofagriculture, horticulture, viticulture, apiculture, sericulture,pisciculture, animal husbandry or forest as are specified in the

Schedule, and includes admixture of two or more of such items,and also includes any such item in processed form, and furtherincludes gur, rab, shakkar, khandsari and jaggery.”

xxxxxxxxx

12. We have considered the arguments advanced on behalf ofthe parties and have perused the record. perusal of thedefinition of agricultural produce under Section 2(a) of the Actshows that apart from items of produce of agriculture,horticulture, viticulture, piculture, sericulture, pisciculture, animalhusbandry or forest as are specified in the Schedule, thedefinition further ‘includes admixture of two or more such items’and thereafter it further ‘includes taking any such item in pro-cessed form’ and again for the third time the words used are ‘andfurther includes gur, rab, shakkar, khandsari and jaggery’. It is awell settled rule of interpretation that where the legislature usesthe words ‘means’ and ‘includes’ such definition is to be given awider meaning and is not exhaustive or restricted to the itemscontained or included in such definition. Thus the meaning of ‘ag-ricultural produce’ in the above definition is not restricted to anyproducts of agriculture as specified in the Schedule but also in-cludes such items which come into being in processed form andfurther includes such items which are called as gur, rab, shakkar,khandsari and jaggery.”72. This statement of the law, as can be seen from the quotationhereinabove, is without citation of any authority. In fact, in Jagir Singh& Ors. v. State of Bihar & Anr. (1976) 2 SCC 942 at paragraphs 11and 19 to 21 and Mahalakshmi Oil Mills v. State of Andhra Pradesh& Ors. (1989) 1 SCC 164, at paragraphs 8 and 11 (which has beencited in P. Kasilingam(supra)), this Court set out definition sectionswhere the expression “means” was followed by some words, after whichcame the expression “and includes” followed by other words, just as inthe Krishi Utpadan Mandi Samiti (supra) case. In two other recentjudgments, Bharat Coop. Bank (Mumbai) Ltd. v. Coop. BankEmployees Union (2007) 4 SCC 685, at paragraphs 12 and 23, andState of West Bengal and Ors. v. Associated Contractors (2015) 1SCC 32 at paragraph 14, this Court has held that wherever the expression“means” is followed by the expression “and includes” whether with orwithout additional words separating “means” from “includes”, these

518SUPREME COURT REPORTS

Aexpressions indicate that the definition provision is exhaustive as matterof statutory interpretation. It has also been held that the expression “andincludes” is an expression which extends the definition contained in wordswhich follow the expression “means”. From this discussion, two thingsfollow. Krishi Utpadan Mandi Samiti (supra) cannot be said to begood law insofar as its exposition on “means” and “includes” is concerned,Bas it ignores earlier precedents of larger and coordinate benches and isout of sync with later decisions on the same point. Equally, Dr. Singhvi’sargument that sub-clauses (a) to (i) of Section 5(8) of the Code must allnecessarily reflect the fact that financial debt can only be debt whichis disbursed against the consideration for the time value of money, andCwhich permeates clauses (a) to (i), cannot be accepted as matter ofstatutory interpretation, as the expression “and includes” speaks of subjectmatters which may not necessarily be reflected in the main part of thedefinition.

73. In any event, as was correctly argued by learned AdditionalDSolicitor General Mrs. Madhavi Divan, the legislature is not precludedby way of amendment from inserting words into what may even be anexhaustive definition. What is an exhaustive definition is exhaustive forpurposes of interpretation of statute by the Courts,which cannot bindthe legislature when it adds something to the statute by way of amendment.

On this score also, there is no substance in the aforesaid argument.E

74. It was then argued, relying on large number of judgmentsthat Section 5(8)(f) must be construed noscitur sociiswith sub-clauses(a) to (e) and (g) to (i), and so construed would only refer to loans orother financial transactions which would involve money at both ends.This, again, is not correct in view of the fact that Section 5(8)(f) isFclearly residuary “catch all” provision, taking within it matters whichare not subsumed within the other sub-clauses. Even otherwise, inController of Estate Duty v. Kantilal Trikamlal(1976) 4 SCC 643,this Court has held that when an expression is residuary one, ejusdemgeneris will not apply. It was thus held:G“21…We have also to stress the expression “other right” in theexplanation which is of the widest import and cannot beconstricted by reading it ejusdem generis with “debt”. “Otherright”, in the context, is expressly meant considerably to widenthe concept and therefore suggests somewhat contraryHintention to the application of the ejusdem generis rule. We may

derive instruction from Green’s construction of the identicalexpression in the English Act. [Section 45 (2)]. The learnedauthor writes:

“A disclaimer is an extinguishment of right for this purpose.Although in the event the person disclaiming never has any rightin the property, he has the right to obtain it, this inchoate right is a‘right’ for the purposes of Section 45(2). The ejusdem generisrule does not apply to the words ‘a debt or other right’ and theword ‘right’ is word of the widest import. Moreover, theexpression ‘at the expense of the deceased’ is used in an ordinaryand natural manner; and is apt to cover not only cases where theextinguishment involves loss to the deceased of benefit healready enjoyed, but also those where it prevents him fromacquiring the benefit.”

Also, in Subramanian Swamy v. Union of India (2016) 7 SCC221, this Court held:

“70. The other aspect that is being highlighted in the context ofArticle 19(2) is that defamation even if conceived of to include acriminal offence, it must have the potentiality to “incite to causean offence”. To elaborate, the submission is the words “incite tocause an offence” should be read to give attributes andcharacteristics of criminality to the word “defamation”. It musthave the potentiality to lead to breach of peace and public order.It has been urged that the intention of clause (2) of Article 19 is toinclude public law remedy in respect of grievance that has acollective impact but not as an actionable claim under thecommon law by an individual and, therefore, the word“defamation” has to be understood in that context, as theassociate words are “incitement to an offence” would sowarrant. Mr Rao, learned Senior Counsel, astutely canvassed thatunless the word “defamation” is understood in this mannerapplying the principle of noscitur sociis, the cherished andnatural right of freedom of speech and expression which has beenrecognised under Article 19(1)(a) would be absolutely at peril.Mr Narasimha, learned ASG would contend that the said rule ofconstruction would not be applicable to understand the meaningof the term “defamation”. Be it noted, while construing theprovision of Article 19(2), it is the duty of the Court to keep in

ABC

EFGH

view the exalted spirit, essential aspects, the value and philosophyof the Constitution. There is no doubt that the principle ofnoscitur sociis can be taken recourse to in order to understandand interpret the Constitution but while applying the principle, onehas to keep in mind the contours and scope of applicability of thesaid principle.

71. In State of Bombay v. Hospital Mazdoor Sabha [State ofBombay v. Hospital Mazdoor Sabha, AIR 1960 SC 610 : (1960)2 SCR 866] , it has been held that it must be borne in mind thatnoscitur sociis is merely rule of construction and it cannotprevail in cases where it is clear that wider words have beendeliberately used in order to make the scope of the defined wordcorrespondingly wider. It is only where the intention of thelegislature in associating wider words with words of narrowersignificance is doubtful, or otherwise not clear that the said rule ofconstruction can be usefully applied. It can also be applied wherethe meaning of the words of wider import is doubtful; but, wherethe object of the legislature in using wider words is clear and freeof ambiguity, the rule of construction in question cannot be pressedinto service.72. In Bank of India v. Vijay Transport [Bank of India v. VijayTransport, 1988 Supp SCC 47 : AIR 1988 SC 151] , the Courtwas dealing with the contention that literal interpretation is notalways the only interpretation of provision in statute and thecourt has to look at the setting in which the words are used andthe circumstances in which the law came to be passed to decidewhether there is something implicit behind the words actually usedwhich would control the literal meaning of the words used. Forthe said purpose, reliance was placed on R.L. Arora (2) v. Stateof U.P. [R.L. Arora (2) v. State of U.P., (1964) 6 SCR 784 : AIR1964 SC 1230] . Dealing with the said aspect, the Court hasobserved thus: (Vijay Transport case [Bank of India v. VijayTransport, 1988 Supp SCC 47 : AIR 1988 SC 151] , SCC p. 51,para 11)

“11. … It may be that in interpreting the words of the provision ofa statute, the setting in which such words are placed may betaken into consideration, but that does not mean that even thoughthe words which are to be interpreted convey clear meaning,

still different interpretation or meaning should be given to thembecause of the setting. In other words, while the setting of thewords may sometimes be necessary for the interpretation of thewords of the statute, but that has not been ruled by this Court tobe the only and the surest method of interpretation.”

73. The Constitution Bench, in Godfrey Phillips India Ltd. v.State of U.P. [Godfrey Phillips India Ltd. v. State of U.P., (2005)2 SCC 515] , while expressing its opinion on the aforesaid rule ofconstruction, opined: (SCC pp. 550 & 551, paras 81 & 83)

“81. We are aware that the maxim of noscitur sociis may be atreacherous one unless the “societas” to which the “socii”belong, are known. The risk may be present when there is noother factor except contiguity to suggest the “societas”. But wherethere is, as here, term of wide denotation which is not free fromambiguity, the addition of the words such as “including” issufficiently indicative of the societas. As we have said, the word“includes” in the present context indicates commonality or sharedfeatures or attributes of the including word with the included.

83. Hence on an application of general principles ofinterpretation, we would hold that the word “luxuries” in Entry 62of List II means the activity of enjoyment of or indulgence in thatwhich is costly or which is generally recognised as being beyondthe necessary requirements of an average member of societyand not articles of luxury.”

74. At this juncture, we may note that in Ahmedabad (P)Primary Teachers’ Assn. v. Administrative Officer [Ahmedabad(P) Primary Teachers’ Assn. v. Administrative Officer, (2004)1 SCC 755 : 2004 SCC (L&S) 306] , it has been stated thatnoscitur sociis is legitimate rule of construction to construethe words in an Act of Parliament with reference to the wordsfound in immediate connection with them. In this regard, we mayrefer to passage from Justice G.P. Singh, Principles ofStatutory Interpretation [(13th Edn., 2012) 509.] where thelearned author has referred to the lucid explanation given byGajendragadkar, J. We think it appropriate to reproduce thepassage:

“It is rule wider than the rule of ejusdem generis; rather thelatter rule is only an application of the former. The rule has beenlucidly explained by Gajendragadkar, J. in the following words:

‘This rule, according to Maxwell [ Maxwell, Interpretation ofStatutes (11th Edn., 1962) 321.] , means that when two or morewords which are susceptible of analogous meaning are coupledtogether, they are understood to be used in their cognate sense.They take as it were their colour from each other, that is, themore general is restricted to sense analogous to lessgeneral.’”

CThe learned author on further discussion has expressed the viewthat meaning of word is to be judged from the company it keepsi.e. reference to words found in immediate connection with them.It applies when two or more words are susceptible of analogousmeanings are coupled together, to be read and understood in theircognate sense. [Principles of Statutory Interpretation by G.P.DSingh (8th Edn.) 379.] Noscitur sociis is merely rule ofconstruction and cannot prevail where it is clear that wider anddiverse etymology is intentionally and deliberately used in theprovision. It is only when and where the intention of thelegislature in associating wider words with words of narrowestEsignificance is doubtful or otherwise not clear, that the rule ofnoscitur sociis is useful.”

75. It is clear from reading of these judgments that noscitur asociis being mere rule of construction cannot be applied in the presentcase as it is clear that wider words have been deliberately used in aresiduary provision, to make the scope of the definition of “financialdebt” subsume matters which are not found in the other sub-clauses ofSection 5(8).This contention must also, therefore, be rejected.

76. It remains to deal with arguments on the effect of deemingfiction. Under the explanation added to Section 5(8)(f), any amount raisedGfrom an allottee under real estate project shall be deemed to be anamount having the commercial effect of borrowing.

77. In every case in which deeming fiction is to be construed,the observations of Lord Asquith in concurring judgment in East End

Dwellings Co. Ltd. v. Finsbury Borough Council (1952) AppealCases 109 are cited. These observations read as follows:

“If you are bidden to treat an imaginary state of affairs as real,you must surely, unless prohibited from doing so, also imagine asreal the consequences and incidents which, if the putative state ofaffairs had in fact existed, must inevitably have flowed from oraccompanied it…. The statute says that you must imagine acertain state of affairs. It does not say that, having done so, youmust cause or permit your imagination to boggle when it comes tothe inevitable corollaries of that state of affairs.”

These observations have been followed time out of number bythe decisions of this Court.(See for example, M. Venugopal v.Divisional Manager, LIC (1994) 2 SCC 323 at page 329).

78. But then it was argued that, relying upon Commissioner ofIncome Tax, Bombay v. Bombay Trust Corporation AIR 1930 PC54 at 55, that the reason that deeming fiction is introduced is that thesubject matter of that fiction is not so in reality, which why Parliamentrequires such subject matter be treated as if it were real. To similareffect are the observations in K. Kamaraja Nadar v. Kunju Thevarand Ors. AIR 1958 SC 687 at paragraph 28, where this Court put itthus:

“The effect of such legal fiction, however, is that positionwhich otherwise would not obtain is deemed to obtain under thosecircumstances.”

79. It was also argued, relying upon Delhi Cloth & GeneralMills Co. Ltd. and Anr. v. State of Rajasthan and Ors. (1996) 2SCC 449, that deeming fiction can only be as to facts and cannot bethe deeming of legal position. It was further argued relying upon DaiichiSankyo Company Limited v. Jayaram Chigurupati and Ors. (2010)7 SCC 449, that deeming provision cannot be destructive of the mainprovision and cannot be construed as such.

80. closer look at Delhi Cloth & General Mills Co. Ltd.(supra) would show that the judgment in essence followed this Court’sjudgment in Shri Prithvi Cotton Mills Ltd. & Anr. v. BroachBorough Municipality & Ors. 1969(2) SCC 283, in that the validating

Astatute in question had not cured the defect that was pointed out. Thisbecomes clear on reading of paragraph 16 and 17 of the judgmentwhich read as follows:

“16. The Validating Act provides that, notwithstanding anythingcontained in Sections 4 to 7 of the 1959 Act or in any judgment,Bdecree, order or direction of any court, the villages of Raipuraand Ummedganj should be deemed always to have continued toexist and they continue to exist within the limits of the KotaMunicipality, to all intents and for all purposes. This provisionrequires the deeming of the legal position that the villages ofRaipura and Ummedganj fall within the limits of the Kota Munici-Cpality, not the deeming of facts from which this legal consequencewould flow. legal consequence cannot be deemed nor, there-from, can the events that should have preceded it. Facts may bedeemed and, therefrom, the legal consequences that follow.

17. Sections 4 to 7 remained on the statute book unamended whenDthe Validating Act was passed. Their provisions were mandatory.They had admittedly not been followed. The defect of notfollowing these mandatory provisions in the case of the villages ofRaipura and Ummedganj was not cured by the Validating Act.The curing of the defect was an essential requirement for theEpassing of valid validating statute, as held by the ConstitutionBench in the case of Prithvi Cotton Mills Ltd. [(1969) 2 SCC283 : (1970) 1 SCR 388] It must, therefore, be held that theValidating Act is bad in law and it must be struck down.”

81. It was in this context that it was stated that the fiction of aFlegal consequence cannot be deemed, whereas facts which precededsuch consequence can so be deemed. In the present case, the deemingprovision, as has been held by us, is only clarificatory of the true legalposition as it already obtained. The present case does not concern itselfwith validating statutes at all. The ratio of this judgment, therefore, wouldhave no application to this case.G

82. Equally, in Daiichi Sankyo Company Limited(supra), it wasfound that the deeming provision contained in sub-clause (2) of Regulation2(1)(e) of the Securities and Exchange Board of India (SubstantialAcquisition of Shares and Takeovers) Regulations, 1997 flew in the faceof the very idea of “persons acting in concert”, as result of which it

was held that deeming fiction cannot do away with the very conceptof “persons acting in concert” contained in the main provision. In thepresent case however, far from doing away with the concept of a“financial creditor”, we have already found that the deeming provision isonly clarificatory of the fact that allottees are to be considered as“financial creditors” for the reasons already given by us hereinabove.

83. Although deeming provision is to deem what is not there inreality, thereby requiring the subject matter to be treated as if it werereal, yet several authorities and judgments show that deeming fictioncan also be used to put beyond doubt particular construction that mightotherwise be uncertain. Thus, Stroud’s Judicial Dictionary of Words andPhrases (Seventh Edition, 2008), defines “deemed” as follows:

“Deemed”-, as used in statutory definitions “to extend thedenotation of the defined term to things it would not in ordinaryparlance denote, is often convenient device for reducing theverbiage or an enactment, but that does not mean that whereverit is used it has that effect; to deem means simply to judge orreach conclusion about something, and the words ‘deem’ and‘deemed’ when used in statute thus simply state the effect ormeaning which some matter or things has- the way in which it isto be adjudged ; this need not import artificiality or fiction; it maysimply be the statement of an indisputable conclusion.”

84. In Hindustan Cooperative Housing Building SocietyLimited v. Registrar, Cooperative Societies and Anr. (2009) 14SCC 302, this Court in dealing with legal fictions generally quoted alarge number of authorities thus at paragraph 17:

“17. “13. … It is, as noted above, deeming provision. Such aprovision creates legal fiction. As was stated by James, L.J. inLevy, Re, ex p Walton [(1881) 17 Ch 746 : (1881-85) All ERRep 548 (CA)] : (Ch p. 756)

‘… When statute enacts that something shall be deemed tohave been done, which in fact and truth was not done, the court isentitled and bound to ascertain for what purposes and betweenwhat persons the statutory fiction is to be resorted to.’

After ascertaining the purpose full effect must be given to thestatutory fiction and it should be carried to its logical conclusion

and to that end it would be proper and even necessary to assumeall those facts on which alone the fiction can operate. [Ed.: Thislatter sentence does not form part of what was observed by James,L.J. in ex p Walton, (1881) 17 Ch 746 : (1881-85) All ER Rep548 (CA) but is paraphrase of what was observed by theSupreme Court in State of Bombay v. Pandurang Vinayak, 1953SCR 773 at p. 778. See also Ali M.K. v. State of Kerala, (2003)11 SCC 632 : 2004 SCC (L&S) 136, SCC at p. 639, para 13.]

[See Hill v. East and West India Dock Co. [(1884) 9 AC 448(HL)] , State of Travancore-Cochin v. Shanmugha VilasCashewnut Factory [AIR 1953 SC 333] , American HomeProducts Corpn. v. Mac Laboratories (P) Ltd. [(1986) 1 SCC465] and ParayankandiyalEravathKanapravanKalliani Ammav. K. Devi [(1996) 4 SCC 76] .] In an oft quoted passage, LordAsquith stated:

‘If you are bidden to treat an imaginary state of affairs as real,you must surely, unless prohibited from doing so, also imagine asreal the consequences and incidents which, if the putative state ofaffairs had in fact, existed, must inevitably have flowed from oraccompanied it. … The statute [states] that you must imagine acertain state of affairs; it does not say that having done so, youmust cause or permit your imagination to boggle when it comes tothe inevitable corollaries of that state of affairs.’

(See East End Dwellings Co. Ltd. v. Finsbury BoroughCouncil [1952 AC 109 : (1951) 2 All ER 587 (HL)] at ACpp. 132-33.)

‘… The word “deemed” is used great deal in modernlegislation. Sometimes it is used to impose for the purposes of astatute an artificial construction of word or phrase that wouldnot otherwise prevail. Sometimes it is used to put beyond doubt aparticular construction that might otherwise be uncertain.Sometimes it is used to give comprehensive description thatincludes what is obvious, what is uncertain and what is, in theordinary sense, impossible.’

[Per Lord Radcliffe in St. Aubyn v. Attorney General (No. 2)[1952 AC 15 : (1951) 2 All ER 473 (HL)] , AC p. 53.]

14. ‘Deemed’, as used in statutory definitions [is meant]

‘to extend the denotation of the defined term to things it would notin ordinary parlance denote, is often convenient devise forreducing the verbiage of an enactment, but that does not meanthat wherever it is used it has that effect; to deem means simplyto judge or reach conclusion about something, and the words“deem” and “deemed” when used in statute thus simply statethe effect or meaning which some matter or thing has — the wayin which it is to be adjudged; this need not import artificiality orfiction; it may simply be the statement of an undisputableconclusion.’ (Per Windener, J. in Hunter Douglas Australia Pty.v. Perma Blinds [(1970) 44 Aust LJ R 257] .)

15. When thing is to be ‘deemed’ something else, it is to betreated as that something else with the attendant consequences,but it is not that something else (per Cave, J., in R. v. NorfolkCounty Court [(1891) 60 LJ QB 379] ).

‘When statute gives definition and then adds that certain thingsshall be “deemed” to be covered by the definition, it matters notwhether without that addition the definition would have coveredthem or not.’(Per Lord President Cooper in Ferguson v.McMillan [1954 SLT 109] .)

16. Whether the word ‘deemed’ when used in statuteestablished conclusive or rebuttable presumption dependedupon the context (see St. Leon Village Consolidated SchoolDistt. v. Ronceray [(1960) 23 DLR (2d) 32] ).

‘…. I … regard its primary function as to bring in somethingwhich would otherwise be excluded.’(Per Viscount Simonds inBarclays Bank v. IRC [1961 AC 509 : (1960) 3 WLR 280 : (1960)2 All ER 817 (HL)] at AC p. 523.)

‘Deems’ means ‘is of opinion’ or ‘considers’ or ‘decides’ andthere is no implication of steps to be taken before the opinion isformed or the decision is taken.[See R. v. Brixton Prison(Governor), ex p Soblen [(1963) 2 QB 243 : (1962) 3 WLR1154 : (1962) 3 All ER 641 (CA)] at QB p. 315.]” [Ed.: Asobserved in Ali M.K. v. State of Kerala, (2003) 11 SCC 632 :2004 SCC (L&S) 136, SCC at pp. 639-40, paras 13-16.]”

AIn the present case, it is clear that the deeming fiction that is usedby the explanation is to put beyond doubt the fact that allottees are to beregarded as financial creditors within the enacting part contained inSection 5(8)(f) of the Code.

85. It was also argued that an explanation does not enlarge theBscope of the original section and for this purpose S. Sundaram Pillai(supra) was relied upon. This very judgment recognises, in paragraph46, that an explanation does not ordinarily enlarge the scope of the originalSection. But if it does, effect must be given to the legislative intentnotwithstanding the fact that the legislature has named provision as anexplanation. [See Hiralal Ratanlal Etc. v. State of U.P and Anr. Etc.C(1973) 1 SCC 216 at 225, followed in paragraph 51 of Sundram Pillai(supra)]. In any case, it has been found by us that the explanation wasadded by the Amendment Act only to clarify doubts that had arisen as towhether homebuyers/allottees were subsumed within Section 5(8)(f).Theexplanation added to Section 5(8)(f) of the Code by the Amendment ActDdoes not in fact enlarge the scope of the original Section as homebuyers/allottees would be subsumed within Section 5(8)(f) as it originally stoodas has been held by us hereinabove. As matter of statutoryinterpretation, that interpretation, which accords with the objects of thestatute in question, particularly when we are dealing with beneficiallegislation, is always the better interpretation or the “creativeEinterpretation” which is the modern trend of authority, and which isreflected in the concurring judgment of Eera (through Dr. ManjulaKrippendorf) v. State (NCT of Delhi) and Anr. (2017) 15 SCC 133at paragraphs 122 and 127.This argument must, therefore, also berejected.F86. We, therefore, hold that allottees/home buyers were includedin the main provision, i.e. Section 5(8)(f) with effect from the inceptionof the Code, the explanation being added in 2018 merely to clarify doubtsthat had arisen.

ConclusionG

i. The Amendment Act to the Code does not infringe Articles 14,19(1)(g) read with Article 19(6), or 300-A of the Constitutionof India.

ii. The RERA is to be read harmoniously with the Code, asamended by the Amendment Act. It is only in the event ofH

conflict that the Code will prevail over the RERA. Remediesthat are given to allottees of flats/apartments are thereforeconcurrent remedies, such allottees of flats/apartments beingin position to avail of remedies under the ConsumerProtection Act, 1986, RERA as well as the triggering of theCode.

iii Section 5(8)(f) as it originally appeared in the Code being aresiduary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fictionadded by the Amendment Act is only clarificatory of thisposition in law.

Postscript

87. We have been informed that most of the States and UnionTerritories have established/appointed adjudicating officers, the RealEstate RegulatoryAuthority, as well as the Appellate Tribunal as underthe RERA. Yet, despite the fact that 1[st] May, 2017 has long gone, somerecalcitrant States and Union Territories have yet to do the needful. Wedirect that in those States in which the needful has not been done, in that,only interim or no adjudicating officer/Real Estate Regulatory Authorityand/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers,a Real Estate Regulatory Authority and Appellate Tribunal within periodof three months from the date of this judgment. Copies of this judgmentbe sent to the Chief Secretaries of all the States and Union Territoriesimmediately. To be placed for compliance by affidavits filed by the ChiefSecretaries of these States and Union Territories within 3 months asaforesaid. Post these matters in the second week of January, 2020.

88. Given the declaration of the constitutional validity of theAmendment Act, it is absolutely necessary that the NCLT and theNCLAT are manned with sufficient members to deal with litigation thatmay arise under the Code generally, and from the real estate sector inparticular. For this purpose, an affidavit be filed by the Union of Indiawithin three months from today as to the steps taken in this behalf. Copyof this judgment be sent to the Ministry of Law and Justice, Governmentof India immediately. To come up with the compliance report by Statesand Union Territories as aforesaid in the second week of January, 2020.

[2019] 10 S.C.R.

A89. All writ petitions and the civil appeal are disposed of in thelight of this judgment. Stay orders granted by this Court to continue untilthe NCLT takes up each application filed by an allottee/ home buyer todecide the same in light of this judgment. No order as to costs.

BNidhi Jain

Matters disposed of.