TREATMENT OF ALLOTTEES AS FINANCIAL CREDITORS UNDER IBC: SUPREME COURT’S LANDMARK RULING IN VISHAL CHELANI V. NANDA

Introduction

The Supreme Court of India delivered a pivotal judgment on October 6, 2023, in the case of Vishal Chelani And Others (s) v. Debashis Nanda (s) (2023 INSC 913). This case addresses the classification and treatment of home buyer allottees under the Insolvency and Bankruptcy Code, 2016 (IBC), particularly in the context of remedies sought under the Real Estate (Regulation and Development) Act, 2016 (RERA). The appellants, comprising home buyers of Bulland Buildtech Pvt. Ltd., contested the differential treatment they received in the company's resolution plan, leading to a broader legal discourse on creditor classification and equality before the law.

Summary of the Judgment

The appellants challenged the National Company Law Appellate Tribunal's (NCLAT) decision, which upheld the Resolution Professional’s (R.P.) stance to treat beneficiaries of a Uttar Pradesh RERA decree differently from other home buyers in the resolution plan under IBC. The Supreme Court meticulously examined whether such differentiation was permissible under the IBC and the Constitution of India.

Ultimately, the Supreme Court set aside the NCLAT's order, ruling that allottees of real estate projects, irrespective of whether they sought remedies under RERA, are to be treated uniformly as financial creditors under Section 5(8)(f) of the IBC. The judgment emphasized that any distinction based on the invocation of RERA remedies constitutes "hyper-classification" and violates the constitutional guarantee of equality under Article 14.

Analysis

Precedents Cited

The Supreme Court heavily relied on the decision of the Mumbai Bench of the National Company Law Tribunal in Mr. Natwar Agrawal (HUF) v. Ms. Ssakash Developers & Builders Pvt. Ltd. (CP(IB) No. 21/MB-IV/2023). This precedent established that allottees holding decrees from RERA are categorized as financial creditors under the IBC. The Court underscored that the nature of the underlying claim and the definition provided in Section 5(8)(f) of the IBC necessitate treating all such allottees uniformly, without allowing distinctions based on their pursuit of RERA remedies.

Legal Reasoning

The core of the Court's reasoning hinged on the legislative intent and the statutory definitions under the IBC. Section 5(8)(f) of the IBC, especially after the 2018 amendment, explicitly includes "any amount raised from an allottee under a real estate project" as financial debt. The Court interpreted this provision to mean that all allottees qualify as financial creditors, regardless of whether they sought redressal through RERA.

The Resolution Professional's contention that appellants relinquished their rights under Section 18 of the RERA Act was dismissed. The Court clarified that engaging with RERA does not alter the fundamental status of allottees as financial creditors. Furthermore, the Court invoked Article 226 of the Constitution, emphasizing that any differential treatment must stand high scrutiny to ensure it does not infringe upon the right to equality.

Additionally, the non obstante clause in Section 238 of the IBC was pivotal. It ensures that the provisions of the IBC override any other conflicting legislative provisions, including RERA. This hierarchical supremacy reinforced the Court's stance that IBC's definitions and provisions take precedence in insolvency proceedings.

Impact

This landmark judgment has far-reaching implications for the real estate sector and insolvency proceedings in India:

• Uniform Treatment of Allottees: All real estate allottees are now unequivocally recognized as financial creditors under the IBC, ensuring equal treatment in insolvency resolution processes.
• Elimination of 'Hyper-Classification': The judgment curtails the Resolution Professionals' ability to create sub-classes among creditors based on their engagement with RERA remedies, promoting fairness and simplicity in resolution plans.
• Legislative Clarity: By reinforcing the IBC's supremacy over RERA in insolvency contexts, the judgment provides clear guidance to stakeholders in future cases.
• Enhanced Rights for Home Buyers: Home buyers gain enhanced protection against preferential treatment in insolvency scenarios, safeguarding their financial interests.

Complex Concepts Simplified

Financial Creditor and Financial Debt

Financial Creditor: An individual or entity to whom a financial debt is owed. This includes anyone who has a claim to receive money, including through legal assignments or transfers.

Financial Debt: Money owed along with interest, typically arising from borrowings or financial instruments like loans, bonds, or other similar arrangements. Under Section 5(8)(f) of the IBC, amounts raised from real estate allottees are explicitly categorized as financial debts.

Hyper-Classification

Hyper-Classification: An excessive or unwarranted categorization of creditors, creating unnecessary sub-classes that can complicate the resolution process and potentially undermine the principle of equality among creditors.

Article 14 of the Constitution

Article 14: Guarantees equality before the law and equal protection of the laws within the territory of India. It prohibits discrimination on various grounds and mandates that laws apply uniformly without arbitrary differentiation.

Conclusion