Supreme Court of India upholds the constitutional validity of the amendment to the IBC which deems allottees as financial creditors
By INSOL India Editorial Board Posted On : September 18, 2019
The Supreme Court of India (“SC”) in the case of Pioneer Urban Land and Infrastructure Limited and Anr. vs. Union of India and Ors upheld the constitutional validity of the Insolvency and Bankruptcy (Second Amendment) Act, 2018 (“Amendment Act”) and confirmed that it does not infringe Articles 14, 19(1)(g) read with Article 19(6) and Article 300-A of the Constitution. The Amendment Act granted the status of financial creditors to allottees.
The constitutional validity of the Amendment Act was challenged on the following grounds:
(a) the provisions of the Amendment Act were discriminatory as it treated equals unequally and unequals equally, having no intelligible differentia for such classification; and
(b) the Amendment Act was not necessary since the Real Estate (Regulation and Development) Act, 2016 (“RERA”) is specific legislation which exists for regulation of the real estate sector and adjudication of disputes in this sector.
In relation to the first ground of challenge, the main argument was that allottees are more akin to operational creditors than financial creditors. In this regard, the SC held that allottees ought to be treated as financial creditors, and not as operational creditors since operational creditors has no interest or stake in the corporate debtor, unlike the case of an allottee who is vitally concerned with the financial health of the corporate debtor.
Further, in relation to second ground of challenge, the SC also observed that the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) should be read in harmonious construction with the provisions of the RERA which is a special enactment and not exclusive. In the event of a conflict between the two, the SC held that provisions of IBC should prevail over RERA.