Case: CHITRA SHARMA Vs. UNION OF INDIA

3. IDBI Bank Limited instituted a petition Under Section 7 of the Insolvency and Bankruptcy Codebefore the National Company Lawat its Bench at Allahabad. The bank sought the initiation of a Corporate Insolvency Resolution Process6 against JIL. JIL filed its objections opposing admission of the petition. However, according to the Petitioners, JIL withdrew its objections and furnished its consent for a resolution plan under the provisions of the IBC. IDBI Bank claimed that JIL had committed a default of Rs. 526.11 crores in the repayment of its dues. On 9 August 2017, NCLT initiated the CIRP in respect of JIL. An order of moratorium was issued Under Section 14 by which the institution of suits and the continuation of pending proceedings, including execution proceedings was prohibited. An Interim Resolutionwas appointed under the provisions of the IBC. On 14 August 2017, JIL, in pursuance of the order of NCLT called for submissions of claims by creditors: financial creditors inoperational creditors inworkmen and employees inand other creditors inOn 16 August 2017, the Insolvency and Bankruptcy Board of India made an amendment to its Regulations and Regulation 9(a) was inserted to include claims by other creditors. On 18 August 2017, the Board released a press note clarifying that home buyers could fill inas they could not be treated at par with financial and operational creditors.These proceedings were instituted for the followingA declaration that Sections 6, 7, 10, 14 and 53 of the Code are ultra vires in so far as only financial or operational creditors are recognized, disregarding other stakeholders such as the homeThe order dated 9 August 2017 of the NCLT be setThe Union of India be directed to notify Under Section 14(3) that the provisions for moratorium contained Under Section 14(1)(a) shall not apply to consumers and that the home buyers be allowed to exercise the rights available to them under the Consumer Protection Act 1986 and the Real Estate (Regulation and Development) ActA forensic audit of JIL and JAL be conducted for the period from 2009 to 2017;A direction be issued to the Union of India to protect the interests of home buyers in the larger public interest.As the above narration indicates, the grievance with which this Court was moved Under Article 32 was that the CIRP ignores the interests of vital stakeholders in building projects, chief among whom are individuals who have invested their wealth in pursuit of the human desire to own a home. The IBC, in the submission of the Petitioners, recognized only three categories or classes namely (i) corporate debtors; (ii) financial creditors and (iii) operational creditors. Not being protected by the IBC, the Petitioners contended that the rights conferred upon them by special enactments including the Consumer Protection Act 1986 and by RERA could not be divested. Suspension of the right to seek redressal before an adjudicatory forum Under Section 14(1)(a) would, it was asserted, leave the home buyers without a remedy. Section 238 of the IBC gives it an overriding effect over other laws in existence.The petition before this Court has grown in size to incorporate as many as 646 persons who claim to be home buyers. Arrayed before the Court as Respondents to these proceedings, besides JIL, JAL and the Union of India are statutory authorities (including the Reserve Bank of India), banks and welfare associations representing home buyers. A large number of intervention applications have been filed.The home buyers invested in residential projectstownships as they were described) proposed by JIL and JAL in the National Capital Region. The townships were to be ready for possession within thirty tomonths of the booking by a prospective buyer. Relying on the representations of the developers, individual purchasers invested in the residential projects. A large number of them have obtained loans from financial institutions. As a result of the delay in handing over possession, numerous flat buyers filed consumer complaints before the State and National Consumer Disputes Redressal Commissions. In June 2017, RBI is stated to have published a list of the top 12 defaulters in the country including JIL which was declared to be in default of an amount approximately of Rs. 8,000 crores to its lenders.This Court was moved in the exercise of its jurisdiction Under Article 32 to protect the interests of home buyers, who had been left in the lurch. When the petition was instituted, they had no locus in the CIRP. Liquidation would leave the home buyers to face an uncertain future. The disposal of assets would, it is apprehended, deprive them of their right to own a home. Faced with a situation of human distress, occasioned by the failure of the developers to meet their contractual obligations and a legal regime as it then stood under the IBC which provided no solace to home buyers, this Court issued notice on 4 September 2017 in a batch of writ petitions. Proceedings before the NCLT at Allahabad were directed to remain stayed until further orders. The Court further directed that a copy of the proceedings be served on the office of the learned Attorney General for India. Applications for impleadment and intervention were allowed.On 11 September 2017, IDBI Bank Limited file an application for vacating theorder dated 4 September 2017. The Attorney General submitted before this Court that the order of stay would result in a consequence which was unintended: control of JIL would be restored to the erstwhile management. Such a consequence would affect the rights of creditors and of the consumers as well. In the meantime, as a result of thestay, the IRP had handed over records to JIL. Counsel for the home buyers contended that if the order of stay was being modified to enable the IRP to take back control, it was necessary to have their representative on the Committee ofThe regime of the Act did not at that stage include any representation for the home buyers on the CoC.Accordingly, on 11 September 2017, this Court modified its earlier order dated 4 September 2017 in the followingThe IRP shall forthwith take over the Management of JIL. The IRP shall formulate and submit an Interim Resolution Plan within 45 days before this Court. The Interim Resolution Plan shall make all necessary provisions to protect the interests of the homeMr. Shekhar Naphade, learned senior Counsel along with Ms. Shubhangi Tuli,shall participate in the meetings of the Committee of Creditors Under Section 21 of the Insolvency and Bankruptcy Code, 2016 to espouse the cause of the home buyers and protect theirThe Managing Director and the Directors of JIL and JAL shall not leave India without the prior permission of thisJAL which is not a party to the insolvency proceedings, shall deposit a sum of Rs. 2,000 crores (Rupees two thousand crores) before this Court on or before 27.10.2017. For the said purpose, if any assets or property of JAL have to be sold, that should be done after obtaining prior approval of this Court. Any person who was a Director or Managing Director of JIL or JAL on the date of the institution of the insolvency proceedings against JIL as well as the present Directors/Managing Director shall also not leave the country without prior permission of this Court. The foregoing restraint shall not apply to nominee Directors of lending institutionsAll suits and proceeding instituted against JIL shall in terms of Section 14(1)(a) remain stayed as we have directed the IRP to remain in Management. Be it clarified that we have passed this order keeping in view the provisions of the Act and also the interest of the home buyers.The above interim directions indicate that three significant aspects were the foundation of thefollowing the discipline of the IBC, the IRP was permitted to take over management of JIL and to proceed to formulate an interim resolution plan within a stipulatedthe IRP was directed to ensure that necessary provisions were made to protect the interests of home buyers. To facilitate the views of the home buyers being placed before the CoC this Court nominated a Senior Counsel practicing before this Court to participate in those meetings Under Section 21 of theJAL as the holding company of JIL was directed to deposit a sum of Rs. 2,000 crores on or before 27 Octoberformulating these directions, the Court initiated steps to protect the interests of the home buyers. At that stage, it must be noted, the CoC as constituted Under Section 21 of the IBC did not include a representative of the home buyers. Nor were the home buyers regarded as financial creditors under the IBC. The mechanism evolved by the Court was intended to provide a workable arrangement under the then prevailing regime so that the interests of the home buyers would not be ignored.By an order dated 23 October 2017 leave was granted to the IRP to file an action plan and an information memorandum in a sealed cover before this Court.JAL moved an application before this Court for vacating the direction for deposit of Rs. 2,000 crores or for a modification that would enable JAL to transfer its rights under a concession agreement in respect of the Yamuna Expressway (between NOIDA and Agra. This request was seriously opposed by the Attorney General as well as by counsel appearing on behalf of IDBI Bank and the Yamuna Expressway Industrial Development Authority. Counsel for the IRP drew the attention of the Court to the fact that the rights under the concession agreement belong to JIL which was subject to proceedings under the IBC as a result of which such a request for alienation could not be permitted. By its order dated 25 October 2017, this Court declined to modify the direction for deposit of an amount of Rs. 2,000 crores. However, time to do so was extended until 5 November 2017.On 30 November 2017 this Court directed that the home buyers may approach the amicusappointed in the case. The amicus curiae was to open a web portal on which details of the home buyers would be uploaded. All directors were required to remain present in this Court on the next date to disclose their personal assets on affidavit. The directors were present before this Court on 22 November 2017 when a statement was made on behalf of JAL of its readiness to deposit a sum of Rs. 275 crores. By its order dated 22 November 2017 this Court permitted JAL to deposit a demand draft of Rs. 275 crores during the course of the day and directed that a further sum of Rs. 150 crores be deposited by 13 December 2017 and of Rs. 125 crores by 31 December 2017. A restraint was imposed on the alienation of the properties and assets of the directors and their families. The earlier direction for the deposit of Rs. 2,000 crores was maintained. In pursuance of the order dated 22 November 2017 an amount of Rs. 150 crores was deposited, as noticed in the order dated 15 December 2017.On 10 January 2018 RBI moved an Interlocutory Application before this Court seeking leave to move the NCLT against JAL under the provisions of the IBC. While observing that the application filed by the RBI would be considered at a later stage, this Court issued directions to JAL to file details of its housing projects on affidavit. The amicus curiae was permitted to open a separate web portal reflecting the details of the home buyers of JAL.When the proceedings were listed before this Court on 21 March 2018, JAL stated through its counsel that an amount of Rs. 550 crores had been deposited with the Registry. Counsel for JAL stated that only 8% of the home buyers are interested in seeking a refund while others have expressed the desire to seek possession of their flats. The Court indicated in its order that presently it was concerned with those home buyers who sought a refund while the grievances of those who wished to have possession of their flats would be considered at a subsequent stage. Since the order for the deposit of Rs. 2,000 crores had not been complied with despite the end of the deadline under the previous directions, the Court issued further directions. As agreed by the Managing Director of JAL, an instalment of Rs. 100 crores was to be deposited by 15 April 2018 while a second instalment in the like amount was directed to be deposited by 10 May 2018. The amicus curiae informed the Court that information gathered from the web portal indicated that an amount of Rs. 1300 crores was required to be refunded by way of principal alone to the home buyers who were seeking refunds. The amicus curiae was requested to submit achart to the Court, indicating the number of persons and the stage of completion. One of the grievances of the home buyers was that the developer was making demands towards monthly instalments despite being unable to complete construction. Consequently, a direction was issued restraining the developer from raising demands towards outstanding or future instalments in respect of those flat buyers who had expressed a desire to obtain refunds. By the order of this Court, the IRP was permitted to finalise the resolution plan. However, the plan would, this Court directed, be implemented only with its leave. The NCLT was permitted to decide the proceedings subject to the directions which were issued.On 16 April 2018, the Court was apprised of the fact that JAL had deposited the first instalment of Rs. 100 crores. We may note at this stage, that JAL had submitted before the Court that it should be permitted to participate as one of the intending bidders in the resolution plan which was being formulated by the IRP. Dealing with the submission, this Court allowed JAL to submit a representation to the competent authority, though with the clarification that the Court had not expressed any opinion on that issue. This Court also directed that if the amount as directed was not deposited within the time specified, steps would be taken to attach the personal properties of the directors.On 16 May 2018, the Court was apprised of the fact that an amount of Rs. 750 crores was deposited by JAL. A further direction was issued for the deposit of Rs. 1000 crores by 15 June 2018 subject to which, a stay was granted of further proceedings only in so far as the liquidation is concerned.

Reasoning: 30. Having carefully considered the proposal submitted on behalf of JAL by Mr. FS Nariman, learned senior Counsel we are not inclined to accept it. As we shall explain, accepting the proposal submitted on behalf of JAL would cause serious prejudice to the discipline of the IBC and would set at naught the salutary provisions of the statute.Parliament has introduced Section 29 A into the IBC with a specific purpose. The provisions of Section 29 A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process. The Statement of Objects and Reasons appended to the Insolvency and Bankruptcy Code (Amendment) Bill 2017, which was ultimately enacted as Act 8 of 2018, statesThe provisions for insolvency resolution and liquidation of a corporate person in the Code did not restrict or bar any person from submitting a resolution plan or participating in the acquisition process of the assets of a company at the time of liquidation. Concerns have been raised that persons who, with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process, and gain or regain control of the corporate debtor. This may undermine the processes laid down in the Code as the unscrupulous person would be seen to be rewarded at the expense of creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such a provision, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and becomet was evidently concerned over the fact that persons whose misconduct has contributed to defaults on the part of bidder companies misuse the absence of a bar on their participation in the resolution process to gain an entry. Parliament was of the view that to allow such persons to participate in the resolution process would undermine the salutary object and purpose of the Act. It was in this background that Section 29 A has now specified a list of persons who are not eligible to be resolution applicants.Clauses (c) and (g) of Section 29 A would operate as a bar to the promoters of JAL/JIL participating in the resolution process. Under Clause (c), a person who at the time of the submission of the resolution plan has an account which has been classified aAsset under the guidelines of the RBI or of a financial regulator is subject to a bar on participation for a stipulated period. Under Clause (g), a person who has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and in respect of which an order has been made by the adjudicating authority under the IBC is prohibited from participating. The Court must bear in mind that Section 29 A has been enacted in the larger public interest and to facilitate effective corporate governance. Parliament rectified a loophole in the Act which allowed aentry to erstwhile managements in the CIRP.In considering the rival submissions, several important facets of the case need to be underscored. First and foremost, the CIRP was initiated on 9 August 2017, following the order of the NCLT admitting the proceedings. The period of 180 days for concluding the CIRP come to an end on 6 February 2018 and the extended period ended on 12 May 2018. When the CIRP was initiated and until the period of 270 days concluded, the home buyers did not have the status of financial creditors under the provisions of the IBC. They had no statutory voting rights in the CoC. Under the interim directions of this Court, a workable arrangement was sought to be put into place by appointing a representative of the home buyers on the CoC to facilitate their interests being duly borne in mind. But the point to be noted is that in the absence of a statutory recognition of the position of the home buyers as financial creditors, the law did not allow for real and substantive entitlements to them in the CoC. These statutory entitlements have been brought in by the Ordinance in order to recognise the vital interests of the home buyers in a real estate project and to allow them a statutory status in the insolvency resolution process. Unfortunately by the time that the Ordinance came into being on 6 June 2018, the period of 270 days had expired; the resolution plan of Lakshdeep was rejected and the IRP informed NCLT that no resolution plan had been approved within the extended period of 270 days on 12 May 2018. Having regard to the material change which has been brought about by the amendment of the IBC by the Ordinance and the fact that this Court has been in seisin of the proceedings to ensure that the home buyers are protected, we are of the view that it is but appropriate and to do complete justice to secure the interests of all concerned that the CIRP should be revived and CoC reconstituted as per the amended provisions to include the home buyers. In the facts of the present case, recourse to the power Under Article 142 would be warranted to render complete justice. Parliament has undoubtedly provided a period of 180 days and an extended period of 90 days to complete the process. But in the present case a peculiar situation has arisen as a result of which the status of the home buyers which had not been recognised prior to 6 June 2018 has now been expressly recognised as a result of the amending Ordinance. Learned Counsel for the IRP submitted that in the CoC which will be reconstituted under the amended IBC, the home buyers would have a substantial voting power so as to be able to effectively protect their interests. Moreover, this Court should follow the discipline of the IBC which has been enacted by Parliament specifically to streamline the resolution of corporate insolvencies. Matters involving corporate insolvencies require expert determination. The legislature has made specific provisions which are conceived in public interest and to facilitate good corporate governance. The Court should not take upon itself the burden of supervising the intricacies of the resolution process. Accepting the suggestion of Mr. Nariman (and one of the two options proposed by Mr. Tripathi) of the Court appointing a Committee to supervise the resolution process outside the IBC will involve the Court in an insuperable burden of evaluating intricate matters of financial expertise on which Parliament has legislated to create specific mechanisms. We are emphatically of the view that it would not be appropriate for the Court to appoint a Committee to oversee the CIRP and assume the task of supervising the work of the Committee. We must particularly be careful not to supplant the mechanisms which have been laid down in the IBC by substituting them with a mechanism under judicial directions. Such a course of action would in our view not be consistent with the need to ensure complete justice Under Article 142, under the regime of law. Hence, the power Under Article 142 should be utilised at the present stage for the limited purpose of recommencing the resolution process afresh from the stage of appointment of IRP by the order dated 9 August 2017 and resultantly renew the period which has been prescribed for the completion of the resolution process. We have furnished above, the reasons for doing so. Chief amongst them is the fact that in the present case the period of 270 days expired before the Ordinance conferring a statutory status on home buyers as financial creditors came into existence. In the circumstances, it would be necessary to revive the period prescribed by the statute by another 180 days commencing from the date of this order. During this period, the IRP shall follow the provisions of the IBC afresh in all respects. A new CoC should be constituted in accordance with the amended provisions of the IBC to enforce the statutory status of the allottees as financial creditors. We also clarify that apart from the three bidders whose bids were found to be eligible by the IRP, it would be open to the IRP to invite fresh bids to facilitate a wider field of choice before the CoC. In that process, the offers made by the intervenors in this proceedings can also be considered by CoC anew. We are not inclined to evaluate the merits of the bids submitted by the bidders who were left in the fray, two of whom have intervened. All bids must follow the discipline of the IBC. We have, however, not accepted the submission to allow JIL or JAL and the erstwhile promoters to participate in the process. Their participation is expressly prohibited by Section 29 A and we decline to make any exception which would breach a salutary and express provision made in the IBC.As we have stated earlier, an amount of Rs. 750 crores is lying in deposit before this Court pursuant to the interim directions, on which interest has accrued. The home buyers have earnestly sought the issuance of interim directions to facilitate adisbursement of this amount to those of the home buyers who seek a refund. We are keenly conscious of the fact that the claim of the home buyers who seek a refund of monies deserves to be considered with empathy. Yet, having given our anxious consideration to the plea and on the balance, we are not inclined to accede to it for more than one reason. Firstly, during the pendency of the CIRP, it would as a matter of law, be impermissible for the Court to direct a preferential payment being made to a particular class of financial creditors, whether secured or unsecured. For the present, we leave open the question as to whether the home buyers are unsecured creditors (as was urged by Mr. Tripathi) or secured creditors (as was urged by counsel appearing for them). Directing disbursement of the amount of Rs. 750 crores to the home buyers who seek refund would be manifestly improper and cause injustice to the secured creditors since it would amount to a preferential disbursement to a class of creditors. Once we have taken recourse to the discipline of the IBC, it is necessary that its statutory provisions be followed to facilitate the conclusion of the resolution process. Secondly, the figures which have been made available presently, following the opening of the web portal by the amicus curiae, indicate that 8% of the home buyers have sought a refund of their monies while 92% would evidently prefer possession of the homes which they have purchased. We cannot be unmindful of the interests of 92% of the home buyers many of whom would also have obtained loans to secure a home. They would have a legitimate grievance if the corpus of Rs. 750 crores (together with accrued interest) is distributed to the home buyers who seek a refund. The purpose of the process envisaged by the IBC for the evaluation and approval of a resolution plan is to form a composite approach to deal with the financial situation of the corporate debtor. Allowing a refund to one class of financial creditors will not be in the overall interest of a composite plan being formulated under the provisions of the IBC. Thirdly during the course of the hearing, the Court has been apprised of the concerns of the secured creditors, chief among them being the IDBI bank limited. In its submissions before this Court, IDBI bank has emphasised that one of the major reasons for the enactment of the IBC was to protect the interest of lenders. The debt owing to the banks and financial institutions has been secured by the assets of JIL, to protect their interests. This debt originates in the public deposits of the banks and financial institutions, who are answerable to their stakeholders. Fourthly, the RBI has moved this Court for permission to initiate an insolvency resolution process. Parliament enacted the Banking Regulation (Amendment) Act 2017 by introducing Section 35 AA and Section 35 AB into the Banking Regulation Act 1949. The amendment empowers the Central government to authorise RBI to issue directions to any banking company to initiate an insolvency resolution process in respect of a default as understood under the IBC. Such an order was issued by the Central government on 5 May 2017. The RBI constituted an Internal Advisory Committee (IAC) consisting primarily of its independent directors. The IAC took up for consideration accounts which were classified either partly or whollyfrom amongst the top 500 exposures in the banking system as on 31 March 2017. As a first step, the IAC recommended all suchnonperforming asset accountswith fund andbased outstandings exceeding Rs. 5,000 crores. The IAC has initially taken up twelve accounts involving total exposure of Rs. 1,79,769 crores. JIL was one of the twelve accounts in respect of which directions have been issued to banks for initiating insolvency resolution. Subsequently, the IAC recommended that in respect of those accounts where 60% or more had been classified as NPAs as on 30 June 2017, banks may be directed to implement a viable resolution plan within six months failing which the accounts may be directed for a reference under the IBC by 31 December 2017. JAL was one such entity. No viable resolution plan could be found as a result of which it is also required to be referred for CIRP. RBI has carried out this exercise as a matter of economic policy in its capacity as the prime banking institution in the country, entrusted with a supervisory role, and the power to issue binding directions. The position of the RBI as an expert regulatory body particularly in matters of economic and financial policy has been reiterated in several decisions of this Court: (R.K. Garg v. Union of India (1981) 4 SCC 675 , Peerless General Finance and Investment Co. Ltd. v. RBI(1992) 2 SCC 343 , TN Generation and Distribution Corporation Ltd. v.Consortium (2017) 4 SCCJAL was classified under the SMAII category (demands overdue for more than 60 days) by banks as early as on 3 October 2014 and as an NPA since 31 March 2015. We agree with the submission of the RBI that any further delay in resolution would adversely impact a viable resolution being found for JAL and JIL. The facts which have emerged before the Court from the application filed by the RBI clearly indicate the financial distress of JAL and JIL. The apprehensions of thein regard to their financial incapacity is borne out by RBI, as a responsible institution has urged before the Court. The IBC has been enacted in the form of a comprehensive bankruptcy law and with a specific legislative intent. With the amendment brought about by the Ordinance promulgated in June 2018, the interests of the home buyers have been sought to be safeguarded. Accordingly, we accede to the request made on behalf of the RBI to allow it to follow the recommendations of the IAC to initiate a CIRP against JAL under the IBC.