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REPORTABLE  

 IN THE SUPREME COURT OF INDIA  

 CIVIL ORIGINAL/APPELLATE JURISDICTION  

 WRIT PETITION (CIVIL) NO. 43 OF 2019  

 Pioneer Urban Land and Infrastructure               …Petitioners    Limited & Anr.     

Versus    

Union of India & Ors.           …Respondents    

WITH  WRIT PETITION (CIVIL) NO.99 OF 2019  

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WRIT PETITION (CIVIL) NO.941 OF 2019    

J U D G M E N T  

R.F. Nariman, J.  

1. The large number of writ petitions that have been filed in  

this Court challenge the constitutional validity of amendments

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made to the Insolvency and Bankruptcy Code, 2016 (hereinafter  

referred to as “the Code”), pursuant to a report prepared by the   

Insolvency Law Committee dated 26th March, 2018 (hereinafter  

referred to as the “Insolvency Committee Report”). The  

amendments so made deem allottees of real estate projects to be  

“financial creditors” so that they may trigger the Code, under  

Section 7 thereof, against the real estate developer. In addition,  

being financial creditors, they are entitled to be represented in the  

Committee of Creditors by authorised representatives. The  

amendments so made to the Code are as follows:  

PROVISIONS OF THE INSOLVENCY AND  

BANKRUPTCY 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 a debt along with interest,  if any, which is disbursed against the consideration  for the time value of money and includes-  

(f) any amount raised under any other transaction,  including any forward sale or purchase agreement,  having the commercial effect of a borrowing;  

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

(i) any amount raised from an allottee under a real  estate project shall be deemed to be an amount  having the commercial effect of a borrowing;  and  

(ii) the expressions, “allottee” and “real estate  project” shall have the meanings respectively

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assigned to them in clauses (d) and (zn) of  section 2 of the Real Estate (Regulation and  Development) Act, 2016 (16 of 2016);”  

2. Section 21(6A)(b)  

“21.  Committee of creditors  

(6A) Where a financial debt-  

(b) is owed to a class of creditors exceeding the number  as may be specified, other than the creditors covered  under clause (a) or sub-section (6), the interim  resolution professional shall make an application to the  Adjudicating Authority along with the list of all financial  creditors, containing the name of an insolvency  professional, other than the interim resolution  professional, to act as their authorised representative  who shall be appointed by the Adjudicating Authority  prior to the first meeting of the committee of creditors;  […]  

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

3. Section 25A  

“25A.  Rights and duties of authorized representatives  of financial creditors –  

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

(2) It shall be the duty of the authorised representative  to circulate the agenda and minutes of the meeting  of the committee of creditors to the financial creditor  he represents.  

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(3) The authorised representative shall not act against  the interest of the financial creditor he represents  and shall always act in accordance with their prior  instructions:  

Provided that if the authorised representative  represents several financial creditors, then he shall  cast his vote in respect of each financial creditor in  accordance with instructions received from 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 authorised representative  shall abstain from voting on behalf of such creditor.   

(4) The authorised representative shall file with the  committee of creditors any instructions received by  way of physical or electronic means, from the  financial creditor he represents, for voting in  accordance therewith, to ensure that the appropriate  voting instructions of the financial creditor he  represents is correctly recorded by the interim  resolution professional or resolution professional, as  the case may be.  

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

2. The Code was passed by the Parliament on 28th May,  

2016. Several petitions were then filed against real estate  

developers under the Code by allottees who had entered into  

“assured returns / committed returns” agreements with these  

developers, whereby, upon payment of a substantial portion of the  

total sale consideration upfront at the time of execution of the  

agreement, the developer undertook to pay a certain amount to

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allottees on a monthly basis from the date of execution of the  

agreement till the date of handing over of possession to the  

allottees. The National Company Law Appellate Tribunal  

(hereinafter referred to as “NCLAT”) on 21st July, 2017 in Nikhil  

Mehta and Sons (HUF) v. AMR Infrastructure Ltd., (Company  

Appeal (AT) (Insolvency) No. 07 of 2017) held that amounts raised  

by developers under assured return schemes had the “commercial  

effect of a borrowing”, which became clear from the developer’s  

annual returns in which the amount raised was shown as  

“commitment charges” under the head “financial costs”. As a  

result, such allottees were held to be “financial creditors” within the  

meaning of Section 5(7) of the Code.   

3. On 9th August, 2017, proceedings were initiated by IDBI  

Bank against a large real estate developer, Jaypee Infratech Ltd.  

under Section 7 of the Code before the National Company Law  

Tribunal (hereinafter referred to as “NCLT”) Allahabad Bench,  

alleging that Jaypee had defaulted on a loan of Rs. 526.11 crores.  

On 11th September, 2017, an order 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 of Jaypee Infratech Ltd.  

appointing a representative of the home buyers, i.e. the allottees,

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to participate in meetings of the Committee of Creditors in order  

that their interests be protected.    

4. While this order was passed in Chitra Sharma (supra), qua  

another group of builders, namely, the Amrapali group, an order  

was passed on 22nd November, 2017 by this Court in Bikram  

Chatterji v. Union of India (Writ Petition (Civil) No.940 of 2017)  

substantially on the same lines as the order passed in Chitra  

Sharma (supra).  During proceedings before this Hon’ble Court in  

Chitra Sharma (supra), this Court, vide order dated 21st March,  

2018, recorded that it was only concerned with those home buyers  

who intend to obtain a refund of amounts advanced by them, being  

8% of the total home buyers/allottees in Jaypee’s case. Given  

these orders by this Court, the Insolvency Committee Report  

suggested that amendments be made in the Code seeking to  

clarify, as a matter of law, that allottees of real estate projects are  

financial creditors. It may be noted that three members of the  

Insolvency Law Committee, namely, Shri Shardul Shroff, Shri S.  

Sen and Shri B. Sriram, dissented with the rest of the Insolvency  

Law Committee on the proposed amendments. On 6th June, 2018,  

pursuant to this Report, the Insolvency and Bankruptcy Code  

Amendment Ordinance, 2018 (hereinafter referred to as the

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“Amendment Ordinance”) was promulgated by which the three  

amendments (supra) to the Code were inserted. On 17th August,  

2018, the Parliament passed the Insolvency and Bankruptcy Code  

(Second Amendment) Act, 2018 (hereinafter referred to as the  

“Amendment Act”) incorporating the aforesaid amendments as  

were provided for by the Amendment Ordinance.    

5. Dr. Abhishek Manu Singhvi, learned Senior Advocate,  

leading the charge on behalf of the real estate developers, has  

argued that the treatment of allottees as financial creditors violates  

two facets of Article 14. One, that the amendment is discriminatory  

inasmuch as it treats unequals equally, and equals unequally,  

having no intelligible differentia; and two, that there is no nexus  

with the objects sought to be achieved by the Code. In fact,  

according to the learned senior counsel the amendments fly in the  

face of the objects sought to be achieved by the Code, i.e. to  

maximise value of assets so that the shareholders of a corporate  

debtor do not suffer from bad management or poor management.  

In the facts of the present cases, according to Dr. Singhvi, the “bad  

eggs” alone have been looked at, and entities like his client and  

many others before us, who have completed building projects in  

time and are in every way compliant with the law, can yet be

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jeopardised by Section 7 petitions filed under the Code to  

blackmail them into making payments which would divert funds  

which are otherwise to be used for the purpose of the project.  

According to the learned senior counsel, a perfectly good  

management which has several projects on its hands can be  

removed at the instance of one allottee and either replaced – in  

which case the massive funds infused by the developer himself  

would be set at naught – or worse still, lead to commercial death,  

in that, if there are no resolution plans or all resolution plans are  

rejected either by the Committee of Creditors or by the authorities  

under the Code, a perfectly solvent company would then be wound  

up, which would not be in the interest of anybody, least of all the  

bulk of allottees themselves, who would want possession of  

flats/apartments. According to him, therefore, these amendments  

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  

Constitution of India is infracted, and the amendments, not being  

a reasonable restriction 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 is inconsistent with the objects sought

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to be achieved by the Code and has been stretched to absurd  

limits, making it manifestly arbitrary. Also, the amendments made  

to Section 21 and the insertion of Section 25A of the Code do away  

with the collegiality and commercial wisdom of the Committee of  

Creditors, and are manifestly arbitrary on this count. He made an  

impassioned plea that it was surprising that these amendments  

were even made, in view of the fact that there is a specific  

legislation, namely, the Real Estate (Regulation and  

Development) Act, 2016 (hereinafter referred to as “RERA”),  

which deals in detail with the real estate sector, and provides for  

adjudication of disputes between allottees and the developer,  

together with a large number of safeguards in favour of the  

allottee, including agreements in statutory form, which would  

replace the agreements entered into between the developer and  

the allottees. According to him, therefore, a reading of RERA  

would show that all concerns of the allottees would be addressed  

by this sector-specific legislation and that the enactment of a  

sledgehammer to kill a gnat would render the impugned  

amendments excessive, disproportionate and violative of Articles  

14 and 19(1)(g) of the Constitution on this score also. In addition,  

the learned senior counsel scoffed at the Union’s stand, in their  

counter affidavit before this Court, that the amendments made are

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clarificatory in nature. According to Dr. Singhvi, by no stretch of  

imagination could allottees who have parted with money as sale  

consideration for an apartment be included within the definition of  

“financial creditor” as originally enacted by Section 5(7). In fact,  

the very need for a deeming fiction is so that Parliament brings in  

persons who are not financial creditors, by forcibly inserting a  

square peg in a round 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 drive home the point that not a single one of  

several characteristics of financial creditors stated in that judgment  

would apply to allottees/home buyers. On the contrary, if at all they  

could be assimilated to anybody, it would be to operational  

creditors, in which event it would be enough to state that there is  

a pre-existing dispute between the parties, as a result of which the  

Code cannot get triggered. According to him, including allottees of  

real estate projects - a huge amorphous and disparate lot - as  

financial creditors, would not only be unworkable, as thousands of  

petitions would flood the NCLT, but would also be both arbitrary  

and unworkable when this large number of disparate persons is  

represented on the Committee of Creditors, many of whom would  

speak in different voices, being concerned only with their own

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investment, and having no concern whatsoever for the financial  

betterment of the corporate debtor.  

6. Shri Neeraj Kishan Kaul, learned Senior Advocate  

appearing on behalf of some of the Petitioners, has adopted the  

submissions of Dr. Singhvi. He cited judgments to buttress the  

Article 14 arguments made by Dr. Singhvi, and added that an  

explanation cannot in any way interfere with or change the  

enactment or any part thereof. He also argued that it would be  

wholly arbitrary to include allottees as financial creditors when, in  

fact, they possess none of the characteristics pointed out in Swiss  

Ribbons (supra) of banks and financial institutions.    

7. Shri Shyam Divan, learned Senior Advocate appearing on  

behalf of some of the real estate developers, made an  

impassioned plea that in one of the writ petitions in which he  

appears, the real estate developer has infused over Rs. 100 crores  

in a particular project, through funds that are obtained from  

abroad.  If in the case of entities like this developer, who complete  

projects on time and who have never defaulted, a single allottee  

can knock at the doors of the NCLT and obtain an admission order,  

the management of the corporate debtor would be removed and  

replaced by either somebody else, or, if not possible, the company

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would be wound up. According to him, not only would this be highly  

arbitrary and excessive, impacting the fundamental rights under  

Article 19(1)(g) and 300-A, but would also have the indirect effect  

of dissuading foreigners from investing in this country. He also  

argued that Article 14 interdicts legislation whose object is itself  

discriminatory, and cited judgments to prove his point. He argued  

with great vehemence, citing judgments to buttress the proposition  

that a deeming fiction cannot do away with what are the essentials  

of being a financial creditor. According to him, there is no “debt” as  

defined under the Code; there is no “borrowing” as there is no  

temporary handing over of money which has then to be returned;  

there is no “disbursal” and no “sum raised” which has then to be  

handed back. Equally, the commercial effect of a borrowing must  

be qua transactions in which money is later replaced by money.    

According to him, in the present case, at the time that the  

agreement is made between the allottee and the real estate  

developer, what is agreed is that in return for money paid by the  

allottee, a flat/apartment would be allotted. It is only in the event of  

breach of the agreement on the part of the real estate developer  

that monies are to be refunded, which does not bring allottees  

within the definition of “financial creditor”. He also argued,  

adopting Dr. Singhvi’s arguments, that all other categories of

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financial creditors would involve these elements, and if read  

noscitur a sociis with the other clauses, Section 5(8) of the Code  

would also make it clear that persons can only be included if there  

is a borrowing, at the end of which the borrowing is returned - with  

or without interest. He thus agreed with Dr. Singhvi’s argument  

that what was sought to be inserted by the amendment is a square  

peg in a round hole.  

8. Shri Jayant Bhushan, learned Senior Advocate appearing  

on behalf of some of the Petitioners, then followed. He stressed  

the facts of Writ Petition No.357 of 2019 to show that huge sums  

have been infused into a large number of projects by the  

developers themselves, all such projects being constructed in  

accordance with RERA.  According to him, if the amendments  

pass muster, as many as 5000 workers engaged across these real  

estate projects together with 600 employees would be directly  

impacted. NCLT applications have been filed by allottees of only  

14 units out of 19,062 units sold. According to him, his client has  

never defaulted in repayment of amounts borrowed from  

banks/financial institutions and, in fact, upon initiation of the  

insolvency process, on account of one petition filed by one allottee,  

IDFC invoked a standby letter of credit and thereby recovered the

22    

entire amount due to them being approximately Rs. 100 crores  

prematurely. Therefore, large solvent real estate developers would  

be crippled if the Code were to be applied in this fashion to them.  

Apart from buttressing arguments already made on Articles 14 and  

19(1)(g), he relied on judgments to show that a claim for  

unliquidated damages becomes a debt only on adjudication, which  

does not take place when a Section 7 application is heard.  

According to him, since the NCLT can only go into “default” and as  

the definition of “default” itself is vague and ambiguous, the said  

definition should be struck down as being manifestly arbitrary. He  

also added, citing the same judgment as Shri Neeraj Kaul, namely,  

S. Sundaram Pillai v. V.R. Pattabiraman (1985) 1 SCC 591, that  

an explanation cannot enlarge the scope of the original provision.  

He also made a without-prejudice argument that even if allottees  

are not permitted to trigger the Code, they may still be protected  

by making suitable amendments for their inclusion in the  

Committee of Creditors, so that they may have a voice in the future  

of the corporate debtor, which will impact the flats/apartments to  

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

23    

14 and 19(1)(g). He also sought directions to recalcitrant States to  

immediately set up the requisite authorities under RERA and  

made an impassioned plea that the words “claims as may be  

specified” in Section 15(1)(c) of the Code be struck down.  

According to him, real estate developers and borrowers are  

treated as equals when they are, in fact, unequals. Also, real  

estate developers are discriminated against when compared with  

other entities supplying goods or services. The amendments made  

are, therefore, excessive and disproportionate being manifestly  

arbitrary. He also buttressed Dr. Singhvi’s argument that a square  

peg is fitted into a round hole as none of the identifying traits of  

financial creditors as explained in Swiss Ribbons (supra) are  

present insofar as allottees are concerned. He added that, in any  

case, RERA looks after all possible difficulties of allottees, who  

may in addition, invoke the arbitration clause for resolution of  

disputes with the real estate developer contained in most  

agreements.    

10. Shri Krishnan Venugopal, learned Senior Advocate, who  

followed Shri Gopal Sankaranarayanan, placed before us the  

Global Derivatives Study Group and extracts from Philip Wood’s  

Project Finance, Subordinated Debt and State Loans; and

24    

Principles of International Insolvency by the same author. He then  

relied on ‘The ACT Borrower’s Guide to the LMA’s Investment  

Grade Agreements’ produced by Slaughter & May to explain the  

genesis of Section 5(8) generally and 5(8)(f) of the Code in  

particular. He then relied upon a number of judgments, which  

according to him made it clear that a deeming fiction is enacted  

when the position in reality is completely different, and hence, a  

deeming fiction is introduced when something is not otherwise  

covered under the main provision. On this basis, he contended  

that the amendment to Section 5(8)(f) of the Code was prospective  

in nature. He also cited judgments to show that time for completion  

of a project can never be said to be of the essence of the  

agreement between the builder and the allottee, and this being so,  

a builder cannot be said to be in default when he does not deliver  

a flat/apartment within the time specified, but later. According to  

him, since Section 5(8) of the Code is a “means and includes”  

definition clause, it is exhaustive and therefore, to then introduce  

by way of amendment something extra by means of a deeming  

fiction would thus not be permissible in law. Shri Krishnan  

Venugopal also referred to extracts from various authorities to  

demonstrate that even qua credit and conditional sale  

agreements, ultimately Section 5(8) is concerned only with

25    

transactions in which finance is involved. He also pointed out, with  

reference to Chapter 11 Bankruptcy Proceedings in the United  

States, that once a company has been stigmatised as being  

bankrupt or having gone into bankruptcy, several persons who  

earlier dealt with the company disengaged themselves, as a result  

of which the Company’s power to do business gets severely  

hampered.   

11. The tail of the arguments on behalf of the Petitioners then  

wagged in the persona of several other counsel who added titbits  

here and there. Shri Bhandari, appearing for one of the writ  

Petitioners, gave a chart of a comparative analysis between the  

‘UNCITRAL Legislative Guide 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), argued that the impugned  

amendments went against several features of this UNCITRAL  

Legislative Guide. He contended that, first and foremost, the  

fundamental difference between financial and operational  

creditors was ignored. Secondly, he contended that by treating  

home buyers, who are in substance operational creditors, as  

financial creditors, infracts the principle of equitable treatment of

26    

similarly situated creditors. Further, the UNCITRAL Legislative  

Guide states that recognition of existing creditor’s rights before the  

commencement of the insolvency proceedings by the insolvency  

law is important. He contended that by treating a home buyer as a  

financial creditor, the Code creates rights which such home buyer  

never had earlier. He further contended that by involving such  

persons in the negotiation process by putting them on the  

Committee of Creditors would infract the principle that, given their  

number and the diverse interests that they have, coupled with no  

knowledge or any commercial expertise of the corporate debtor,  

they should not and ought not to be allowed to participate in the  

Committee of Creditors. Also, insolvency law and other laws  

should be harmoniously construed, which harmony is disrupted  

when the Code is applied to cases which should really fall under  

RERA.  Shri Bhandari was followed by Shri J. Gupta, who argued  

that instead of deeming that allottees/home buyers be regarded as  

financial creditors, they ought to be regarded as operational  

creditors in which case, defences available in such cases would  

then be available. Shri Pulkit Deora then showed us accounting  

standards in which it became clear that advances received from  

home buyers by developers cannot, from an accounting  

perspective, be treated as financial liabilities and the amendments

27    

in doing so, therefore, violate the aforesaid standards and become  

manifestly arbitrary. Also, after going into the definition of “claim”,  

“financial debt” and “operational debt”, he argued that a financial  

debt is a crystallised claim which is due, as opposed to an  

operational debt which may simply be a claim upon breach of  

contract that may be disputed and therefore not due. On this basis  

he contended that to put home buyers in the financial creditor  

category, instead of the operational creditor category, would then  

blur this distinction and do away with a vital defence available to  

the real estate developer in the case of operational debts. Shri  

Rana Mukherjee, appearing through Shri K. Poddar, argued that  

home buyers would not fall within the category of either financial  

or operational creditors and should therefore be subsumed only  

within RERA, which is a complete code dealing with the real estate  

industry. He further argued that RERA is a special Act as opposed  

to the Code, which is a general Act and ought, therefore, to prevail.  

Also, as the adjudication process envisaged under RERA would  

be done away with if the Code is to be applied, the application of  

the Code to home buyers would be manifestly arbitrary. M/s.  

Kejriwal and P. Aggarwal have argued that on the facts of their  

cases, force majeure events occurred as a result of which  

possession could not be handed over. They also pointed out that,

28    

from a practical point of view, the NCLT in such cases does not go  

into defences which would demonstrate that delays in handing  

over possession cannot be attributed to the developer, and being  

a summary proceeding, merely goes ahead and admits a Section  

7 petition despite the fact that the developer is not at fault in not  

handing over the flat/apartment in time. Shri S. Malhotra repeated  

some of the submissions that have already been noted  

hereinabove. Shri P.S. Bindra argued that we should apply the  

Amendment Act only prospectively, either from 2018 itself or at the  

very earliest from 1st December, 2016. He also argued 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 the  

agreement between his client and allottees, which this Court  

should make clear 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 the  

Amendment Act would clearly be covered by the ratio laid down  

by this Court in Swiss Ribbons (supra), which is that sufficient  

play in the joints must be given to the legislature when it comes to  

economic legislation, and every experiment that the legislature

29    

bona fide undertakes should not be interfered with by the Court.  

She referred copiously to the Insolvency Committee Report which  

led to the enactment of the Amendment Act, and stated that the  

real reason for including allottees as financial creditors is because,  

in substance, they finance the project in which they will ultimately  

be given flats/apartments. She contended that a cursory look at  

the agreement between developers and such allottees would  

show that at every stage in the building process, certain amounts  

have to be paid which are then supposed to be utilised in  

constructing the apartments/flats. This is what makes them  

different from other operational creditors. Also, in the case of  

operational creditors, it is the person who stands in the place of  

the developer, who either sells goods or renders service for which  

he is to be paid. The exact opposite obtains in the case of home  

buyers/allottees who in fact fund their own flats/apartments. She  

was at great pains to point out that it must never be forgotten that  

the Code is not a recovery mechanism. When a home buyer  

approaches the NCLT, if his petition is admitted, he does not get  

his money back in the near foreseeable future and has to stand in  

line and await either the vagaries of a resolution plan which gives  

him some percentage of the monies owed to him, and/or  

completes the project for him. In the event of winding up, he has

30    

then to stand in line and receive whatever is available. As opposed  

to this, home buyers/allottees can and do approach the authorities  

under RERA in which, upon showing breach on the part of the real  

estate developer, they would be able to claim whatever has been  

paid by them in full together with interest thereon. This being the  

case it is wholly incorrect to paint a picture, as was done by  

learned senior counsel appearing on behalf of the Petitioners, that  

trigger-happy allottees mala fide invoke the Code to put pressure  

on developers to refund their money given as advances.  Also, it  

is wholly incorrect to say that highly solvent companies would go  

in the red and then be wound up under the Code. If in fact such  

companies are solvent, the Committee of Creditors may decide to  

continue the same management or may decide to accept  

resolution plans from other developers so that the real estate  

development company continues as a going concern. Winding up  

is only a last resort, which will never really occur in the case of well  

managed corporate entities. She referred in copious detail to  

NCLT and NCLAT judgments in which it was held that, save and  

except allottees who had agreements in which a fixed monthly  

return was guaranteed by the developer, allottees were held to be  

neither operational nor financial creditors, resulting in great  

hardship to them. She took us through the various sections of the

31    

Code afresh and argued that Section 5(8)(f), even read without the  

explanation, would, on its plain language, include real estate  

development agreements. For this purpose, she relied upon 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  

give either money or something equivalent back to the lender”. In  

the facts of these cases, she contended that the “something  

equivalent” would be the flat/apartment. She also relied upon the  

definition of “commercial” to show that the profit element is  

important. She stressed the fact that the “time value of money” is  

present qua both allottee and builder as the allottee would pay less  

than he would have to for a complete flat/apartment, in which case  

the entire consideration for the flat/apartment would have to be  

paid upfront; as against instalments while it is being completed.  

Qua the builder, she contended that the time value of money would  

be the money paid by way of advances by allottees which would  

be used to finance the building of the flats/apartments in the  

project. She also relied strongly upon Section 18 of RERA to show  

that in order to be a financial creditor, it is enough that a right  

recognised by Section 18 in favour of the allottee to payment  

would exist, and therefore, would be included within the definition

32    

of “financial debt” read with “debt” contained in Section 5(8) and  

Section 3(11) of the Code respectively. She also referred to and  

relied upon Section 4(2)(l)(D) of RERA to show that 70% of  

advances received by the developer from allottees must be put  

into an escrow account, which can only be used for the project at  

hand, showing therefore that even statutorily, monies paid by way  

of advance are in the nature of a financing transaction. She then  

cited judgments to show how the noscitur a sociis principle cannot  

be used when express wider language is used in one of the sub-

clauses of a particular provision, making it clear that it is meant to  

be read by itself, and not in conjunction with what precedes and  

succeeds it. She also cited judgments to show that the expression  

“deemed” is also to put a certain matter beyond doubt and argued  

that an explanation can be inserted by the legislature as additional  

support to what is already contained in the main provision. She  

added that deeming fictions put in explanations are not something  

unknown to the law, and cited judgments to buttress her  

contention. She also cited judgments to show that when “means”  

is used separately from “includes”, the definition clause would be  

inclusive, as opposed to when “means and includes” is used, and  

therefore argued that since Section 5(8) is not exhaustive, the  

category of home buyers could be added therein. Also, according

33    

to her, “means” and “includes” when interpreted by courts, is  

different from the legislature itself amending the provision so as to  

add something therein. Legislative activity cannot be confused  

with interpretational activity by the courts. She then argued,  

referring to the provisions of RERA in some detail, that a complete  

information bank is provided by RERA, which is provided by the  

real estate developer himself, from which, like information utilities  

under the Code, information, inter alia, as to defaults made by the  

real estate developer would be available. According to her,  

therefore, all that the NCLT would have to be supplied with by the  

allottee in his Section 7 petition would be this information, and,  

after receiving a reply from the real estate developer, would then  

easily be able to decide whether a real estate developer owes  

money in the form of compensation payable for late 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 that no  

amount is due and payable from the allottee, in that, the allottee is  

himself in breach of conditions laid down by the agreement read  

with the RERA, and rules and regulations made thereunder.  

According to her, therefore, the NCLT would be able to decide  

such applications in the same manner as would be decided in the  

case of banks and financial institutions. She also rebutted the

34    

argument that the collegiality of creditors will be affected by  

inserting home buyers into their committee by stating that home  

buyers, like banks and financial institutions, and unlike other  

operational creditors, are vitally concerned with the well-being of  

the corporate debtor, as otherwise the real estate project would  

never come to fruition. In rebutting the challenge to Section 21(6A)  

and Section 25A, she said there may be teething problems with  

regard to how an authorised representative is to vote on the  

Committee of Creditors, but stated that the legislature is in the  

process of ironing out these creases and referred to the recent  

Insolvency and Bankruptcy Code (Amendment) Bill, 2019 which  

has just been passed by Parliament. She also argued that home  

buyers may themselves finance up to 100% of a project, and in  

case they finance a project by 100%, the Code would not work  

unless they were recognised as financial creditors as, not being  

financial or operational creditors, no Committee of Creditors could  

be set up at all; and for this purpose she relied upon the proviso to  

Section 21(8) of the Code, read with Regulation 16 of the  

Insolvency and Bankruptcy Board of India (Insolvency Resolution  

Process for Corporate Persons) Regulations, 2016. She argued,  

therefore, that on point of fact, if allottees of real estate projects  

were to be kept out of the Committee of Creditors, that itself would

35    

be manifestly arbitrary as in most cases they 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 a ‘special purpose vehicle’,  

being a corporate entity on its own, and therefore, the bogey of  

destabilisation of a management which has brought in large funds  

for many projects, and which would be replaced for all projects,  

would not be correct.  

13. Shri Tushar Mehta, learned Solicitor General of India  

broadly supported the detailed arguments of Mrs. Madhavi Divan,  

learned Additional Solicitor General, by buttressing the same by  

citing various judgments and authorities. According to him also,  

given the fact that Swiss Ribbons (supra) gives the legislature  

free play in the joints when it comes to economic legislation and  

experimentation in this sphere, Swiss Ribbons (supra) itself is  

more or less a complete answer to all constitutional challenges  

that may be made to the Amendment Act.  

14. A number of counsel then appeared for allottees in  

individual cases. These counsel argued, by referring copiously to  

NCLT and NCLAT orders, consumer forum judgments and High  

Court judgments, that the consumer fora, and the authorities under  

RERA are not meaningful remedies for allottees at all. According

36    

to them, loopholes made in the rules by various States still allow  

one-sided agreements by real estate developers to continue to  

govern the relationship between allottee and real estate developer  

long after RERA has come into force. This has been done, for  

example, by defining ‘Completion Certificate’ to include partial  

completion certificates of projects (or parts of projects), so that  

such partial certificates given to the real estate developer before  

coming into force of RERA would make the provisions of RERA  

inapplicable. Also, it has been pointed out that real estate  

developers have been successful in arguing that RERA has now  

shut out the consumer fora so far as allottees are concerned, and  

referred to stay orders by which consumer fora for a long period of  

time were unable to proceed with cases filed by allottees before  

them, until the National Consumer Disputes Redressal  

Commission finally decided that the Consumer Protection Act,  

1986 was an additional remedy and continued to be an additional  

remedy to the remedies provided under RERA. They also pointed  

out that the authorities themselves under RERA jostled the  

allottees about, as when an allottee went to the Real Estate  

Regulatory Authority and obtained orders against developers,  

such orders were nullified by some Appellate Tribunal orders,  

stating that they should be sent to the adjudicating officer who

37    

alone could decide disputes between allottees and real estate  

developers. Separately, in answer to the argument that the  

admission of a Section 7 application would be fatal to the  

management of the corporate debtor, and that one single allottee  

could destabilise the management of the corporate debtor and not  

just the project undertaken by the corporate debtor, they pointed  

out that there were 5 stages at which it would be open for the real  

estate developer to compromise with the allottee in question,  

before the sledgehammer under the Code comes down on the  

erstwhile management. They pointed out that settlements have  

taken place at: (i) the stage of the Section 7 notice itself before  

replies were filed by the real estate developer; (ii) after the NCLT  

issues notice on a Section 7 application and before admission; (iii)  

after the hearing and before the order admitting the matter; (iv)  

post-admission, and before appointment of the Committee of  

Creditors  where both the NCLT and NCLAT use their inherent  

power to permit settlements; and (v) even post setting-up of the  

Committee of Creditors, whereby settlements can be arrived at  

under Section 12A of the Code with the concurrence of 90% of the  

creditors. On this basis, they pointed out that long before the  

chopper comes down on the management of the corporate debtor,  

all these opportunities are given to the management of the

38    

corporate debtor to settle with the individual allottee, showing  

thereby that there is no real infraction of Article 14, 19(1)(g) or 300-

A of the Constitution. They also argued that the provisions of  

Section 7(4) of the Code giving the NCLT 14 days within which to  

ascertain the existence of a default is directory as has been held  

in Surendra Trading Company v. Juggilal Kamlapat Jute Mills  

Company Limited and Ors.  2017 (16) SCC 143. They made an  

impassioned plea, relying upon the background to RERA, to argue  

that if these beneficial amendments were to be struck down, they  

would be back in the same position as they were before enactment  

of other measures, 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 point  

out, referring, inter alia, to various American decisions in  

paragraphs 17 to 24, that the legislature must be given free play  

in the joints when it comes to economic legislation. Apart from the  

presumption of constitutionality which arises in such cases, the  

legislative judgment in economic choices must be given a certain  

degree of deference by the courts. In paragraph 120 of the said  

judgment, this Court held:

39    

“120. The Insolvency Code is a legislation which deals  with economic matters and, in the larger sense, deals  with the economy of the country as a 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. The  experiment contained in the Code, judged by the  generality of its provisions and not by so- called  crudities and inequities that have been pointed out by  the petitioners, passes constitutional muster. To stay  experimentation in things economic is a grave  responsibility, and denial of the right to experiment is  fraught with serious consequences to the nation. We  have also seen that the working of the Code is being  monitored by the Central Government by Expert  Committees that have been set up in this behalf.  Amendments have been made in the short period in  which the Code has operated, both to the Code itself  as well as to subordinate legislation made under it.  This process is an ongoing process which involves all  stakeholders, including the petitioners.”  

It is in this background that the constitutional challenge to the  

Amendment Act will have to be decided.  

Raison d’être for the Insolvency Code (Second Amendment)  

Act of 2018  

16. The Insolvency Committee Report is of crucial importance  

in understanding why the legislature thought it fit to categorise  

home buyers as financial creditors under the Code. The  

recommendations made by the said Insolvency Law Committee  

are set out hereinbelow in extenso:

40    

“RECOMMENDATIONS PROPOSING AMENDMENTS  TO THE CODE AND RELEVANT SUBORDINATE  

LEGISLATION  

1. DEFINITIONS     Financial debt     1.1 Section 5(8) of the Code defines ‘financial debt’  to mean a debt along with interest, if any, which is  disbursed against the consideration for the time  value of money and inter alia includes money  borrowed against payment of interest, etc. The  Committee’s attention was drawn to the significant  confusion regarding the status of buyers of under- construction apartments (“home buyers”) as  creditors under the Code. Multiple judgments have  categorised them as neither fitting within the  definition of ‘financial’ nor ‘operational’ creditors. In  one particular case, they have been classified as  ‘financial creditors’ due to the assured return scheme  in the contract, in which there was an arrangement  wherein it was agreed that the seller of the  apartments would pay ‘assured returns’ to the home  buyers till possession of property was given. It was  held that such a transaction was in the nature of a  loan and constituted a ‘financial debt’ within the  Code. A similar judgment was given in Anil  Mahindroo & Anr v. Earth Organics Infrastructure.  But it must be noted that these judgments were given  considering the terms of the contracts between the  home buyers and the seller and are fact specific.  Further, the IBBI issued a claim form for “creditors  other than financial or operational creditors”, which  gave an indication that home 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 a cause for worry since it deprives them of, first,  the right to initiate the corporate insolvency  resolution process (“CIRP”), second, the right to be  on the committee of creditors (“CoC”) and third, the

41    

guarantee of receiving at least the liquidation value  under the resolution plan. Recent cases like Chitra  Sharma v. Union of India and Bikram Chatterji v.  Union of India have evidenced the stance of the  Hon’ble Supreme Court in safeguarding the rights of  home buyers under the Code due to their current  disadvantageous position.  

1.3 To completely understand the issue, it is  imperative that the peculiarity of the Indian real  estate sector is highlighted. Delay in completion of  under-construction apartments has become a  common phenomenon and the records indicate that  out of 782 construction projects in India monitored by  the Ministry of Statistics and Programme  Implementation, Government of India, a total of 215  projects are delayed with the time over-run ranging  from 1 to 261 months. Another study released by the  Associated Chambers of Commerce and Industry of  India, revealed that 826 housing projects are running  behind schedule across 14 states as of December  2016. Further, the Committee agreed that it is well  understood that amounts raised under home buyer  contracts is a significant amount, which contributes  to the financing of construction of an asset in the  future.     1.4 The current definition of ‘financial debt’ under  section 5(8) of the Code uses the words “includes”,  thus the kinds of financial debts illustrated are not  exhaustive. The phrase “disbursed against the  consideration for the time value of money” has been  the subject of interpretation only in a handful of cases  under the Code. The words “time value” have been  interpreted to mean compensation or the price paid  for the length of time for which the money has been  disbursed. This may be in the form of interest paid  on the money, or factoring of a discount in the  payment.     1.5 On a review of various financial terms of  agreements between home buyers and builders and

42    

the manner of utilisation of the disbursements made  by home buyers to the builders, it is evident that the  agreement is for disbursement of money by the  home buyer for the delivery of a building to be  constructed in the future. The disbursement of  money is made in relation to a future asset, and the  contracts usually span a period of 4-5 years or more.  The Committee deliberated that the amounts so  raised are used as a means of financing the real  estate project, and are thus in effect a tool for raising  finance, and on failure of the project, money is repaid  based on time value of money. On a plain reading of  section 5(8)(f), it is clear that it is a residuary entry to  cover debt transactions not covered under any other  entry, and the essence of the entry is that “amount  should have been raised under a transaction having  the commercial effect of a borrowing.” An example  has been mentioned in the entry itself i.e. forward  sale or purchase agreement. The interpretation to be  accorded to a forward sale or purchase agreement  to have the texture of a financial contract may be  drawn from an observation made in the case of Nikhil  Mehta and Sons (HUF) v. AMR Infrastructure Ltd.:     “A forward contract to sell product at the end of a  specified period is not a financial contract. It is  essentially a contract for sale of specified goods. It is  true that some time financial transactions seemingly  restructured as sale and repurchase. Any  repurchase and reverse repo transaction are  sometimes used as devices for raising money. In a  transaction of this nature an entity may require  liquidity against an asset and the financer in return  sell it back by way of a forward contract. The  difference between the two prices would imply the  rate of return to the financer.”     (emphasis supplied)     1.6 Thus, not all forward sale or purchase are  financial transactions, but if they are structured as a  tool or means for raising finance, there is no doubt  that the amount raised may be classified as financial  debt under section 5(8)(f). Drawing an analogy, in  the case of home buyers, the amounts raised

43    

under the contracts of home buyers are in effect  for the purposes of raising finance, and are a  means of raising finance. Thus, the Committee  deemed it prudent to clarify that such amounts  raised under a real estate project from a home  buyer fall within entry (f) of section 5(8).    1.7 Further, it may be noted that the amount of  money given by home buyers as advances for their  purchase is usually very high, and frequent delays in  delivery of possession may thus, have a huge  impact. For example, in Chitra Sharma v. Union of  India the amount of debts owed to home buyers,  which was paid by them as advances, was claimed  to be INR Fifteen Thousand Crore, more than what  was due to banks. Despite this, banks are in a more  favourable position under the Code since they are  financial creditors. Moreover, the general practice is  that these contracts are structured unilaterally by  construction companies with little or no say of the  home buyers. A denial of the right of a class of  creditors based on technicalities within a contract  that such creditor may not have had the power to  negotiate, may not be aligned with the spirit of the  Code.    1.8 The Committee also discussed that section  30(2)(e) of the Code provides that all proposed  resolution plans must not contravene any provisions  of law in force, and thus, the provisions of Real  Estate (Regulation and Development) Act, 2016  (“RERA”) will need to be complied with and  resolution plans under the Code should be compliant  with the said law.     1.9. Finally, the Committee concluded that the  current definition of ‘financial debt’ is sufficient to  include the amounts raised from home buyers /  allottees under a real estate project, and hence, they  are to be treated as financial creditors under the  Code. However, given the confusion and multiple  interpretations being taken, at this stage, it may be  prudent to explicitly clarify that such creditors fall

44    

within the definition of financial creditor, by inserting  an explanation to section 5(8)(f) of the Code.  Accordingly, in CIRP, they will be a part of the CoC  and will be represented in the manner specified in  paragraph 10 of this report, and in the event of  liquidation, they will fall within the relevant entry in  the liquidation waterfall under section 53. The  Committee also agreed that resolution plans under  the Code must be compliant with applicable laws,  like RERA, which may be interpreted through section  30(2)(e) of the Code. It may be noted that there was  majority support in the Committee for the  abovementioned treatment of home buyers.  However, certain members of the Committee,  namely Sh. Shardul Shroff, Sh. Sudarshan Sen and  Sh. B. Sriram, differed on this matter.”   

 (emphasis supplied)  

17. When it came to devising a mechanism by which several  

persons may be represented by one authorised representative,  

the Insolvency Law Committee concluded:  

“10.8 In light of the deliberation above, the  Committee felt that a mechanism requires to be  provided in the Code to mandate representation in  meetings of security holders, deposit holders, and all  other classes of financial creditors which exceed a  certain number, through an authorised  representative. This can be done by adding a new  provision to section 21 of the Code. Such a  representative may either be a trustee or an agent  appointed under the terms of the debt agreement of  such creditors, otherwise an insolvency professional  may be appointed by the NCLT for each such class  of financial creditors. Additionally, the representative  shall act and attend the meetings on behalf of the  respective class of financial creditors and shall vote  on behalf of each of the financial creditor to the extent

45    

of the voting share of each such creditor, and as per  their instructions. To ensure adequate representation  by the authorised representative of the financial  creditors, a specific provision laying down the rights  and duties of such authorised representatives may be  inserted. Further, the requisite threshold for the  number of creditors and manner of voting may be  specified by IBBI through regulations to enable  efficient voting by the representative. Also, regulation  25 may also be amended to enable voting through  electronic means such as e-mail, to address any  technical issues which may arise due to a large  number of creditors voting at the same time.”  

18. It can be seen that the Insolvency Law Committee found,  

as a matter of fact, that delay in completion of flats/apartments has  

become a common phenomenon, and that amounts raised from  

home buyers contributes significantly to the financing of the  

construction of such flats/apartments. This being the case, it was  

important, therefore, to clarify that home buyers are treated as  

financial creditors so that they can trigger the Code under Section  

7 and have their rightful place on the Committee of Creditors when  

it comes to making important decisions as to the future of the  

building construction company, which is the execution of the real  

estate project in which such home buyers are ultimately to be  

housed.   

19. Shri Shardul Shroff, whose dissent was provided to us in  

the form of an e-mail, after finding that self-financed home buyers

46    

may be financial creditors, but a home buyer who is a borrower is  

not, then went on to state:  

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

9. Our report ought to be altered to the extent that  home buyers financiers should be treated as  unsecured financial creditors and they should be  representatives of the home buyers.  There should be  no direct right given to home buyers to be on the  CoC.”    

Even the dissent of Shri Shroff recognises that in the case of home  

buyers, who have taken loans from banks, such banks ought to  

be on the Committee of Creditors. If such banks ought to be on  

the Committee of Creditors as representatives of the home  

buyers, and they are to vote only in accordance with the home  

buyer’s instructions, why should the home buyer himself then not  

be on the Committee of Creditors, and why should it make any  

difference as to whether he has borrowed money from banks in  

order to pay instalments under the agreement for sale or whether  

he does it from his own finances? These matters have not been  

addressed by the dissenting view which in principle, as we have  

seen, supports home buyers who have taken loans as against  

home buyers who have used their own finances. Perhaps the real  

reason for Shri Shroff’s dissent is the fact that unsecured, as

47    

opposed to secured, financial creditors are being put on the  

Committee of Creditors. If there is otherwise good reason as to  

why this particular group of unsecured creditors, like deposit  

holders, should be part of the Committee of Creditors, it is difficult  

to appreciate how such a 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 as  

follows:  

STATEMENT OF OBJECTS AND REASONS  

“1. The real estate sector plays a catalytic role in  

fulfilling the need and demand for housing and  

infrastructure in the country. While the sector has grown  

significantly in recent years, it has been largely  

unregulated, with absence of professionalism and  

standardisation and lack of adequate consumer  

protection.  Though the Consumer Protection Act, 1986  

is available as a forum to the buyers in the real estate  

market, the recourse is only curative and is not  

adequate to address all the concerns of buyers and  

promoters in that sector. The lack of standardisation  

has been a constraint to the healthy and orderly growth  

of industry. Therefore, the need for regulating the sector  

has been emphasised in various forums.   

2. In view of the above, it becomes necessary to have  

a Central legislation, namely, the Real Estate  

(Regulation and Development) Bill, 2013 in the interests  

of effective consumer protection, uniformity and  

standardisation of business practices and transactions  

in the real estate sector. The proposed Bill provides for

48    

the establishment of the Real Estate Regulatory  

Authority (the Authority) for regulation and promotion of  

real estate sector and to ensure sale of plot, apartment  

or building, as the case may be, in an efficient and  

transparent manner and to protect the interest of  

consumers in real estate sector and establish the Real  

Estate Appellate Tribunal to hear appeals from the  

decisions, directions or orders of the Authority.   

3. The proposed Bill will ensure greater accountability  

towards consumers, and significantly reduce frauds and  

delays as also the current high transaction costs. It  

attempts to balance the interests of consumers and  

promoters by imposing certain responsibilities on both.  

It seeks to establish symmetry of information between  

the promoter and purchaser, transparency of  

contractual conditions, set minimum standards of  

accountability and a fast-track dispute resolution  

mechanism. The proposed Bill will induct  

professionalism and standardisation in the sector, thus  

paving the way for accelerated growth and investments  

in the long run.”  

 21. It may be stated that Sections 2, 20 to 39, 41 to 58, 71 to  

78 and 81 to 92 of this statute were brought into force on 1st May,  

2016. Sections 3 to 19 which deal with registration of real estate  

projects and real estate agents; functions and duties of promoters;  

rights and duties of allottees, together with Section 40 which deals  

with recovery of interest or penalty or compensation and  

enforcement of orders qua the same; the Sections dealing with  

offences and penalties, viz., Sections 59 to 70 and Sections 79  

and 80 which bar the jurisdiction of Civil Courts and deal with

49    

cognizance of offences under the RERA were all brought into  

force one year later i.e. on the 1st day of May, 2017. This was for  

the reason that the “appropriate Government” as defined in  

Section 2(g), which means the various State Governments and  

Union Territories, were given a period of one year to  

establish/appoint the Real Estate Regulatory Authority, the  

adjudicating officer and the Appellate Tribunal, consequent upon  

which the aforesaid Sections were brought into force one year  

later - in the hope and expectation that the appropriate  

Government would set up the aforesaid authorities within the  

period of one year from 1st May, 2016. The relevant provisions of  

RERA are set out hereunder:  

“2. Definitions. --In this Act, unless the context  

otherwise requires, —  

(a) "adjudicating officer" means the adjudicating  

officer appointed under sub-section (1) of  

section 71;   

xxx xxx xxx  

(d) "allottee" in relation to a real estate project,  

means the person to whom a plot, apartment or  

building, as the case may be, has been allotted, sold  

(whether as freehold or leasehold) or otherwise  

transferred by the promoter, and includes the  

person who subsequently acquires the said  

allotment through sale, transfer or otherwise but  

does not include a person to whom such plot,  

apartment or building, as the case may be, is given  

on rent;  

50    

(e) "apartment" whether called block, chamber,  

dwelling unit, flat, office, showroom, shop, godown,  

premises, suit, tenement, unit or by any other name,  

means a separate and self-contained part of any  

immovable property, including one or more rooms or  

enclosed spaces, located on one or more floors or  

any part thereof, in a building or on a plot of land,  

used or intended to be used for any residential or  

commercial use such as residence, office, shop,  

showroom or godown or for carrying an any  

business, occupation, profession or trade, or for any  

other type of use ancillary to the purpose specified;  

xxx xxx xxx  

(g) "appropriate Government" means in respect of  

matters relating to, —  

(i) the Union territory without Legislature, the  

Central Government;   

(ii) the Union territory of Puducherry, the Union  

territory Government;   

(iii) the Union territory of Delhi, the Central  

Ministry of Urban Development;   

(iv) the State, the State Government;   

xxx xxx xxx  

(i) "Authority" means the Real Estate Regulatory  

Authority established under sub-section (1) of  

section 20;  

xxx xxx xxx  

(s) "development" with its grammatical variations  

and cognate expressions, means carrying out the  

development of immovable property, engineering or  

other operations in, on, over or under the land or the  

making of any material change in any immovable  

property or land and includes re-development;

51    

xxx xxx xxx  

(zn) "real estate project" means the development of  

a building or a building consisting of apartments, or  

converting an existing building or a part thereof into  

apartments, or the development of land into plots or  

apartments, as the case may be, for the purpose of  

selling all or some of the said apartments or plots or  

building, as the case may be, and includes the  

common areas, the development works, all  

improvements and structures thereon, and all  

easement, rights and appurtenances belonging  

thereto;  

xxx xxx xxx  

3. Prior registration of real estate project with  

Real Estate Regulatory Authority. --(1) No  

promoter shall advertise, market, book, sell or offer  

for sale, or invite persons to purchase in any manner  

any plot, apartment or building, as the case may be,  

in any real estate project or part of it, in any planning  

area, without registering the real estate project with  

the Real Estate Regulatory Authority established  

under this Act:   

Provided that projects that are ongoing on the date  

of commencement of this Act and for which the  

completion certificate has not been issued, the  

promoter shall make an application to the Authority  

for registration of the said project within a period of  

three months from the date of commencement of  

this Act:   

Provided further that if the Authority thinks  

necessary, in the interest of allottees, for projects  

which are developed beyond the planning area but  

with the requisite permission of the local authority, it  

may, by order, direct the promoter of such project to  

register with the Authority, and the provisions of this  

Act or the rules and regulations made thereunder,

52    

shall apply to such projects from that stage of  

registration.  

(2) Notwithstanding anything contained in sub-

section (1), no registration of the real estate project  

shall be required—   

(a) where the area of land proposed to be developed  

does not exceed five hundred square meters or the  

number of apartments proposed to be developed  

does not exceed eight inclusive of all phases:   

Provided that, if the appropriate Government  

considers it necessary, it may, reduce the threshold  

below five hundred square meters or eight  

apartments, as the case may be, inclusive of all  

phases, for exemption from registration under this  

Act;   

(b) where the promoter has received completion  

certificate for a real estate project prior to  

commencement of this Act;   

(c) for the purpose of renovation or repair or re-

development which does not involve marketing,  

advertising selling or new allotment of any  

apartment, plot or building, as the case may be,  

under the real estate project.   

Explanation. —For the purpose of this section,  

where the real estate project is to be developed in  

phases, every such phase shall be considered a  

stand alone real estate project, and the promoter  

shall 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 for registration of the real  

estate project in such form, manner, within such  

time and accompanied by such fee as may be  

prescribed by the regulations made by the Authority.  

53    

(2) The promoter shall enclose the following  

documents along with the application referred to in  

sub-section (1), namely: —   

(a) a brief details of his enterprise including its name,  

registered address, type of enterprise  

(proprietorship, societies, partnership, companies,  

competent authority), and the particulars of  

registration, and the names and photographs of the  

promoter;   

(b) a brief detail of the projects launched by him, in  

the past five years, whether already completed or  

being developed, as the case may be, including the  

current status of the said projects, any delay in its  

completion, details of cases pending, details of type  

of land and payments pending;   

(c) an authenticated copy of the approvals and  

commencement certificate from the competent  

authority obtained in accordance with the laws as  

may be applicable for the real estate project  

mentioned in the application, and where the project  

is proposed to be developed in phases, an  

authenticated copy of the approvals and  

commencement certificate from the competent  

authority for each of such phases;   

(d) the sanctioned plan, layout plan and  

specifications of the proposed project or the phase  

thereof, and the whole project as sanctioned by the  

competent authority;  

(e) the plan of development works to be executed  

in the proposed project and the proposed facilities to  

be provided thereof including firefighting facilities,  

drinking water facilities, emergency evacuation  

services, use of renewable energy;   

(f) the location details of the project, with clear  

demarcation of land dedicated for the project along  

with its boundaries including the latitude and  

longitude of the end points of the project;  

54    

(g) proforma of the allotment letter, agreement for  

sale, and the conveyance deed proposed to be  

signed with the allottees;   

(h) the number, type and the carpet area of  

apartments for sale in the project along with the area  

of the exclusive balcony or verandah areas and the  

exclusive open terrace areas apartment with the  

apartment, 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, for the proposed project;   

(k) the names and addresses of the contractors,  

architect, structural engineer, if any and other  

persons concerned with the development of the  

proposed project;   

(l) a declaration, supported by an affidavit, which  

shall be signed by the promoter or any person  

authorised by the promoter, stating:—   

(A) that he has a legal title to the land on which  

the development is proposed along with legally  

valid documents with authentication of such title,  

if such land is owned by another person;   

(B) that the land is free from all encumbrances,  

or as the case may be details of the  

encumbrances on such land including any rights,  

title, interest or name of any party in or over such  

land along with details;   

(C) the time period within which he undertakes  

to complete the project or phase thereof, as the  

case may be;   

(D) that seventy per cent. of the amounts  

realised for the real estate project from the  

allottees, from time to time, shall be deposited in  

a separate account to be maintained in a  

scheduled bank to cover the cost of construction

55    

and the land cost and shall be used only for that  

purpose:  

    Provided that the promoter shall withdraw the  

amounts from the separate account, to cover the  

cost of the project, in proportion to the percentage  

of completion of the project:   

     Provided further that the amounts from the  

separate account shall be withdrawn by the  

promoter after it is certified by an engineer, an  

architect and a chartered accountant in practice that  

the withdrawal is in proportion to the percentage of  

completion of the project:   

Provided also that the promoter shall get his  

accounts audited within six months after the end of  

every financial year by a chartered accountant in  

practice, and shall produce a statement of accounts  

duly certified and signed by such chartered  

accountant and it shall be verified during the audit  

that the amounts collected for a particular project  

have been utilised for that project and the  

withdrawal has been in compliance with the  

proportion to the percentage of completion of the  

project.   

    Explanation.— For the purpose of this clause,  

the term "schedule bank" means a bank included in  

the Second Schedule to the Reserve Bank of India  

Act, 1934;   

(E) that he shall take all the pending approvals on  

time, from the competent authorities;   

(F) that he has furnished such other documents  

as may be prescribed 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 a web based  

online system for submitting applications for

56    

registration of projects within a period of one year  

from the date of its establishment.   

5. Grant of registration.— On receipt of the  

application under sub-section (1) of section 4, the  

Authority shall within a period of thirty days.  

(a) grant registration subject to the provisions of  

this Act and the rules and regulations made  

thereunder, and provide a registration number,  

including a Login Id and password to the applicant  

for accessing the website of the Authority and to  

create his web page and to fill therein the details  

of the proposed project; or   

(b) reject the application for reasons to be  

recorded in writing, if such application does not  

conform to the provisions of this Act or the rules  

or regulations made thereunder:  

Provided that no application shall be rejected  

unless the applicant has been given an opportunity  

of being heard in the matter.  

(2) If the Authority fails to grant the registration or  

reject the application, as the case may be, as  

provided under sub-section (1), the project shall be  

deemed to have been registered, and the Authority  

shall within a period of seven days of the expiry of  

the said period of thirty days specified under sub-

section (1), provide a registration number and a  

Login Id and password to the promoter for accessing  

the website of the Authority and to create his web  

page and to fill therein the details of the proposed  

project.   

(3) The registration granted under this section shall  

be valid for a period declared by the promoter under  

sub-clause (C) of clause (1) of sub-section (2) of  

section 4 for completion of the project or phase  

thereof, as the case may be.  

6. Extension of registration.-- The registration  

granted under section 5 may be extended by the

57    

Authority on an application made by the promoter  

due to force majeure, in such form and on payment  

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 of each case, and for  

reasons to be recorded in writing, extend the  

registration granted to a project for such time as it  

considers necessary, which shall, in aggregate, not  

exceed a period of one year:   

       Provided further that no application for  

extension of registration shall be rejected unless the  

applicant has been given an opportunity of being  

heard in the matter.   

       Explanation.— For the purpose of this section,  

the expression "force majeure" shall mean a case of  

war, flood, drought, fire, cyclone, earthquake or any  

other calamity caused by nature affecting the  

regular development of the real estate project.  

7.Revocation of registration.-- (1) The Authority  

may, on receipt of a complaint or suo motu in this  

behalf or on the recommendation of the competent  

authority, revoke the registration granted under  

section 5, after being satisfied that—   

(a) the promoter makes default in doing anything  

required by or under this Act or the rules or the  

regulations made thereunder;   

(b) the promoter violates any of the terms or  

conditions of the approval given by the competent  

authority;   

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

practice or irregularities.   

      Explanation.—For the purposes of this clause,  

the term "unfair practice” means a practice which,  

for the purpose of promoting the sale or  

development of any real estate project adopts any

58    

unfair method or unfair or deceptive practice  

including any of the following practices, namely:—       

     (A) the practice of making any statement,  

whether in writing or by visible representation  

which,—  

    (i) falsely represents that the services are of a  

particular standard or grade;   

   (ii) represents that the promoter has approval or  

affiliation which such promoter does not have;   

   (iii) makes a false or misleading representation  

concerning the services;   

     (B) the promoter permits the publication of any  

advertisement or prospectus whether in any  

newspaper or otherwise of services that are not  

intended to be offered;   

(d) the promoter indulges in any fraudulent  

practices.  

(2) The registration granted to the promoter under  

section 5 shall not be revoked unless the Authority  

has given to the promoter not less than thirty days  

notice, in writing, stating the grounds on which it is  

proposed to revoke the registration, and has  

considered any cause shown by the promoter  

within the period of that notice against the  

proposed revocation.   

(3) The Authority may, instead of revoking the  

registration under sub-section (1), permit it to  

remain in force subject to such further terms and  

conditions as it thinks fit to impose in the interest of  

the allottees, and any such terms and conditions so  

imposed shall be binding upon the promoter.  

(4) The Authority, upon the revocation of the  

registration,—  

(a) shall debar the promoter from accessing its  

website in relation to that project and specify his

59    

name in the list of defaulters and display his  

photograph on its website and also inform the other  

Real Estate Regulatory Authority in other States  

and Union territories about such revocation or  

registration;   

(b) shall facilitate the remaining development  

works to be carried out in accordance with the  

provisions of section 8;   

(c) shall direct the bank holding the project back  

account, specified under sub clause (D) of clause  

(I) of sub-section (2) of section 4, to freeze the  

account, and thereafter take such further  

necessary actions, including consequent de-

freezing of the said account, towards facilitating the  

remaining development works in accordance 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 on revocation of registration.--Upon  

lapse of the registration or on revocation of the  

registration under this Act, the Authority, may  

consult the appropriate Government to take such  

action as it may deem fit including the carrying out  

of the remaining development works by competent  

authority or by the association of allottees or in any  

other manner, as may be determined by the  

Authority:   

    Provided that no direction, decision or order of  

the Authority under this section shall take effect until  

the expiry of the period of appeal provided under the  

provisions of this Act:  

   Provided further that in case of revocation of  

registration of a project under this Act, the  

association of allottees shall have the first right of

60    

refusal for carrying out of the remaining  

development works.  

xxx xxx xxx  

11. Functions and duties of promoter.--(1) The  

promoter shall, upon receiving his Login Id and  

password under clause (a) of sub-section (1) or  

under sub-section (2) of section 5, as the case may  

be, create his web page on the website of the  

Authority and enter all details of the proposed  

project as provided under sub-section (2) of section  

4, in all the fields as provided, for public viewing,  

including—   

(a) details of the registration granted by the  

Authority;   

(b) quarterly up-to-date the list of number and  

types of apartments 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 the approvals which are pending subsequent  

to commencement certificate;   

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

(f) such other information and documents as may  

be specified by the regulations made by the  

Authority.  

(2) The advertisement or prospectus issued or  

published by the promoter shall mention prominently  

the website address of the Authority, wherein all  

details of the registered project have been entered  

and include the registration number obtained from  

the Authority and such other matters incidental  

thereto.   

(3) The promoter at the time of the booking and  

issue of allotment letter shall be responsible to make

61    

available to the allottee, the following 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  

made by 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 functions under the  

provisions of this Act or the rules and  

regulations made thereunder or to the allottees  

as per the agreement for sale, or to the  

association of allottees, as the case may be, till  

the conveyance of all the apartments, plots or  

buildings, as the case may be, to the allottees,  

or the common areas to the association of  

allottees or the competent authority, as the  

case may be:   

Provided that the responsibility of the promoter,  

with respect to the structural defect or any other  

defect for such period as is referred to in sub-

section (3) of section 14, shall continue even  

after the conveyance deed of all the  

apartments, plots or buildings, as the case may  

be, to the allottees are executed.  

(b) be responsible to obtain the completion  

certificate or the occupancy certificate, or both,  

as applicable, from the relevant competent  

authority as per local laws or other laws for the  

time being in force and to make it available to  

the allottees individually or to the association of  

allottees, as the case may be;  

62    

(c) be responsible to obtain the lease certificate,  

where the real estate project is developed on a  

leasehold land, specifying the period of lease,  

and certifying that all dues and charges in  

regard to the leasehold land has been paid, and  

to make the lease certificate available to the  

association of allottees;   

(d) be responsible for providing and maintaining  

the essential services, on reasonable charges,  

till the taking over of the maintenance 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 a federation of the  

same, under the laws applicable:  

Provided that in the absence of local laws, the  

association of allottees, by whatever name  

called, shall be formed within a period of three  

months of the majority of allottees having  

booked their plot or apartment or building, as  

the case may be, in the project;   

(f) execute a registered conveyance deed of the  

apartment, plot or building, as the case may be,  

in favour of the allottee along with the undivided  

proportionate title in the common areas to the  

association of allottees or competent authority,  

as the case may be, as provided under section  

17 of this Act;   

(g) pay all outgoings until he transfers the  

physical possession of the real estate project to  

the allottee or the associations of allottees, as  

the case may be, which he has collected from  

the allottees, for the payment of outgoings  

(including land cost, ground rent, municipal or  

other local taxes, charges for water or  

electricity, maintenance charges, including  

mortgage loan and interest on mortgages or

63    

other encumbrances and such other liabilities  

payable to competent authorities, banks and  

financial institutions, which are related to the  

project):   

Provided that where any promoter fails to pay  

all or any of the outgoings collected by him from  

the allottees or any liability, mortgage loan and  

interest thereon before transferring the real  

estate 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  

outgoings and penal charges, if any, to the  

authority or person to whom they are payable  

and be liable for the cost of any legal  

proceedings which may be taken therefor by  

such authority or person;   

(h) after he executes an agreement for sale for  

any apartment, plot or building, as the case may  

be, not mortgage or create a charge on such  

apartment, plot or building, as the case may be,  

and if any such mortgage or charge is made or  

created then notwithstanding anything  

contained in any other law for the time being in  

force, it shall not affect the right and interest of  

the 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 the agreement for sale:   

Provided that the allottee may approach the  

Authority for relief, if he is aggrieved by such  

cancellation and such cancellation is not in  

accordance with the terms of the agreement for  

sale, unilateral and without any sufficient cause.  

64    

(6) The promoter shall prepare and maintain all  

such other details as may be specified, from time  

to time, by regulations made by the Authority.  

xxx xxx xxx  

13. No deposit or advance to be taken by  

promoter without first entering into agreement for  

sale. (1) A promoter shall not accept a sum more than  

ten per cent of the cost of the apartment, plot, or  

building as the case may be, as an advance payment  

or an application fee, from a person without first  

entering into a written agreement for sale with such  

person and register the said agreement for sale,  

under any law for the time being in force.   

(2) The agreement for sale referred to in sub-section  

(1) shall be in such form as may be prescribed and  

shall specify the particulars of development of the  

project including the construction of building and  

apartments, along with specifications and internal  

development works and external development works,  

the dates and the manner by which payments  

towards the cost of the apartment, plot or building, as  

the case may be, are to be made by the allottees and  

the date on which the possession of the apartment,  

plot or building is to be handed over, the rates of  

interest payable by the promoter to the allottee and  

the allottee to the promoter in case of default, and  

such other particulars, as may be prescribed.  

xxx xxx xxx  

18. Return of amount and compensation --(1) If the  

promoter fails 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 a  

developer on account of suspension or

65    

revocation of the registration under this Act or for  

any other reason,   

he shall be liable on demand to the allottees, in  

case the allottee wishes to withdraw from the  

project, without prejudice to any other remedy  

available, to return the amount received by him in  

respect of that apartment, plot, building, as the  

case may be, with interest at such rate as may be  

prescribed in this behalf including compensation in  

the manner as provided under this Act:   

Provided that where an allottee does not intend to  

withdraw from the project, he shall be paid, by the  

promoter, interest for every month of delay, till the  

handing over of the possession, at such rate as  

may be prescribed.  

(2) The promoter shall compensate the allottees in  

case of any loss caused to him due to defective title  

of the land, on which the project is being developed  

or has been developed, in the manner as provided  

under this Act, and the claim for compensation  

under this subsection shall not be barred by  

limitation provided under any law for the time being  

in force.  

(3) If the promoter fails to discharge any other  

obligations imposed on him under this Act or the  

rules or regulations made thereunder or in  

accordance with the terms and conditions of the  

agreement for 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 be entitled to obtain the information relating to  

sanctioned plans, layout plans along with the  

specifications, approved by the competent authority  

and such other information as provided in this Act or  

the rules and regulations made thereunder or the  

agreement for sale signed with the promoter.  

66    

(2) The allottee shall be entitled to know stage-wise  

time schedule of completion of the project, including  

the provisions for water, sanitation, electricity and  

other amenities and services as agreed to between  

the promoter and the allottee in accordance with the  

terms and conditions of the agreement for sale.   

(3) The allottee shall be entitled to claim the  

possession of apartment, plot or building, as the  

case may be, and the association of allottees shall  

be entitled to claim the possession of the common  

areas, 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 amount paid along with interest at such rate as  

may be prescribed and compensation in the manner  

as provided under this Act, from the promoter, if the  

promoter fails to comply or is unable to give  

possession of the apartment, plot or building, as the  

case may be, in accordance with the terms of  

agreement for sale or due to discontinuance of his  

business as a developer on account of suspension  

or revocation of his registration under the provisions  

of this Act or the rules or regulations made  

thereunder.  

(5) The allottee shall be entitled to have the  

necessary documents and plans, including that of  

common areas, after handing over the physical  

possession of the apartment or plot or building as  

the case may be, by the promoter.  

(6) Every allottee, who has entered into an  

agreement or sale to take an apartment, plot or  

building as the case may be, under section 13, shall  

be responsible to make necessary payments in the  

manner and within the time as specified in the said  

agreement for sale and shall pay at the proper time  

and place, the share of the registration charges,  

municipal taxes, water and electricity charges,

67    

maintenance charges, ground rent, and other  

charges, if any.   

(7) The allottee shall be liable to pay interest, at such  

rate as may be prescribed, for any delay in payment  

towards any amount or charges to be paid under  

sub-section (6).   

(8) The obligations of the allottee under sub-section  

(6) and the liability towards interest under sub-

section (7) may be reduced when mutually agreed  

to between the promoter and such allottee.   

(9) Every allottee of the apartment, plot or building  

as the case may be, shall participate towards the  

formation of an association or society or cooperative  

society of the allottees, or a federation of the same.  

(10) Every allottee shall take physical possession of  

the apartment, plot or building as the case may be,  

within a period of two months of the occupancy  

certificate issued for the said apartment, plot or  

building, as the case may be.  

(11) Every allottee shall participate towards  

registration of the conveyance deed of the  

apartment, plot or building, as the case may be, as  

provided under sub-section (1) of section 17 of this  

Act.  

20. Establishment and incorporation of Real  

Estate Regulatory Authority -- (1) The appropriate  

Government shall, within a period of one year from  

the date of coming into force of this Act, by  

notification, establish an Authority to be known as the  

Real Estate Regulatory Authority to exercise the  

powers conferred on it and to perform the functions  

assigned to it under this Act:   

Provided that the appropriate Government of two or  

more States or Union territories may, if it deems fit,  

establish one single Authority:

68    

Provided further that, the appropriate Government  

may, if it deems fit, establish more than one Authority  

in a State or Union territory, as the case may be:   

Provided also that until the establishment of a  

Regulatory Authority under this section, the  

appropriate Government shall, by order, designate  

any Regulatory Authority or any officer preferably the  

Secretary of the department dealing with Housing, as  

the Regulatory Authority for the purposes under this  

Act:   

Provided also that after the establishment of the  

Regulatory Authority, all applications, complaints or  

cases pending with the Regulatory Authority  

designated, shall stand transferred to the Regulatory  

Authority so established and shall be heard from the  

stage such applications, complaints or cases are  

transferred.  

(2) The Authority shall be a body corporate by the  

name aforesaid having perpetual succession and a  

common seal, with the power, subject to the  

provisions of this Act, to acquire, hold and dispose of  

property, both movable and immovable, and to  

contract, and shall, by the said name, sue or be sued.  

xxx xxx xxx  

31. Filing of complaints with the Authority or the  

adjudicating officer.-- (1) Any aggrieved person  

may file a complaint with the Authority or the  

adjudicating officer, as the case may be, for any  

violation or contravention of the provisions of this Act  

or the rules and regulations made thereunder against  

any promoter allottee or real estate agent, as the  

case may be.   

Explanation.—For the purpose of this sub-section  

"person" shall include the association of allottees or  

any voluntary consumer association registered under  

any law for the time being in force.  

69    

(2) The form, manner and fees for filing complaint  

under sub-section (1) shall be such as may be  

prescribed.  

xxx xxx xxx  

34. Functions of Authority --The functions of the  

Authority shall include—   

(a) to register and regulate real estate projects and  

real estate agents registered under this Act;   

(b) to publish and maintain a website of records, for  

public viewing, of all real estate projects for which  

registration has been given, with such details as  

may be prescribed, including information provided  

in the application for which registration has been  

granted;   

(c) to maintain a database, on its website, for public  

viewing, and enter the names and photographs of  

promoters as defaulters including the project  

details, registration for which has been revoked or  

have been penalised under this Act, with reasons  

therefor, for access to the general public;   

(d) to maintain a database, on its website, for public  

viewing, and enter the names and photographs of  

real estate agents who have applied and registered  

under this Act, with such details as may be  

prescribed, including those whose registration has  

been rejected or revoked;   

(e) to fix through regulations for each areas under  

its jurisdiction the standard fees to be levied on the  

allottees or the promoter or the real estate agent,  

as the case may be;   

(f) to ensure compliance of the obligations cast  

upon the promoters, the allottees and the real  

estate agents under this Act and the rules and  

regulations made thereunder;  

70    

(g) to ensure compliance of its regulations or  

orders or directions made in exercise of its powers  

under this Act;   

(h) to perform such other functions as may be  

entrusted to the Authority by the appropriate  

Government as may be necessary to carry out the  

provisions of this Act.  

xxx xxx xxx  

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 committed and continues  

to be committed or that such act is about to be  

committed, the Authority may, by order, restrain any  

promoter, allottee or real estate agent from carrying  

on such act until the conclusion of such inquiry of until  

further orders, without giving notice to such party,  

where the Authority deems it necessary.   

37. Powers of Authority to issue directions. --The  

Authority may, for the purpose of discharging its  

functions under the provisions of this Act or rules or  

regulations made thereunder, issue such directions  

from time to time, to the promoters or allottees or real  

estate agents, as the case may be, as it may consider  

necessary and such directions shall be binding on all  

concerned.  

38. Powers of Authority. --(1) The Authority shall  

have powers to impose penalty or interest, in regard  

to any contravention of obligations cast upon the  

promoters, the allottees and the real estate agents,  

under this Act or the rules and the regulations made  

thereunder.   

(2) The Authority shall be guided by the principles of  

natural justice and, subject to the other provisions of  

this Act and the rules made thereunder, the  

Authority shall have powers to regulate its own  

procedure.  

71    

(3) Where an issue is raised relating to agreement,  

action, omission, practice or procedure that—  

(a) has an appreciable prevention, restriction or  

distortion of competition in connection with the  

development of a real estate project; or   

(b) has effect of market power of monopoly  

situation being abused for affecting interest of  

allottees adversely,   

then the Authority, may suo motu, make reference  

in respect of such issue to the Competition  

Commission of India.  

39. Rectification of orders. --The Authority may, at  

any time within a period of two years from the date of  

the order made under this Act, with a view to  

rectifying any mistake apparent from the record,  

amend any order passed by it, and shall make such  

amendment, if the mistake is brought to its notice by  

the parties:   

Provided that no such amendment shall be made in  

respect of any order against which an appeal has  

been preferred under this Act:  

Provided further that the Authority shall not, while  

rectifying any mistake apparent from record, amend  

substantive part of its order passed under the  

provisions of this Act.   

40. Recovery of interest or penalty or  

compensation and enforcement of order, etc.-   

(1) If a promoter or an allottee or a real estate  

agent, as the case may be, fails to pay any interest  

or penalty or compensation imposed on him, by the  

adjudicating officer or the Regulatory Authority or  

the Appellate Authority, as the case may be, under  

this Act or the rules and regulations made  

thereunder, it shall be recoverable from such  

promoter or allottee or real estate agent, in such

72    

manner as may be prescribed as an arrears of land  

revenue.  

(2) If any adjudicating officer or the Regulatory  

Authority or the Appellate Tribunal, as the case  

may be, issues any order or directs any person to  

do any act, or refrain from doing any act, which it is  

empowered to do under this Act or the rules or  

regulations made thereunder, then in case of  

failure by any person to comply with such order or  

direction, the same shall be enforced, in such  

manner as may be prescribed.  

xxx xxx xxx  

43. Establishment of Real Estate Appellate  

Tribunal-- (1) The appropriate Government shall,  

within a period of one year from the date of coming  

into force of this Act, by notification, establish an  

Appellate Tribunal to be known as the — (name of  

the State/Union territory) Real Estate Appellate  

Tribunal.   

xxx xxx xxx  

44. Application for settlement of disputes and  

appeals to Appellate Tribunal-- (1) The appropriate  

Government or the competent authority or any  

person aggrieved by any direction or order or  

decision of the Authority or the adjudicating officer  

may prefer an appeal to the Appellate Tribunal.  

xxx xxx xxx  

58. Appeal to High Court. --(1) Any person  

aggrieved by any decision or order of the Appellate  

Tribunal, may, file an appeal to the High Court, within  

a period of sixty days from the date of communication  

of the decision or order of the Appellate Tribunal, to  

him, on any one or more of the grounds specified in  

section 100 of the Code of Civil Procedure, 1908 (5  

of 1908):  

73    

Provided that the High Court may entertain the  

appeal after the expiry of the said period of sixty days,  

if it is satisfied that the appellant was prevented by  

sufficient cause from preferring the appeal in time.   

Explanation.—The expression "High Court" means  

the High Court of a State or Union territory where the  

real estate project is situated.   

(2) No appeal shall lie against any decision or order  

made by the Appellate Tribunal with the consent of  

the parties.  

59. Punishment for nonregistration under section  

3.-- (1) If any promoter contravenes the provisions of  

section 3, he shall be liable to a penalty which may  

extend up to ten per cent of the estimated cost of the  

real estate project as determined by the Authority.   

(2) If any promoter does not comply with the orders,  

decisions or directions issued under sub-section  

(1) or continues to violate the provisions of section  

3, he shall be punishable with imprisonment for a  

term which may extend up to three years or with  

fine which may extend up to a further ten per cent  

of the estimated cost of the real estate project, or  

with both.   

60. Penalty for contravention of section 4. --If any  

promoter provides false information or contravenes  

the provisions of section 4, he shall be liable to a  

penalty which may extend up to five per cent. of the  

estimated cost of the real estate project, as  

determined by the Authority.   

61. Penalty for contravention of other provisions  

of this Act.-- If any promoter contravenes any other  

provisions of this Act, other than that provided under  

section 3 or section 4, or the rules or regulations  

made thereunder, he shall be liable to a penalty which  

may extend up to five per cent. of the estimated cost  

of the real estate project as determined by the  

Authority.

74    

xxx xxx xxx  

71. Power to adjudicate.-- (1) For the purpose of  

adjudging compensation under sections 12, 14, 18  

and section 19, the Authority shall appoint in  

consultation with the appropriate Government one or  

more judicial officer as deemed necessary, who is or  

has been a District Judge to be an adjudicating officer  

for holding an inquiry in the prescribed manner, after  

giving any person concerned a reasonable  

opportunity of being heard:   

Provided that any person whose complaint in respect  

of matters covered under sections 12, 14, 18 and  

section 19 is pending before the Consumer Disputes  

Redressal Forum or the Consumer Disputes  

Redressal Commission or the National Consumer  

Redressal Commission, established under section 9  

of the Consumer Protection Act, 1986, (68 of 1986),  

on or before the commencement of this Act, he may,  

with the permission of such Forum or Commission,  

as the case may be, withdraw the complaint pending  

before it and file an application before the  

adjudicating officer under this Act.  

(2) The application for adjudging compensation  

under sub-section (1), shall be dealt with by the  

adjudicating officer as expeditiously as possible and  

dispose of the same within a period of sixty days  

from the date of receipt of the application:  

Provided that where any such application could not  

be disposed of within the said period of sixty days,  

the adjudicating officer shall record his reasons in  

writing for not disposing of the application within that  

period.   

(3) While holding an inquiry the adjudicating officer  

shall have power to summon and enforce the  

attendance of any person acquainted with the facts  

and circumstances of the case to give evidence or  

to produce any document which in the opinion of

75    

the adjudicating officer, may be useful for or  

relevant to the subject matter of the inquiry and if,  

on such inquiry, he is satisfied that the person has  

failed to comply with the provisions of any of the  

sections specified in sub-section (1), he may direct  

to pay such compensation or interest, as the case  

may be, as he thinks fit in accordance with the  

provisions of any of those sections.  

xxx xxx xxx  

72. Factors to be taken into account by the  

adjudicating officer.-- While adjudging the quantum  

of compensation or interest, as the case may be,  

under section 71, the adjudicating officer shall have  

due regard to the following factors, namely:—   

(a) the amount of disproportionate gain or unfair  

advantage, wherever quantifiable, made as a result  

of the default;  

(b) the amount of loss caused as a result of the  

default;   

(c) the repetitive nature of the default;   

(d) such other factors which the adjudicating officer  

considers necessary to the case in furtherance of  

justice.  

xxx xxx xxx  

79. Bar of jurisdiction. --No civil court shall have  

jurisdiction to entertain any suit or proceeding in  

respect of any matter which the Authority or the  

adjudicating officer or the Appellate Tribunal is  

empowered by or under this Act to determine and no  

injunction shall be granted by any court or other  

authority in respect of any action taken or to be taken  

in pursuance of any power conferred by or under this  

Act.  

xxx xxx xxx

76    

88. Application of other laws not barred-- The  

provisions of this Act shall be in addition to, and not  

in derogation of, the provisions of any other law for  

the time being in force.  

89. Act to have overriding effect.-- The provisions  

of this Act shall have effect, notwithstanding anything  

inconsistent therewith contained in any other law for  

the time being in force.”  

22. A perusal of the aforesaid provisions would show that, on  

and from the coming into force of the RERA, all real estate projects  

(as defined) would first have to be registered with the Real Estate  

Regulatory Authority, which, before registering such projects,  

would look into all relevant details, including delay in completion  

of other projects by the developer. Importantly, the promoter is  

now to make a declaration supported by an affidavit, that he  

undertakes to complete the project within a certain time period,  

and that 70% of the amounts realised for the project from allottees,  

from time to time, shall be deposited in a separate account, which  

would be spent only to defray the cost of construction and land  

cost for that particular project. Registration is granted by the  

authority only when it is satisfied that the promoter is a bona fide  

promoter who is likely to perform his part of the bargain  

satisfactorily. Registration of the project enures only for a certain  

period and can only be extended due to force majeure events for

77    

a maximum period of one year by the authority, on being satisfied  

that such events have, in fact, taken place. Registration once  

granted, may be revoked if it is found that the promoter defaults in  

complying with the various statutory requirements or indulges in  

unfair practices or irregularities. Importantly, upon revocation of  

registration, the authority is to facilitate the remaining development  

work, which can then be carried out either by the “competent  

authority” as defined by the RERA or by the association of  

allottees or otherwise. The promoter at the time of booking and  

issue of allotment letters has to make available to the allottees  

information, inter alia, as to the stage-wise time schedule of  

completion of the project. Deposits or advances beyond 10% of  

the estimated cost as advance payment cannot be taken without  

first entering into an agreement for sale. Importantly, the  

agreement for sale will now no longer be a one-sided contract of  

adhesion, but in such form as may be prescribed, which balances  

the rights and obligations of both the promoter and the allottees.  

Importantly, under Section 18, if the promoter fails to complete or  

is unable to give possession of an apartment, plot or building in  

accordance with the terms of the agreement for sale, he must  

return the amount received by him in respect of such apartment  

etc. with such interest as may be prescribed and must, in addition,

78    

compensate the allottee in case of any loss caused to him. Under  

Section 19, the allottee shall be entitled to claim possession of the  

apartment, plot or building, as the case may be, or refund of  

amount paid along with interest in accordance with the terms of  

the agreement for sale. In addition, all allottees are to be  

responsible for making necessary payments in instalments within  

the time specified in the agreement for sale and shall be liable to  

pay interest at such rate as may be prescribed for any delay in  

such payment. Under Section 31, any aggrieved person may file  

a complaint with the authority or the adjudicating officers set up by  

such authority against any promoter, allottee or real estate agent,  

as the case may be, for violation or contravention of the RERA,  

and rules and regulations made thereunder. Also, if after  

adjudication a promoter, allottee or real estate agent fails to pay  

interest, penalty or compensation imposed on him by the  

authorities under the RERA, the same shall be recoverable as  

arrears of land revenue. Appeals may be filed to the Real Estate  

Appellate Tribunal against decisions or orders of the authority or  

the adjudicating officer. From orders of the Appellate Tribunal,  

appeals may thereafter be filed to the High Court. Stiff penalties  

are to be awarded for breach and/or contravention of the  

provisions of the RERA. Importantly, under Section 72, the

79    

adjudicating officer must first determine that the complainant has  

established “default” on the part of the respondent, after which  

consequential orders may then follow. Under Section 88, the  

provisions of RERA are in addition to and not in derogation of the  

provisions of any other law for time being in force and under  

Section 89, RERA is to have effect notwithstanding anything  

inconsistent contained in any other law for the time being in force.    

 The Insolvency and Bankruptcy Code, 2016 vis-à-vis the Real  

Estate (Regulation and Development) Act, 2016  

 23. Section 238 of the Code reads as follows:  

“238. The provisions of this Code shall have effect,  

notwithstanding anything inconsistent therewith  

contained in any other law for the time being in force  

or any instrument having effect by virtue of any such  

law.”  

24. It is significant to note that there is no provision similar to  

that of Section 88 of RERA in the Code, which is meant to be a  

complete and exhaustive statement of the law insofar as its  

subject matter is concerned. Also, the non-obstante clause of  

RERA came into force on 1st May, 2016, as opposed to the non-

obstante clause of the Code which came into force on 1st  

December, 2016. Further, the amendment with which we are

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concerned has come into force only on 6th June, 2018. Given  

these circumstances, it is a little difficult to accede to arguments  

made on behalf of learned senior counsel for the Petitioners, that  

RERA is a special enactment which deals with real estate  

development projects and must, therefore, be given precedence  

over the Code, which is only a general enactment dealing with  

insolvency generally. From the introduction of the explanation to  

Section 5(8)(f) of the Code, it is clear that Parliament was aware  

of RERA, and applied some of its definition provisions so that they  

could apply when the Code is to be interpreted. The fact that  

RERA is in addition to and not in derogation of the provisions of  

any other law for the time being in force, also makes it clear that  

the remedies under RERA to allottees were intended to be  

additional and not exclusive remedies. Also, it is important to  

remember that as the authorities under RERA were to be set up  

within one year from 1st May, 2016, remedies before those  

authorities would come into effect only on and from 1st May, 2017  

making it clear that the provisions of the Code, which came into  

force on 1st December, 2016, would apply in addition to the RERA.    

 25. In KSL & Industries Ltd. v. Arihant Threads Ltd. (2015)  

1 SCC 166, a Three Judge Bench of this Court held that the Sick

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Industries Companies (Special Provisions) Act, 1985 (hereinafter  

referred to as the “Sick Act”) would prevail over the Recovery of  

Debts Due to Banks and Financial Institutions Act, 1993  

(hereinafter referred to as the “Recovery Act”) - both statutes  

containing non-obstante clauses. After going into the scheme of  

both the statutes, this Court referred in particular to Section 34(2)  

of the Recovery Act and then held as follows:  

“35. This special law, which deals with the recovery of  debts due to banks and financial institutions, makes  the procedure for recovery of such debts exclusive and  even unique. The non obstante clause in sub-section  (1) confers an overriding effect on the provisions of the  RDDB Act notwithstanding anything inconsistent  therewith contained in any other law for the time being  in force. Sub-section (2), however, makes the RDDB  Act additional to and not in derogation or annulment of  the five Acts mentioned therein i.e. the Industrial  Finance Corporation Act, 1948; the State Financial  Corporations Act, 1951; the Unit Trust of India Act,  1963; the Industrial Reconstruction Bank of India Act,  1984 and the Sick Industrial Companies (Special  Provisions) Act, 1985.  

36. Sub-section (2) was added to Section 34 of the  RDDB Act w.e.f. 17-1-2000 by Act 1 of 2000. There is  no doubt that when an Act provides, as here, that its  provisions shall be in addition to and not in derogation  of another law or laws, it means that the legislature  intends that such an enactment shall coexist along  with the other Acts. It is clearly not the intention of the  legislature, in such a case, to annul or detract from the  provisions of other laws. The term “in derogation of”  means “in abrogation or repeal of”. The Black's Law  Dictionary sets forth the following meaning for  “derogation”:

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“derogation.—The partial repeal or abrogation of a law  by a later Act that limits its scope or impairs its utility  and force.”  

It is clear that sub-section (1) contains a 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 laws and that  the RDDB Act shall be in addition to and not in  abrogation of, such laws. SICA is undoubtedly one  such law.  

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

38. We, thus, find a harmonious scheme in relation to  the proceedings for reconstruction of the company  under SICA, which includes the reconstruction of  debts and even the sale or lease of the sick company's  properties for the purpose, which may or may not be a  part of the security executed by the sick company in  favour of a bank or a financial institution on the one  hand, and the provisions of the RDDB Act, which deal  with recovery of debts due to banks or financial  institutions, if necessary by enforcing the security  charged with the bank or financial institution, on the  other.  

xxx xxx xxx  

48. In view of the observations of this Court in the  decisions referred to and relied on by the learned  counsel for the parties we find that, the purpose of the  two enactments is entirely different. As observed  earlier, the purpose of one is to provide ameliorative  measures for reconstruction of sick companies, and  the purpose of the other is to provide for speedy  recovery of debts of banks and financial institutions.  Both the Acts are “special” in this sense. However,  with reference to the specific purpose of reconstruction  of sick companies, SICA must be held to be a special

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law, though it may be considered to be a general law  in relation to the recovery of debts. Whereas, the  RDDB Act may be considered to be a special law in  relation to the recovery of debts and SICA may be  considered to be a general law in this regard. For this  purpose we rely on the decision in LIC v. Vijay  Bahadur [(1981) 1 SCC 315 : 1981 SCC (L&S) 111] .  Normally the latter of the two would prevail on the  principle that the legislature was aware that it had  enacted the earlier Act and yet chose to enact the  subsequent Act with a non obstante clause. In this  case, however, the express intendment of Parliament  in the non obstante 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 provisions of the  Act or the Rules made thereunder shall be in addition  to, and not in derogation of, the other laws mentioned  therein including SICA.  

49. The term “not in derogation” clearly expresses the  intention of Parliament not to detract from or abrogate  the provisions of SICA in any way. This, in effect must  mean that Parliament intended the proceedings under  SICA for reconstruction of a sick company to go on  and for that purpose further intended that all the other  proceedings against the company and its properties  should be stayed pending the process of  reconstruction. While the term “proceedings” under  Section 22 of SICA did not originally include the RDDB  Act, which was not there in existence. Section 22  covers proceedings under the RDDB Act.”  

 26. In view of Section 34(2) of the Recovery Act, this Court held  

that despite the fact that the non-obstante clause contained in the  

Recovery Act is later in time than the non-obstante clause  

contained in the Sick Act, in the event of a conflict, the Recovery  

Act i.e. the later Act must give way to the Sick Act i.e. the earlier

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Act. Several judgments were referred to in which ordinarily a later  

Act containing a non-obstante clause must be held to have  

primacy over an earlier Act containing a non-obstante clause, as  

Parliament must be deemed to be aware of the fact that the later  

Act is intended to override all earlier statutes including those which  

contained non-obstante clauses. This statement of the law was  

departed from in KSL & Industries (supra) only because of the  

presence of a Section like Section 88 of RERA contained in the  

Recovery Act, which makes it clear that the Act is meant to be in  

addition to and not in derogation of other statutes. In the present  

case, it is clear that both tests are satisfied, namely, that the Code  

as amended, is both later in point of time than RERA, and must  

be given precedence over RERA, given Section 88 of RERA.   

 27. In fact, in Bank of India v. Ketan Parekh (2008) 8 SCC  

148, this Court held that Section 9A of the Special Court (Trial of  

Offences Relating to Transactions in Securities) Act, 1992  

(hereinafter referred to as the “Special Court Act”) must be  

considered to be legislation that is subsequent to the Recovery  

Act, since Section 9A was introduced by amendment, into the  

Special Court Act after the Recovery Act. Needless to add, both  

statutes contained non-obstante clauses. This Court held:

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“28. In the present case, both the two Acts i.e. the Act  of 1992 and the Act of 1993 start with the non obstante  clause. Section 34 of the Act of 1993 starts with non  obstante clause, likewise Section 9-A (sic 13) of the  Act of 1992. But incidentally, in this case Section 9-A  came subsequently i.e. it came on 25-1-1994.  Therefore, it is a subsequent legislation which will  have the overriding effect over the Act of 1993. But  cases might arise where both the enactments have the  non obstante clause then in that case, the proper  perspective would be that one has to see the subject  and the dominant purpose for which the special  enactment was made and in case the dominant  purpose is covered by that contingencies, then  notwithstanding that the Act might have come at a later  point of time still the intention can be ascertained by  looking to the objects and reasons. However, so far as  the present case is concerned, it is more than clear  that Section 9-A of the Act of 1992 was amended on  25-1-1994 whereas the Act of 1993 came in 1993.  Therefore, the Act of 1992 as amended to include  Section 9-A in 1994 being subsequent legislation will  prevail and not the provisions of the Act of 1993.”  

(emphasis supplied)  

28. It is clear, therefore, that even by a process of harmonious  

construction, RERA and the Code must be held to co-exist, and,  

in the event of a clash, RERA must give way to the Code. RERA,  

therefore, cannot be held to be a special statute which, in the case  

of a conflict, would override the general statute, viz. the Code.  

29. As a matter of fact, the Code and RERA operate in  

completely different spheres. The Code deals with a proceeding  

in rem in which the focus is the rehabilitation of the corporate  

debtor. This is to take place by replacing the management of the

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corporate debtor by means of a resolution plan which must be  

accepted by 66% of the Committee of Creditors, which is now put  

at the helm of affairs, in deciding the fate of the corporate debtor.  

Such resolution plan then puts the same or another management  

in the saddle, subject to the provisions of the Code, so that the  

corporate debtor may be pulled out of the woods and may  

continue as a going concern, thus benefitting all stakeholders  

involved. It is only as a last resort that winding up of the corporate  

debtor is resorted to, so that its assets may be liquidated and paid  

out in the manner provided by Section 53 of the Code. On the  

other hand, RERA protects the interests of the individual investor  

in real estate projects by requiring the promoter to strictly adhere  

to its provisions. The object of RERA is to see that real estate  

projects come to fruition within the stated period and to see that  

allottees of such projects are not left in the lurch and are finally  

able to realise their dream of a home, or be paid compensation if  

such dream is shattered, or at least get back monies that they had  

advanced towards the project with interest. At the same time,  

recalcitrant allottees are not to be tolerated, as they must also  

perform their part of the bargain, namely, to pay instalments as  

and when they become due and payable. Given the different  

spheres within which these two enactments operate, different

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parallel remedies are given to allottees – under RERA to see that  

their flat/apartment is constructed and delivered to them in time,  

barring which compensation for the same and/or refund of  

amounts paid together with interest at the very least comes their  

way. If, however, the allottee wants that the corporate debtor’s  

management itself be removed and replaced, so that the  

corporate debtor can be rehabilitated, he may prefer a Section 7  

application under the Code. That another parallel remedy is  

available is recognised by RERA itself in the proviso to Section  

71(1), by which an allottee may continue with an application  

already filed before the Consumer Protection fora, he being given  

the choice to withdraw such complaint and file an application  

before the adjudicating officer under RERA read with Section 88.  

In similar circumstances, this Court in Swaraj Infrastructure  

Private Limited v. Kotak Mahindra Bank Limited (2019) 3 SCC  

620 has held that Debt Recovery Tribunal proceedings under the  

Recovery of Debts Due to Banks and Financial Institutions Act,  

1993 and winding up proceedings under the Companies Act, 1956  

can carry on in parallel streams (see paragraphs 21 and 22  

therein).  

Financial and Operational Creditors  

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30. In Innoventive Industries v. ICICI Bank & Anr. (2018) 1  

SCC 407, this Court after setting out some of the sections of the  

Code, laid down the Scheme of the Code when it came to financial  

and operational creditors triggering the Code against a Corporate  

debtor. This Court held:  

“27. The scheme of the Code is to ensure that when a  default takes place, in the sense that a debt becomes  due and is not paid, the insolvency resolution process  begins. Default is defined in Section 3(12) in very wide  terms as meaning non-payment of a debt once it  becomes due and payable, which includes non- payment of even part thereof or an instalment amount.  For the meaning of “debt”, we have to go to Section  3(11), which in turn tells us that a debt means a liability  of obligation in respect of a “claim” and for the meaning  of “claim”, we have to go back to Section 3(6) which  defines “claim” to mean a right to payment even if it is  disputed. The Code gets triggered the moment default  is of rupees one lakh or more (Section 4). The  corporate insolvency resolution process may be  triggered by the corporate debtor itself or a financial  creditor or operational creditor. A distinction is made  by the Code between debts owed to financial creditors  and operational creditors. A financial creditor has been  defined under Section 5(7) as a person to whom a  financial debt is owed and a financial debt is defined in  Section 5(8) to mean a debt which is disbursed against  consideration for the time value of money. As opposed  to this, an operational creditor means a person to  whom an operational debt is owed and an operational  debt under Section 5(21) means a claim in respect of  provision of goods or services.  

28. When it comes to a financial creditor triggering the  process, Section 7 becomes relevant. Under the  Explanation to Section 7(1), a default is in respect of a  financial debt owed to any financial creditor of the

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corporate debtor — it need not be a debt owed to the  applicant financial creditor. Under Section 7(2), an  application is to be made under sub-section (1) in such  form and manner as is prescribed, which takes us to  the Insolvency and Bankruptcy (Application to  Adjudicating Authority) Rules, 2016. Under Rule 4, the  application is made by a financial creditor in Form 1  accompanied by documents and records required  therein. Form 1 is a detailed form in 5 parts, which  requires particulars of the applicant in Part I,  particulars of the corporate debtor in Part II, particulars  of the proposed interim resolution professional in Part  III, particulars of the financial debt in Part IV and  documents, records and evidence of default in Part V.  Under Rule 4(3), the applicant is to dispatch a copy of  the application filed with the adjudicating authority by  registered post or speed post to the registered office  of the corporate debtor. The speed, within which the  adjudicating authority is to ascertain the existence of a  default from the records of the information utility or on  the basis of evidence furnished by the financial  creditor, is important. This it must do within 14 days of  the receipt of the application. It is at the stage of  Section 7(5), where the adjudicating authority is to be  satisfied that a default has occurred, that the corporate  debtor is entitled to point out that a default has not  occurred in the sense that the “debt”, which may also  include a disputed claim, is not due. A debt may not be  due if it is not payable in law or in fact. The moment  the adjudicating authority is satisfied that a default has  occurred, the application must be admitted unless it is  incomplete, in which case it may give notice to the  applicant to rectify the defect within 7 days of receipt  of a notice from the adjudicating authority. Under sub- section (7), the adjudicating authority shall then  communicate the order passed to the financial creditor  and corporate debtor within 7 days of admission or  rejection of such application, as the case may be.  

29. The scheme of Section 7 stands in contrast with  the scheme under Section 8 where an operational  creditor is, on the occurrence of a default, to first  deliver a demand notice of the unpaid debt to the

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operational debtor in the manner provided in Section  8(1) of the Code. Under Section 8(2), the corporate  debtor can, within a period of 10 days of receipt of the  demand notice or copy of the invoice mentioned in  sub-section (1), bring to the notice of the operational  creditor the existence of a dispute or the record of the  pendency of a suit or arbitration proceedings, which is  pre-existing—i.e. before such notice or invoice was  received by the corporate debtor. The moment there  is existence of such a dispute, the operational creditor  gets out of the clutches of the Code.  

30. On the other hand, as we have seen, in the case  of a corporate debtor who commits a default of a  financial debt, the adjudicating authority has merely to  see the records of the information utility or other  evidence produced by the financial creditor to satisfy  itself that a default has occurred. It is of no matter that  the debt is disputed so long as the debt is “due” i.e.  payable unless interdicted by some law or has not yet  become due in the sense that it is payable at some  future date. It is only when this is proved to the  satisfaction of the adjudicating authority that the  adjudicating authority may reject an application and  not otherwise.”  

(emphasis supplied)  

 31. Likewise, in Swiss Ribbons (supra), this Court while  

repelling a challenge to the constitutional validity of the Code  

based on a purported infraction of Article 14, differentiated  

between financial and operational creditors. In so doing, it made it  

clear that the context of the decision dealt with banks and financial  

institutions as financial creditors as opposed to operational  

creditors who could be corporations or individuals to whom monies

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were owed for goods and/or services. In certain circumstances,  

financial creditors could also be individuals, such as debenture  

holders and fixed deposit holders, who were then spoken of as  

follows:  

“42. A perusal of the definition of “financial creditor”  and “financial debt” makes it clear that a financial debt  is a debt together with interest, if any, which is  disbursed against the consideration for time value of  money. It may further be money that is borrowed or  raised in any of the manners prescribed in Section 5(8)  or otherwise, as Section 5(8) is an inclusive definition.  On the other hand, an “operational debt” would include  a claim in respect of the provision of goods or services,  including employment, or a debt in respect of payment  of dues arising under any law and payable to the  Government or any local authority.  

43. A financial creditor may trigger the Code either by  itself or jointly with other financial creditors or such  persons as may be notified by the Central Government  when a “default” occurs. The Explanation to Section  7(1) also makes it clear that the Code may be triggered  by such persons in respect of a default made to any  other financial creditor of the corporate debtor, making  it clear that once triggered, the resolution process  under the Code is a collective proceeding in rem which  seeks, in the first instance, to rehabilitate the corporate  debtor. Under Section 7(4), the adjudicating authority  shall, within the prescribed period, ascertain the  existence of a default on the basis of evidence  furnished by the financial creditor; and under Section  7(5), the adjudicating authority has to be satisfied that  a default has occurred, when it may, by order, admit  the application, or dismiss the application if such  default has not occurred. On the other hand, under  Sections 8 and 9, an operational creditor may, on the  occurrence of a default, deliver a demand notice which  must then be replied to within the specified period.

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What is important is that at this stage, if an application  is filed before the adjudicating authority for initiating  the corporate insolvency resolution process, the  corporate debtor can prove that the debt is disputed.  When the debt is so disputed, such application would  be rejected.  

xxx xxx xxx  

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

“10.6. For certain securities, a trustee or an agent may  already be appointed as per the terms of the security  instrument. For example, a debenture trustee would  be appointed if debentures exceeding 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]. Such creditors may be represented through  such pre-appointed trustees or agents. For other  classes of creditors which exceed a certain threshold  in number, like home buyers or security-holders for  whom no trustee or agent has already been appointed  under a debt instrument or otherwise, an insolvency  professional (other than IRP) shall be appointed by  NCLT on the request of IRP. It is to be noted that as  the agent or trustee or insolvency professional i.e. the  authorised representative for the creditors discussed  above and executors, guarantors, etc. as discussed in  Para 9 of this Report, shall be a part of the CoC, they  cannot be related parties to the corporate debtor in line  with the spirit of proviso to Section 21(2).  

***  

10.8. In light of the deliberation above, the Committee  felt that a mechanism requires to be provided in the  Code to mandate representation in meetings of  security-holders, deposit-holders, and all other  classes of financial creditors which exceed a certain

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number, through an authorised representative. This  can be done by adding a new provision to Section 21  of the Code. Such a representative may either be a  trustee or an agent appointed under the terms of the  debt agreement of such creditors, otherwise an  insolvency professional may be appointed by NCLT for  each such class of financial creditors. Additionally, the  representative shall act and attend the meetings on  behalf of the respective class of financial creditors and  shall vote on behalf of each of the financial creditors to  the extent of the voting share of each such creditor,  and as per their instructions. To ensure adequate  representation by the authorised representative of the  financial creditors, a specific provision laying down the  rights and duties of such authorised representatives  may be inserted. Further, the requisite threshold for  the number of creditors and manner of voting may be  specified by IBBI through regulations to enable  efficient voting by the representative. Also, Regulation  25 may also be amended to enable voting through  electronic means such as e-mail, to address any  technical issues which may arise due to a 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 a financial debt—  

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

(b) is owed to a class of creditors exceeding the  number as may be specified, other than the creditors  covered under clause (a) or sub-section (6), the  interim resolution professional shall make an

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application to the adjudicating authority along with the  list of all financial creditors, containing the name of an  insolvency professional, other than the interim  resolution professional, to act as their authorised  representative who shall be appointed by the  adjudicating authority prior to the first meeting of the  Committee of Creditors;  

(c) is represented by a guardian, executor or  administrator, such person shall act as authorised  representative on behalf of such financial creditors,  

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

(6-B) The remuneration payable to the authorised  representative—  

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

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

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

“16-A. Authorised representative.—(1) The interim  resolution professional shall select the insolvency  professional, who is the choice of the highest number  of financial creditors in the class in Form CA received  under sub-regulation (1) of Regulation 12, to act as the  authorised representative of the creditors of the  respective class:  

Provided that the choice for an insolvency professional  to act as authorised representative in Form CA

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received under sub-regulation (2) of Regulation 12  shall not be considered.  

(2) The interim resolution professional shall apply to  the adjudicating authority for appointment of the  authorised representatives selected under sub- regulation (1) within two days of the verification of  claims received under sub-regulation (1) of Regulation  12.  

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

(4) The interim resolution professional shall provide  the list of creditors in each class to the respective  authorised representative appointed by the  adjudicating authority.  

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

Clarification: The authorised representative shall have  no role in receipt or verification of claims of creditors  of the class he represents.  

(6) The interim resolution professional or the resolution  professional, as the case may be, shall provide  electronic means of communication between the  authorised representative and the creditors in the  class.  

(7) The voting share of a creditor in a class shall be in  proportion to the financial debt which includes an  interest at the rate of eight per cent per annum unless  a different rate has been agreed to between the  parties.  

(8) The authorised representative of creditors in a  class shall be entitled to receive fee for every meeting

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of the committee attended by him in the following  manner, namely:  

Number of  creditors in  the class  

Fee per meeting of  the committee (Rs)  

10-100 15,000  

101-1000 20,000  

More than  1000  

25,000  

(9) The authorised representative shall circulate the  agenda to creditors in a class and announce the voting  window at least twenty-four hours before the window  opens for voting instructions and keep the voting  window open for at least twelve hours.  

16-B. Committee with only creditors in a class. — Where the corporate debtor has only creditors in a  class and no other financial creditor eligible to join the  committee, the committee shall consist of only the  authorised representative(s).”  

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

xxx xxx xxx  

61. Insofar as set-off and counterclaim is concerned,  a set-off of amounts due from financial creditors is a  rarity. Usually, financial debts point only in one way— amounts lent have to be repaid. However, it is not as  if a legitimate set-off is not to be considered at all. Such  set-off may be considered at the stage of filing of proof  of claims during the resolution process by the  resolution professional, his decision being subject to

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challenge before the adjudicating authority under  Section 60.”  

The Article 14 Challenge (I): Discrimination  

32. Learned counsel for the Petitioners have emphasised that  

treating allottees to be financial creditors is discriminatory  

inasmuch as unequals are treated equally, equals are treated  

unequally, and both are without any intelligible differentia having  

any nexus with the objects of the Code. It is argued that  

discrimination arises, equals being treated as unequal, as real  

estate developers are differentiated from other entities who supply  

goods or services and would, therefore, be discriminated against  

as, in the case of real estate developers, all that an allottee would  

have to show is that a debt is due to him, whereas in the cases of  

persons supplying goods or services if there exists any pre-

existing dispute between the operational debtor and the person  

who purchases the goods or avails of the services, the operational  

debtor would be outside the clutches of the Code. It was also  

argued that unequals are treated as equals as banks and financial  

institutions are completely different from real estate developers,  

as has been recognised in Swiss Ribbons (supra), and to treat

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these unequals as equals by making real estate developers  

financial debtors, again infracts Article 14.    

33. When Article 14 is alleged to have been infracted by  

legislation which is economic in nature, it is important to first  

restate a few fundamental principles. In Ram Krishna Dalmia v.  

Justice S.R. Tendolkar (1959) SCR 279, this Court laid down the  

oft quoted principles that apply when challenges on the ground of  

discrimination are made to statutes. This Court held:  

“…The principle enunciated above has been  consistently adopted and applied in subsequent  cases. The decisions of this Court further  establish—  

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

(b) that there is always a presumption in favour  of the constitutionality of an enactment and the  burden is upon him who attacks it to show that  there has been a clear transgression of the  constitutional principles;  

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

99    

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

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

(f) that while good faith and knowledge of the  existing conditions on the part of a legislature are  to be presumed, if there is nothing on the face of  the law or the surrounding circumstances  brought to the notice of the court on which the  classification may reasonably be regarded as  based, the presumption of constitutionality  cannot be carried to the extent of always holding  that there must be some undisclosed and un- known reasons for subjecting certain individuals  or corporations to hostile or discriminating  legislation. (at page 297, 298)”  

34. This principle has been re-iterated by this Court in State of  

Bihar v. Shree Baidyanath Ayurved Bhawan (P) Ltd. (2005) 2  

SCC 762 at 783 and more recently in Karnataka Live Band  

Restaurants Assn. v. State of Karnataka (2018) 4 SCC 372 at  

393 where this Court re-iterated the principles to test legislation on  

the touchstone of Article 14 as laid down by this Court in Ram  

Krishna Dalmia (supra), wherein as extracted above, this Court  

held that the legislature is free to recognise degrees of harm and

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confine its application to those cases where 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 that are under-inclusive and held, particularly with  

regard to economic legislation, that such under-inclusion would  

not result in the death-knell of such laws on the anvil of Article 14.   

This Court put it thus:  

“53. The equal protection of the laws is a pledge  of the protection of equal laws. But laws may  classify. And the very idea of classification is that  of inequality. In tackling this paradox the Court  has neither abandoned the demand for equality  nor denied the legislative right to classify. It has  taken a middle course. It has resolved the  contradictory demands of legislative  specialization and constitutional generality by a  doctrine of reasonable classification. [See  Joseph Tussman and Jacobusten Brook The  Equal Protection of the Law, 37 California Rev  341]  

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

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55. A classification is under-inclusive when all  who are included in the class are tainted with the  mischief but there are others also tainted whom  the classification does not include. In other  words, a classification is bad as under-inclusive  when a State benefits or burdens persons in a  manner that furthers a legitimate purpose but  does not confer the same benefit or place the  same burden on others who are similarly  situated. A classification is over-inclusive when  it includes not only those who are similarly  situated with respect to the purpose but others  who are not so situated as well. In other words,  this type of classification imposes a burden upon  a wider range of individuals than are included in  the class of those attended with mischief at  which the law aims. Herod ordering the death of  all male children born on a particular day  because one of them would someday bring  about his downfall employed such a  classification.  

56. The first question, therefore, is, whether the  exclusion of establishments carrying on  business or trade and employing less than 50  persons makes the classification under- inclusive, when it is seen that all factories  employing 10 or 20 persons, as the case may  be, have been included and that the purpose of  the law is to get in unpaid accumulations for the  welfare of the labour. Since the classification  does not include all who are similarly situated  with respect to the purpose of the law, the  classification might appear, at first blush, to be  unreasonable. But the Court has recognised the  very real difficulties under which legislatures  operate — difficulties arising out of both the  nature of the legislative process and of the  society which legislation attempts perennially to  re-shape — and it has refused to strike down  indiscriminately all legislation embodying  classificatory inequality here under  consideration. Mr Justice Holmes, in urging

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tolerance of under-inclusive classifications,  stated that such legislation should not be  disturbed by the Court unless it can clearly see  that there is no fair reason for the law which  would not require with equal force its extension  to those whom it leaves untouched. [  Missouri, K&T Rly v. May, 194 US 267, 269]  What, then, are the fair reasons for non- extension? What should a court do when it is  faced with a law making an under-inclusive  classification in areas relating to economic and  tax matters? Should it, by its judgment, force the  legislature to choose between inaction or  perfection?  

xxx xxx xxx  

66. That the legislation is directed to practical  problems, that the economic mechanism is  highly sensitive and complex, that many  problems are singular and contingent that laws  are not abstract propositions and do not relate to  abstract units and are not to be measured by  abstract symmetry, that exact wisdom and nice  adaption of remedies cannot be required, that  judgment is largely a prophecy based on meagre  and uninterpreted experience, should stand as  reminder that in this area the Court does not take  the equal protection requirement in a pedagogic  manner [ See “General Theory of Law and  State”, p. 161] .  

67. In the utilities, tax and economic regulation  cases, there are good reasons for judicial self- restraint if not judicial deference to legislative  judgment. The legislature after all has the  affirmative responsibility. The Courts have only  the power to destroy, not to reconstruct. When  these are added to the complexity of economic  regulation, the uncertainty, the liability to error,  the bewildering conflict of the experts, and the  number of times the judges have been overruled  by events — self-limitation can be seen to be the

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path to judicial wisdom and institutional prestige  and stability. [See “General Theory of Law and  State”, p. 161]  

xxx xxx xxx  

71. The Court must be aware of its own  remoteness and lack of familiarity with local  problems. Classification is dependent on the  peculiar needs and specific difficulties of the  community. The needs and difficulties of the  community are constituted out of facts and  opinions beyond the easy ken of the Court [ See  “General Theory of Law and State”, p. 161] . It  depends to a great extent upon an assessment  of the local condition of these concerns which  the legislature alone was competent to make.”   

36. In V.C. Shukla v. State (Delhi Administration) 1980  

Supp. SCC 249, this Court further elaborated:  

“11. In a diverse society and a large democracy  such as ours where the expanding needs of the  nation change with the temper of the times, it is  extremely difficult for any legislation to make laws  applicable to all persons alike. Some amount of  classification is, therefore, necessary to  administer various spheres of the activities of the  State. It is well settled that in applying Article 14  mathematical precision or nicety or perfect  equanimity are not required. Similarity rather than  identity of treatment is enough. The courts should  not make a doctrinaire approach in construing  Article 14 so as to destroy or frustrate any  beneficial legislation. What Article 14 prohibits is  hostile discrimination and not reasonable  classification for the purpose of legislation.  Furthermore, the legislature which is in the best  position to understand the needs and  requirements of the people must be given  sufficient latitude for making selection or

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differentiation and so long as such a selection is  not arbitrary and has a rational basis having  regard to the object of the Act, Article 14 would  not be attracted. That is why this Court has laid  down that presumption is always in favour of the  constitutionality of an enactment and the onus lies  upon the person who attacks the statute to show  that there has been an infraction of the  constitutional concept of equality. It has also been  held that in order to sustain the presumption of  constitutionality, the court is entitled to take into  consideration matters of common knowledge,  common report, the history of the times and all  other facts which may be existing at the time of  the legislation. Similarly, it cannot be presumed  that the administration of a particular law would  be done with an “evil eye and an unequal hand”.  Finally, any person invoking Article 14 of the  Constitution must show that there has been  discrimination against a person who is similarly  situate or equally circumstanced. In the case  of State of U.P. v. Deoman Upadhyaya [AIR 1960  SC 1125 : (1961) 1 SCR 14 : (1961) 2 SCJ 334]  Subba Rao, J., observed as follows:  

“No discrimination can be made either in the  privileges conferred or in the liabilities imposed.  But these propositions conceived in the interests  of the public, if logically stretched too far, may not  achieve the high purpose behind them. In a  society of unequal basic structure, it is wellnigh  impossible to make laws suitable in their  application to all the persons alike. So, a  reasonable classification is not only permitted but  is necessary if society should progress.”  

37. Equally, it is important to note that classification need not  

be perfect. In Venkateshwara Theatre v. State of A.P. (1993) 3  

SCC 677 this Court held:

105    

“20. Article 14 enjoins the State not to deny to  any person equality before the law or the equal  protection of the laws. The phrase “equality  before the law” contains the declaration of  equality of the civil rights of all persons within the  territories of India. It is a basic principle of  republicanism. The phrase “equal protection of  laws” is adopted from the Fourteenth  Amendment to the U.S. Constitution. The right  conferred by Article 14 postulates that all  persons similarly circumstanced shall be treated  alike both in privileges conferred and liabilities  imposed. Since the State, in exercise of its  governmental power, has, of necessity, to make  laws operating differently on different groups of  persons within its territory to attain particular  ends in giving effect to its policies, it is  recognised that the State must possess the  power of distinguishing and classifying persons  or things to be subjected to such laws. It is,  however, required that the classification must  satisfy two conditions, namely, (i) it is founded  on an intelligible differentia which distinguishes  those that are grouped together from others; and  (ii) the differentia must have a rational relation to  the object sought to be achieved by the Act. It is  not the requirement that the classification should  be scientifically perfect or logically complete.  Classification would be justified if it is not  palpably arbitrary. (See : Re, Special Courts Bill,  1978 [(1979) 1 SCC 380 : (1979) 2 SCR 476,  534-36] .) If there is equality and uniformity  within each group, the law will not be  condemned as discriminative, though due to  some fortuitous circumstance arising out of a  peculiar situation some included in a class get  an advantage over others, so long as they are  not singled out for special treatment.  (See: Khandige Sham Bhat v. Agricultural  I.T.O. [(1963) 3 SCR 809, 817: AIR 1963 SC  591: (1963) 48 ITR 21])  

(emphasis supplied)

106    

xxx xxx xxx  

23. Just as a difference in the treatment of  persons similarly situate leads to discrimination,  so also discrimination can arise if persons who  are unequals, i.e. differently placed, are treated  similarly. In such a case failure on the part of the  legislature to classify the persons who are  dissimilar in separate categories and applying  the same law, irrespective of the differences,  brings about the same consequence as in a case  where the law makes a distinction between  persons who are similarly placed. A law  providing for equal treatment of unequal objects,  transactions or persons would be condemned as  discriminatory if there is absence of rational  relation to the object intended to be achieved by  the law.  

xxx xxx xxx  

29. In the instant case, we find that the  legislature has prescribed different 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-permanent and touring and  temporary. The theatres have further been  categorised on the basis of the type of the local  area in which they are situate. It cannot,  therefore, be said that there has been no attempt  on the part of the legislature to classify the  cinema theatres taking into consideration the  differentiating circumstances for the purpose of  imposition of tax. The grievance of the  appellants is that the classification is not perfect.  What they want is that there should have been  further classification amongst the theatres falling  in the same class on the basis of the location of  the theatre in each local area. We do not think  that such a contention is well founded.”

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38. Also, in Mardia Chemicals Ltd. v. Union of India (2004)  

4 SCC 311, this Court held that Parliamentary intent cannot be  

thwarted even if it operates a bit harshly on a small section of the  

public, if otherwise made in the larger public interest. This Court  

said:  

“74. A reference has also been made for similar  observations in Srinivasa Enterprises v. Union  of India [(1980) 4 SCC 507] at SCC pp. 513-14  and in Jalan Trading Co. (P) Ltd. v. Mill Mazdoor  Sabha [AIR 1967 SC 691 : (1967) 1 SCR 15] at  SCR p. 36. While referring to the observations  made in Collector of Customs v. Nathella  Sampathu Chetty [AIR 1962 SC 316 : (1962) 3  SCR 786 : (1962) 1 Cri LJ 364] at SCR pp. 829- 30 it is submitted that the intent of Parliament  shall not be defeated merely for the reason that  it may operate a bit harshly on a small section of  public where it may be necessary to make such  provisions of achieving the desired objectives to  ensure that the nefarious activities of smuggling,  etc. had to be necessarily curbed.  In Fatehchand Himmatlal [(1977) 2 SCC 670]  where debts of the agriculturists were wiped off,  this Court observed:  

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

108    

The principle contained in Swiss Ribbons (supra), that far greater  

deference is accorded to economic legislation, as the legislature  

is given free play in the joints and is at liberty to conduct economic  

experiments in 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) of Ram Krishna Dalmia (supra) are all  

also attracted in the present case.    

39. It is also important to remember that the Code is not meant  

to be a debt recovery mechanism [see paragraph 28 of Swiss  

Ribbons (supra)]. It is a proceeding in rem which, after being  

triggered, goes completely outside the control of the allottee who  

triggers it. Thus, any allottee/home buyer who prefers an  

application under Section 7 of the Code takes the risk of his  

flat/apartment not being completed in the near future, in the event  

of there being a breach on the part of the developer. Under the  

Code, he may never get a refund of the entire principal, let alone  

interest. This is because, the moment a petition is admitted under  

Section 7, the resolution professional must first advertise for and  

find a resolution plan by somebody, usually another developer,  

which has then to pass muster under the Code, i.e. that it must be  

approved by at least 66% of the Committee of Creditors and must

109    

further go through challenges before NCLT and NCLAT before the  

new management can take over and either complete construction,  

or pay out or refund amounts. Depending on the kind of resolution  

plan that is approved, such home buyer/allottee may have to wait  

for a very long period for the successful completion of the project.  

He may never get his full money back together with interest in the  

event that no suitable resolution plan is forthcoming, in which  

case, winding up of the corporate debtor alone would ensue. On  

the other hand, if such allottee were to approach the Real Estate  

Regulatory Authority under RERA, it is more than likely that the  

project would be completed early by the persons mentioned  

therein, and/or full amount of refund and interest together with  

compensation and penalty, if any, would be awarded. Thus, given  

the bona fides of the allottee who moves an application under  

Section 7 of the Code, it is only such allottee who has completely  

lost faith in the management of the real estate developer who  

would come before the NCLT under the Code hoping that some  

other developer takes over and completes the project, while  

always taking the risk that if no one were to come forward,  

corporate death must ensue and the allottee must then stand in  

line to receive whatever is given to him in winding up. Given the  

reasons of the Insolvency Committee Report, which show that

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experience of the real estate sector in this country has not been  

encouraging, in that huge amounts are advanced by ordinary  

people to finance housing projects which end up in massive delays  

on the part of the developer or even worse, i.e. failure of the project  

itself, and given the state of facts which was existing at the time of  

the legislation, as adverted to by the Insolvency Committee  

Report, it is clear that any alleged discrimination has to meet the  

tests laid down in Ram Krishna Dalmia (supra), V.C. Shukla  

(supra), Shri Ambica Mills (supra), Venkateshwara Theatre  

(supra) and Mardia Chemicals (supra).   

40. It is impossible to say that classifying real estate  

developers is not founded upon an intelligible differentia which  

distinguishes them from other operational creditors, nor is it  

possible to say that such classification is palpably arbitrary having  

no rational relation to the objects of the Code. It was vehemently  

argued by learned counsel on behalf of the Petitioners that if at all  

real estate developers were to be brought within the clutches of  

the Code, being like operational debtors, at best they could have  

been brought in under this rubric and not as financial debtors.  

Here again, what is unique to real estate developers vis-à-vis  

operational debts, is the fact that, in operational debts generally,

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when a person supplies goods and services, such person is the  

creditor and the person who has to pay for such goods and  

services is the debtor. In the case of real estate developers, the  

developer who is the supplier of the flat/apartment is the debtor  

inasmuch as the home buyer/allottee funds his own apartment by  

paying amounts in advance to the developer for construction of  

the building in which his apartment is to be found. Another vital  

difference between operational debts and allottees of real estate  

projects is that an operational creditor has no interest in or stake  

in the corporate debtor, unlike the case of an allottee of a real  

estate project, who is vitally concerned 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 other option, will be  

recoverable from the corporate debtor. One other important  

distinction is that in an operational debt, there is no consideration  

for the time value of money – the consideration of the debt is the  

goods or services that are either sold or availed of from the  

operational creditor. Payments made in advance for goods and  

services are not made to fund manufacture of such goods or  

provision of such services. Examples given of advance payments  

being made for turnkey projects and capital goods, where

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customisation and uniqueness of such goods are important by  

reason of which advance payments are made, are wholly  

inapposite as examples vis-à-vis advance payments made by  

allottees. In real estate projects, money is raised from the allottee,  

being raised against consideration for the time value of money.  

Even the total consideration agreed at a time when the  

flat/apartment is non-existent or incomplete, is significantly less  

than the price the buyer would have to pay for a ready/complete  

flat/apartment, and therefore, he gains the time value of money.  

Likewise, the developer who benefits from the amounts disbursed  

also gains from the time value of money. The fact that the allottee  

makes such payments in instalments which are co-terminus with  

phases of completion of the real estate project does not any the  

less make such payments as payments involving “exchange”, i.e.  

advances paid only in order to obtain a flat/apartment. What is  

predominant, insofar as the real estate developer is concerned, is  

the fact that such instalment payments are used as a means of  

finance qua the real estate project. One other vital difference with  

operational debts is the fact that the documentary evidence for  

amounts being due and payable by the real estate developer is  

there in the form of the information provided by the real estate  

developer compulsorily under RERA. This information, like the

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information from information utilities under the Code, makes it  

easy for home buyers/allottees to approach the NCLT under  

Section 7 of the Code to trigger the Code on the real estate  

developer’s own information given on its webpage as to delay in  

construction, etc. It is these fundamental differences between the  

real estate developer and the supplier of goods and services that  

the legislature has focused upon and included real estate  

developers as financial debtors. This being the case, it is clear that  

there cannot be said to be any infraction of equal protection of the  

laws.  

41. Shri Shyam Divan relying upon Nagpur Improvement  

Trust and Anr. v. Vithal Rao and Ors. (1973) 1 SCC 500 at  

paragraph 26 and Subramanian Swamy v. Director, Central  

Bureau of Investigation and Anr. (2014) 8 SCC 682 at  

paragraphs 44, 58 and 68 argued that the object of the  

amendment is itself discriminatory in that it seeks to insert into a  

“means and includes” definition a category which does not fit  

therein, namely, real estate developers who do not, in the classical  

sense, borrow monies like banks and financial institutions.  

According to him, therefore, the object itself being discriminatory,  

the inclusion of real estate developers as financial debtors should

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be struck down. We have already pointed out how real estate  

developers are, in substance, persons who avail finance from  

allottees who then fund the real estate development project. The  

object of dividing debts into two categories under the Code,  

namely, financial and operational debts, is broadly to sub-divide  

debts into those in which money is lent and those where debts are  

incurred on account of goods being sold or services being  

rendered. We have no doubt that real estate developers fall  

squarely within the object of the Code as originally enacted insofar  

as they are financial debtors and not operational debtors, as has  

been pointed out hereinabove. So far as unequals being treated  

as equals is concerned, home buyers/allottees can be assimilated  

with other individual financial creditors like debenture holders and  

fixed deposit holders, who have advanced certain amounts to the  

corporate debtor. For example, fixed deposit holders, though  

financial creditors, would be like real estate allottees in that they  

are unsecured creditors. Financial contracts in the case of these  

individuals need not involve large sums of money. Debenture  

holders and fixed deposit holders, unlike real estate holders, are  

involved in seeing that they recover the amounts that are lent and  

are thus not directly involved or interested in assessing the viability  

of the corporate debtors. Though not having the expertise or

115    

information to be in a position to evaluate feasibility and viability of  

resolution plans, such individuals, by virtue of being financial  

creditors, have a right to be on the Committee of Creditors to  

safeguard their interest. Also, the question that is to be asked  

when a debenture holder or fixed deposit holder prefers a Section  

7 application under the Code will be asked in the case of allottees  

of real estate developers – is a debt due in fact or in law? Thus,  

allottees, being individual financial creditors like debenture  

holders and fixed deposit holders and classified as such, show  

that they within the larger class of financial creditors, there being  

no infraction of Article 14 on this score.  

42. The presumption that the legislature has understood and  

correctly appreciated the need of its people and that the  

amendment to the Code is directed to problems made manifest by  

experience, as was pointed out by the Insolvency Law Committee  

findings (supra) demonstrates that the presumption of  

constitutionality that attaches to the Amendment Act has not been  

displaced by the Petitioners.  

43. It was also argued with reference to Regulation 9A of the  

Insolvency and Bankruptcy Board of India (Insolvency Resolution  

Process for Corporate Persons) Regulations, 2016 that home

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buyers would really fall within “other creditors” as a residuary  

class, who would have to stand in line with their claims which  

would be made to the resolution professional once the Code is  

triggered. Regulation 9A reads as follows:  

“9A. Claims by other creditors.  

(1) A person claiming to be a creditor, other than  those covered under regulations 7, 8, or 9, shall  submit proof of its claim to the interim resolution  professional or resolution professional in person,  by post or by electronic means in Form F of the  Schedule.  

(2) The existence of the claim of the creditor  referred to in sub-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, including any or all of the  following:—  

(i) documentary evidence demanding  satisfaction of the claim;  

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

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

We have already held that given the fact that home  

buyers/allottees give advances to the real estate developer and  

thereby finance the real estate project at hand, are really financial

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creditors. Given this finding, this plea of the Petitioners must also  

be rejected. This challenge must also, therefore, fail.    

The Article 14 Challenge (II): Manifest arbitrariness; Article  

19(1)(g) and Article 300-A  

44. Counsel for the Petitioners argued that a square peg has  

been fitted in a round hole and have thus stated that doing so  

would not only be contrary to the objects sought to achieved by  

the Code, but would be directly contrary to Swiss Ribbons  

(supra) in that every characteristic of financial creditors vis-à-vis  

operational creditors would show that real estate developers are  

assimilated to operational and not financial debtors. For this  

purpose, in the written argument presented by Dr. Singhvi, relying  

upon Swiss Ribbons (supra) it is stated that:   

“FINDINGS IN SWISS RIBBONS P. LTD. V. UOI, (2019) 4 SCC  17 ON NATURE OF OPERATIONAL CREDITORS (OCs)/  FINANCIAL CREDITORS (FCs) VIS-À-VIS ALLOTTEES   

S.No. FINDINGS IN SWISS  RIBBONS W.R.T.  RATIONALE BEHIND  DISTINCTION BETWEEN  FINANCIAL AND  OPERATIONAL  CREDITORS  

REASON FOR NON- APPLICABILITY OF  DISTINCTION  BETWEEN FCs and OCs  (AS EXPLAINED IN  SWISS RIBBONS) IN  CASE OF  HOMEBUYERS/  ALLOTTEES  

1. Nature of security:  

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 “it is clear that most financial  creditors, particularly banks  and financial institutions, are  secured creditors whereas  most operational creditors  are unsecured, payments for  goods and services as well  as payments to workers not  being secured by mortgaged  documents and the like.”    [Para 44]    

 Real estate allottees/  homebuyers are  unsecured creditors and  are therefore more akin to  OCs rather than FCs  

2. “The nature of loan  agreements with financial  creditors is different from  contracts with operational  creditors for supplying  goods and services.     ● Financial creditors  generally lend finance on a  term loan or for working  capital that enables the  corporate debtor to either  set up and/or operate its  business.  On the other  hand, contracts with  operational creditors are  relatable to supply of goods  and services in the operation  of business.     ● Financial contracts  generally involve large sums  of money.  By way of  contrast, operational  contracts have dues whose  quantum is generally less.     ● In the running of a  business, operational  

             ● Real estate allottees  make payments to the  corporate debtors in lieu  of services rendered –  i.e., construction of  apartments. In several  cases, payments are also  made on a construction- linked payment basis.         ● Each individual allottee  will be owed a sum that is  often much smaller than  the amount owed to a  single bank/financial  institution.     ● Real estate allottees are  large in number – often  hundreds or thousands,

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creditors can be many as  opposed to financial  creditors, who lend finance  for the set up or working of  business.  It is obvious that  debenture holders and  persons with home loans  may be numerous and,  therefore, have been  statutorily dealt with by the  aforesaid change made in  the Code as well as the  Regulations.  However, as a  general rule, it is correct to  say that financial creditors,  which involve banks and  financial institutions, would  certainly be smaller in  number than operational  creditors of a corporate  debtor.     ● Also, financial creditors  have specified repayment  schedules, and defaults  entitle financial creditors to  recall a loan in totality.   Contracts with operational  creditors do not have any  such stipulations.         ● Also, the forum in which  dispute resolution takes  place is completely different.   Contracts with operational  creditors can and do have  arbitration clauses where  dispute resolution is done  privately.  Operational debts  also tend to be recurring in  nature and the possibility of  

depending on the size of  the developer and the  number of development  projects.                       ● There are no repayment  schedules in apartment  buyer agreements – as  the payments have been  made by allottees towards  grant of possession of  their units in a project –  and the date of  possession is further  subject to force majeure  and other circumstances.   Refund of money by the  developer only arises in  the event that the allottee  validly terminates/  cancels the agreement  and not otherwise.     ● Agreements between  allottees and developers  have arbitration clauses.  Further, there is often the  possibility of a genuine  dispute in case of  allottees’ claims – e.g.,  where date of possession  stands extended on  account of force majeure  circumstances and

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genuine disputes in case of  operational debts is much  higher when compared to  financial debts.  A simple  example will suffice.  Goods  that are supplied may be  substandard.  Services that  are provided may be  substandard.  Goods may  not have been supplied at  all.  All these qua operational  debts are matters to be  proved in arbitration or in the  courts of law. On the other  hand, financial debts made  to banks and financial  institutions are well- documented and defaults  made are easily verifiable.”    [Para 43, 44]      

therefore allottees’ right to  receive refund has not yet  arisen, where there has  been delay on part of  allottees in making  payments to the  developer, where  termination/cancellation  of the agreement is not as  per terms of the  agreement, etc.  These  are not easily  verifiable/available and  are required to be  examined by a court of  law / during an arbitration.   

3. Regarding role and  involvement of FCs vis-à- vis OCs:    “financial creditors are, from  the very beginning, involved  with assessing the viability  of the corporate debtor.  They can, and therefore do,  engage in restructuring of  the loan as well as  reorganization of the  corporate debtor’s business  when there is financial  stress, which are things  operational creditors do not  and cannot do.  Thus,  preserving the corporate  debtor as a going concern,  while ensuring maximum  

   Allottees are interested in  securing their single time  investment, and not the  financial well-being of, or  ensuring the continuity of,  the corporate debtor as a  going-concern.  Further,  allottees in different real  estate projects of a  corporate debtor, may  have different interests  confined only to that  particular development,  with no interest in the  overall well-being or  rearrangement or viability  of the Company.  If such  allottees are vested with

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recovery for all creditors  being the objective of the  Code, financial creditors are  clearly different from  operational creditors and  therefore, there is obviously  an intelligible differentia  between the two which has a  direct relation to the objects  sought to be achieved by the  Code.”    [Para 45]    

decision making powers  concerning the business  of the enterprise as a  whole, it is unlikely that  sound financial decisions  will be taken having  regard to the overall  status of the entity which  will undoubtedly defeat  the very purpose and  objective of the CIRP  process.   

4. Regarding participation in  the COC meetings:    “Under the Code, the  committee of creditors is  entrusted with the primary  responsibility of financial  restructuring.  They are  required to assess the  viability of a corporate  debtor by taking into account  all available information as  well as to evaluate all  alternative investment  opportunities that are  available.  The committee of  creditors is required to  evaluate the resolution plan  on the basis of feasibility and  viability.”    “Since the financial creditors  are in the business of money  lending, banks and financial  institutions are best  equipped to assess viability  and feasibility of the  business of the corporate  debtor.  Even at the time of  

   ● Allottees do not have  the expertise or  information to be in a  position to evaluate the  feasibility and viability of  resolution plans keeping  in mind the business of  the corporate debtor as a  whole. Expecting allottees  to carry out such a  function and role is  entirely impractical.     ● Allottees are interested  in securing their single  time investment, and not  the financial well-being of,  or ensuring the continuity  of, the corporate debtor  as a going-concern.     ● Allottees in different real  estate projects of a  corporate debtor, may  have different interests  confined only to that  particular development,

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granting loans, these banks  and financial institutions  undertake a detailed market  study which includes a  techno-economic valuation  report, evaluation of  business, financial  projection, etc.  Since this  detailed study has already  been undertaken before  sanctioning a loan, and  since financial creditors  have trained employees to  assess viability and  feasibility, they are in a good  position to evaluate the  contents of a resolution plan.   On the other hand,  operational creditors, who  provide goods and services,  are involved only in  recovering amounts that are  paid for such goods and  services, and are typically  unable to assess viability  and feasibility of business.”    [Para 67, 69]      

with no interest in overall  well-being or  rearrangement or viability  of the Company.  If such  allottees are vested with  decision making powers  concerning the business  of the enterprise as a  whole, it is unlikely that  sound financial decisions  will be taken having  regard to the overall  status of the entity which  will undoubtedly defeat  the very purpose and  objective of the CIRP  process.  Interests of  other stakeholders,  including other financial  creditors, suppliers, small  creditors, labour, etc. are  unlikely to be considered  appropriately.   

5. Regarding process for  initiation of corporate  insolvency resolution  process:    

• Information with  respect to debt  incurred by financial  debtors:    “It is clear from these  Sections that  information in respect  

• In practice, real  estate allottees do  not upload  information in  respect of amounts  owed to them by  developers with the  Information Utilities.

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of debts incurred by  financial debtors is  easily available  through information  utilities which, under  the Insolvency and  Bankruptcy Board of  India (Information  Utilities) Regulations,  2017 [“Information  Utilities  Regulations”], are to  satisfy themselves  that information  provided 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.     Apart from the record  maintained by such  utility, Form I  appended to the  Insolvency and  Bankruptcy  (Application to  Adjudicating Authority)  Rules, 2016, makes it  clear that the following  are other sources  which evidence a  financial debt:  

 (a) Particulars of security  

held, if any, the date of  its creation, its  estimated value as per  the creditor;   

(b) Certificate of  registration of charge  

• Most of the sources  evidencing a  financial debt as  listed do not apply  to real-estate  allottees.    

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issued by the registrar  of companies (if the  corporate debtor is a  company);   

(c) Order of a court,  tribunal or arbitral  panel adjudicating on  the default;   

(d) Record of default with  the information utility;   

(e) Details of succession  certificate, or probate  of a will, or letter of  administration, or  court decree (as may  be applicable), under  the Indian Succession  Act, 1925;   

(f) The latest and  complete copy of the  financial contract  reflecting all  amendments and  waivers to date;   

(g) A record of default as  available with any  credit information  company;   

(h) Copies of entries in a  bankers book in  accordance with the  Bankers Books  Evidence Act, 1891.”  

 [Para 48, 49]          

● With respect to set-offs:    “a set-off of amounts due  from financial creditors is a  

                                                                         ● In the case of real estate  allottees, amounts are  also due and payable by  the allottees to the  developer – i.e.,  payments owed to the

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rarity.  Usually, financial  debts point only in one way  – amounts lent have to be  repaid.”    [Para 55]    ● Requirement of proving  ‘default’ in case of section 7  applications:    Whereas a “claim” gives rise  to a “debt” only when it  becomes “due”, a “default”  occurs only when a “debt”  becomes “due and payable”  and is not paid by the debtor.   It is for this reason that a  financial creditor has to  prove “default” as opposed  to an operational creditor  who merely “claims” a right  to payment of a liability or  obligation in respect of a  debt which may be due.   When this aspect is borne in  mind, the differentiation in  the triggering of insolvency  resolution process by  financial creditors under  Section 7 and by operational  creditors under Sections 8  and 9 of the Code becomes  clear.     [Para 59]        

developer as per the  schedule under the  Apartment Buyer’s  Agreement, interest on  delayed payments.  Set- off of amounts is therefore  quite common in the case  of allottees.   ● In the case of real estate  allottees, in most cases,  the default has not yet  occurred since the date of  possession is often  extended on account of  force majeure and other  circumstances.  As a  result, in such a case, the  right of the allottees to  terminate/cancel their  agreement with the  developer and seek a  refund of amounts paid  would not have arisen in  the first place.          

”

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45. As has been pointed out by us hereinabove, it is clear that  

the context of Swiss Ribbons (supra) was a challenge under  

Article 14 stating that financial creditors have been discriminated  

against because there is no real difference between financial and  

operational creditors, and that such artificial distinction made by  

the Code, not having been made anywhere else in the world,  

would be discriminatory, having no rational relation with the object  

sought to be achieved by the Code and would have, therefore, to  

be struck down under Article 14. As has been pointed out by us  

hereinabove, the context of this argument was financial institutions  

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  

context that the various differences that have been pointed out  

hereinabove were made. However, the judgment itself recognises  

- as has been pointed out by us hereinabove - in paragraphs 46 to  

49, that it was not dealing with individual financial creditors, such  

as debenture holders, fixed deposit holders and home buyers. To  

apply a judgment rendered in a wholly different context to the facts  

in the present cases would itself be an arbitrary exercise. What  

has been stated hereinabove as to allottees being individual  

financial creditors like deposit holders and debenture holders,  

applies on all fours to repel this argument based on another facet

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of Article 14. In fact, the object of the Code, as originally set out in  

paragraphs 27 and 28 of Swiss Ribbons (supra) is as follows:  

“27. As is discernible, the Preamble gives an  insight into what is sought to be achieved by the  Code. The Code is first and foremost, a Code for  reorganisation and insolvency resolution of  corporate debtors. Unless such reorganisation is  effected in a time-bound manner, the value of  the assets of such persons will deplete.  Therefore, maximisation of value of the assets of  such persons so that they are efficiently run as  going concerns is another very important  objective of the Code. This, in turn, will promote  entrepreneurship as the persons in  management of the corporate debtor are  removed and replaced by entrepreneurs. When,  therefore, a resolution plan takes off and the  corporate debtor is brought back into the  economic mainstream, it is able to repay its  debts, which, in turn, enhances the viability of  credit in the hands of banks and financial  institutions. Above all, ultimately, the interests of  all stakeholders are looked after as the  corporate debtor itself becomes a 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 a  corporate debtor who is in the red, by an  effective legal framework, would go a long way  to support the development of credit markets.  Since more investment can be made with funds  that have come back into the economy, business  then eases up, which leads, overall, to higher  economic growth and development of the Indian  economy. What is interesting to note is that the  Preamble does not, in any manner, refer to  liquidation, which is only availed of as a last  resort if there is either no resolution plan or the  resolution plans submitted are not up to the

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mark. Even in liquidation, the liquidator can sell  the business of the corporate debtor as a going  concern. (See ArcelorMittal [ArcelorMittal (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 is to ensure revival and  continuation of the corporate debtor by  protecting the corporate debtor from its own  management and from a corporate death by  liquidation. The Code is thus a beneficial  legislation which puts the corporate debtor back  on its feet, not being a mere recovery legislation  for creditors. The interests of the corporate  debtor have, therefore, been bifurcated and  separated from that of its promoters/those who  are in management. Thus, the resolution  process is not adversarial to the corporate  debtor but, in fact, protective of its interests. The  moratorium imposed by Section 14 is in the  interest of the corporate debtor itself, thereby  preserving the assets of the corporate debtor  during the resolution process. The timelines  within which the resolution process is to take  place again protects the corporate debtor's  assets from further dilution, and also protects all  its creditors and workers by seeing that the  resolution process goes through as fast as  possible so that another management can,  through its entrepreneurial skills, resuscitate the  corporate debtor to achieve all these ends.”  

A reading of these paragraphs will show these very objects are  

sub-served by treating allottees as financial creditors. The Code  

is thus a beneficial legislation which can be triggered to put the  

corporate debtor back on its feet in the interest of unsecured  

creditors like allottees, who are vitally interested in the financial

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health of the corporate debtor, so that a replaced management  

may then carry out the real estate project as originally envisaged  

and deliver the flat/apartment as soon as possible and/or pay  

compensation in the event of late delivery, or non-delivery, or  

refund amounts advanced together with interest. Thus, applying  

the Shayara Bano v. Union of India (2017) 9 SCC 1 test, it  

cannot be said that a square peg has been forcibly fixed into a  

round hole so as to render Section 5(8)(f) manifestly arbitrary i.e.  

excessive, disproportionate or without adequate determining  

principle. For the same reason, it cannot be said that Article  

19(1)(g) has been infracted and not saved by Article 19(6) as the  

Amendment Act is made in public interest, and it cannot be said  

to be an unreasonable restriction on the Petitioner’s fundamental  

right under Article 19(1)(g). Also, there is no infraction of Article  

300-A as no person is deprived of its property without authority of  

a constitutionally 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  

contracts being different from operational contracts, the one  

should not be confused with the other. Also, treatment of similarly

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situated creditors should be the same, and as allottees are like  

operational creditors, they should not be treated as financial  

creditors. We have already answered these questions in the  

context of discrimination and manifest arbitrariness and have  

found that, in point of fact, real estate allottees are really in the  

nature of financial creditors, and thus the UNCITRAL Legislative  

Guide has been followed, and not breached. Equally, it was  

argued that creating new creditors’ rights in Insolvency Law, as  

opposed to recognising existing creditors’ rights, will infract the  

UNCITRAL Legislative Guide. As will be pointed out hereinbelow,  

since allottees of real estate projects have always been subsumed  

within Section 5(8)(f), no new rights or claims have been created.  

It was also contended that since allottees are then said to have no  

expertise or knowledge in the working of the corporate debtor,  

they cannot participate effectively in the Committee of Creditors,  

and should therefore be kept out. The same answer as has been  

given hereinabove, i.e. that allottees, like individual financial  

creditors who are already on the Committee of Creditors, are to  

have a voice in determining the corporate debtor and their own  

future. This contention, therefore, also fails.

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47. One other argument that is made on behalf of the counsel  

for the Petitioners is that allottees of flats/apartments who do not  

want refunds, but who want their flats/apartments constructed so  

that they may occupy and live in their flats/apartments, will be  

jeopardised, as a single allottee who does not want the  

flat/apartments, but wants a refund of amounts paid for reasons  

best known to him, can trigger the Code and upset the  

construction and handing over of such flats/apartments to the vast  

bulk of allottees of a project who may be genuine buyers who wish  

to occupy such flats/apartments as roofs over their heads. Another  

facet of this argument is that the bulk of such persons will never  

be on the Committee of 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 project in question can either join  

together under the explanation to Section 7(1) of the Code, or file  

their own individual petitions after the Code gets triggered by a  

single allottee, stating that in addition to the construction of their  

flat/apartment, they are also entitled to compensation under RERA  

and/or under the general law, and would thus be persons who  

have a “claim”, i.e. a right to remedy for breach of contract which  

gives rise to a right to compensation, whether or not such right is  

reduced to judgment, and would therefore be persons to whom a

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liability or obligation in respect of a “claim” is due. Such persons  

would, therefore, have a voice in the Committee of Creditors as to  

future plans for completion of the project, and compensation for  

late delivery of the flat/apartment. This contention therefore also  

has no legs to stand upon.  

48. It was then argued that placing allottees as financial  

creditors is directly contrary to the object of the Code in  

maximising the value of assets and putting the corporate debtor  

back on its feet.  We may only state that if a Section 7 application  

is admitted in favour of an allottee, and if the management of the  

corporate debtor is in fact a strong and stable one, nothing debars  

the same erstwhile management from offering a resolution plan,  

subject to Section 29A of the Code, which may well be accepted  

by the Committee of Creditors in which home buyers now have a  

voice. Equally, to assume that the moment the insolvency  

resolution process starts, corporate death must ensue is wholly  

incorrect. If the real estate project is otherwise viable, resolution  

plans from others may well be accepted and the best of these  

would then work in order to maximise the value of the assets of  

the corporate debtor. Corporate death, as has been stated in  

Swiss Ribbons (supra) is the last resort under the Code after all

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other available options have failed. This argument again need not  

deter us further.    

49. It was then stated that there will be a flood of petitions  

before the NCLT, and as the NCLT has to decide within a period  

of 14 days, there will only be a summary decision in which a  

complicated agreement entered into between home buyer and  

real estate developer will not be gone into in order to discover  

whether a debt is due and payable. Coupled with this argument,  

is the alternative argument that, given the fact that RERA  

adequately looks after the rights and interests of allottees, to apply  

the Code would then be manifestly arbitrary, as a management  

which may have infused large funds to develop the real estate  

project would then be summarily removed. A supplementary  

argument was made that this would also infract Article 19(1)(g)  

and 300-A, as a person who invests a huge sum of money from  

its own resources or borrowed resources, would then be left in the  

lurch the moment the insolvency resolution process is admitted.  

50. The answer to these contentions is provided by reading  

some of the provisions of RERA. Under paragraph 3 of the  

Statement of Objects and Reasons of RERA, one of the important  

reasons for enacting the RERA is to “establish symmetry of

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information between the promoter and purchaser”. This is  

achieved through Section 4, where every promoter in 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 and conveyance deed proposed to be signed  

with the allottee are all to be furnished. Also, under sub-clause  

(l)(C), the time period within which he undertakes to complete the  

project is also to be stated. Above all, under Section 4(3) read with  

Section 11, the authority is to operationalise a web-based online  

system in which the promoter shall, upon receiving his Login Id  

and password, create a webpage on the website of the authority  

to enter all details as required by Section 4(2), including quarterly  

update of the status of the project and the stage-wise time  

schedule of completion of the project. Also, under Section 7, the  

Authority may revoke registration for various reasons, and under  

Section 7(4)(a) shall debar the promoter from accessing its  

website in relation to that project, and thereafter specify its name  

in the list of defaulters and display its photograph on the website  

and inform other Real Estate Regulatory Authorities in other  

States and Union Territories about such revocation. Equally,

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under Section 13(2), the prescribed agreement for sale, which is  

to be entered into between the promoter and allottee, must clearly  

state the date on which possession of the apartment, plot or  

building is to be handed over, the rates of interest payable by the  

promoter to the allottee in the case of default and such other  

particulars, as may be prescribed. We were then referred to the  

‘Andaman and Nicobar Islands Real Estate (Regulation and  

Development) (General) Rules, 2016’ to give us a flavour of what  

is actually prescribed by the Rules made by States and Union  

Territories under RERA. Here, Rule 14 of these Rules speaks of  

details to be published on the website; and among other details,  

Rule 14(1)(d) states that the following details shall be uploaded by  

the promoter:  

"14. Details to be published on the website.-  (1) The Authority shall ensure the following  information, as applicable, shall be made  available on its website in respect of each project  registered under the Act, namely –  

xxx xxx xxx  

(d) the promoter shall upload the following  updates on the webpage for the project, within  fifteen days from the expiry of each quarter,  namely:-  

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

(ii) list of number of garages booked;

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(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 and common 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 by the  competent authority with regard to any  sanctioned plans, layout plans,  specifications, license, permit or  approval for the project;”  

Also, Rules 15 and 16 provide for interest payable by the promoter  

and timelines for refund as follows:  

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

Provided that in case the State Bank of India  Marginal Cost of Lending Rate is not in use it  would be replaced by such benchmark lending  rates which the State Bank of India may fix from  time to time for lending to the general public.

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16. Timelines for refund- Any refund of monies  along with the applicable interest and  compensation, if any, payable by the promoter in  terms of the Act or the rules and regulations  made thereunder, shall be payable by the  promoter to the allottee within forty-five days  from the date on which such refund along with  applicable interest and compensation, as the  case may be, become due.”  

It can thus be seen that just as information utilities provide the kind  

of information as to default that banks and financial institutions are  

provided under Sections 214 to 216 of the Code read with  

Regulations 25 and 27 of the Insolvency and Bankruptcy Board of  

India (Information Utilities) Regulations, 2017, allottees of real  

estate projects can come armed with the same kind of information,  

this time provided by the promoter or real estate developer itself,  

on the basis of which, prima facie at least, a “default” relating to  

amounts due and payable to the allottee is made out in an  

application under Section 7 of the Code. We may mention here  

that once this prima facie case is made out, the burden shifts on  

the promoter/real estate developer to point out in their reply and  

in the hearing before the NCLT, that the allottee is himself a  

defaulter and would, therefore, on a reading of the agreement and  

the applicable RERA Rules and Regulations, not be entitled to any  

relief including payment of compensation and/or refund, entailing  

a dismissal of the said application. At this stage also, it is important

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to point out, in answer to the arguments made by the Petitioners,  

that under Section 65 of the Code, the real estate developer can  

also point out that the insolvency resolution process under the  

Code has been invoked fraudulently, with malicious intent, or for  

any purpose other than the resolution of insolvency. This the real  

estate developer may do by pointing out, for example, that the  

allottee who has knocked at the doors of the NCLT is a speculative  

investor and not a person who is genuinely interested in  

purchasing a flat/apartment. They can also point out that in a real  

estate market which is falling, the allottee does not, in fact, want  

to go ahead with its obligation to take possession of the  

flat/apartment under RERA, but wants to 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 is very difficult to accede to the  

Petitioners’ contention that a wholly one-sided and futile hearing  

will take place before the NCLT by trigger-happy allottees who  

would be able to ignite the process of removal of the management  

of the real estate project and/or lead the corporate debtor to its  

death.  

51. At this juncture it is necessary to deal with the argument of  

the Petitioners that as the NCLT is given only 14 days in which to

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adjudicate on “default”, the NCLT cannot, in such a summary  

proceeding, give detailed findings based on arguments raised by  

the allottees which are then countered with reference to a large  

number of documents and complicated 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  

operational creditors, in Surendra Trading Company (supra),  

held that the timelines contained 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 obvious reason that no  

consequence is provided if the periods so mentioned are  

exceeded. Though this decision is not in the context of the 14-day  

period provided by Section 7(4), we are of the view that this  

judgment would apply squarely on all fours so that the period of  

14 days given to the NCLT for decision under Section 7(4) would  

be directory. We are conscious of the fact that under Section 64(1)  

of the Code, the NCLT President or the Chairperson of the NCLAT  

may, after taking into account reasons by the NCLT or NCLAT for  

exceeding the period mentioned by statute, extend the period of  

14 days by a period not exceeding 10 days. We may note that

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even this provision is directory, in that no consequence is provided  

either if the period is not extended, or after the extension expires.  

This is also for the good reason that an act of the court cannot  

harm the litigant before it. Unfortunately, both the NCLT and  

NCLAT do not have sufficient members to deal with the flood of  

applications and appeals that is before them. The time taken in  

the queue by applicants who knock at their doors cannot, for no  

fault of theirs, be put against them. This Court, in State of Bihar  

v. Bihar Rajya Bhumi Vikas Bank Samiti (2018) 9 SCC 472, has  

held in the context of Section 34(5) of the Arbitration and  

Conciliation Act, 1996, that the absence of any consequences for  

infraction of a procedural provision implies that such a 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 the power of the Court to condone  the non-compliance thereof. It is imperative to  note that the provision is procedural, the object  behind which is to dispose of applications under  Section 34 expeditiously. One must remember  the wise observation contained  in Kailash [Kailash v. Nanhku, (2005) 4 SCC  480] , where the object of such a provision is only  to expedite the hearing and not to scuttle the  same. All rules of procedure are the handmaids  of justice and if, in advancing the cause of  justice, it is made clear that such provision  should be construed as directory, then so be it.

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xxx xxx xxx  

21. Section 80, though a procedural provision,  has been held to be mandatory as it is conceived  in public interest, the public purpose underlying  it being the advancement of justice by giving the  Government the opportunity to scrutinise and  take immediate action to settle a just claim  without driving the person who has issued a  notice having to institute a suit involving  considerable expenditure and delay. This is to  be contrasted with Section 34(5), also a  procedural provision, the infraction of which  leads to no consequence. To construe such a  provision as being mandatory would defeat the  advancement of justice as it would provide the  consequence of dismissing an application filed  without adhering to the requirements of Section  34(5), thereby scuttling the process 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 the  

Code, it has been argued by learned counsel for the Petitioners  

that the allottees would fall in the following five categories and  

cannot be said, therefore, to be a homogenous class. A glance at  

the five categories would show, they argue, that they have, in fact,  

conflicting interests. These five categories are stated to be as  

follows:

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a) “Those who have taken possession and have  executed sale deeds, with or without further  claims for delay compensation;  

b) Those who have taken possession but are yet to  execute sale deeds, with or without further  claims for delay compensation;  

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

d) Those who are yet to receive possession and  seek to obtain refunds 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  

by different allottees making it difficult for the authorised  

representatives to vote on the Committee of Creditors and that in  

any case, the collegiality of the secured creditors will be disturbed.  

To this the answer is that like other financial creditors, be they  

banks and financial institutions, or other individuals, all persons  

who have advanced monies to the corporate debtor should have  

the right to be on the Committee of Creditors. True, allottees are  

unsecured creditors, but they have a vital interest in amounts that  

are advanced for completion of the project, maybe to the extent of  

100% of the project being funded by them alone. As has been  

correctly argued by the learned Additional Solicitor General, under  

the proviso to Section 21(8) of the Code if the corporate debtor  

has no financial creditors, then under Regulation 16 of the

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Insolvency and Bankruptcy Board of India (Insolvency Resolution  

Process for Corporate Persons) Regulations, 2016, up to 18  

operational creditors then become the Committee of Creditors or,  

if there are more than 18 operational creditors, the highest in order  

of debt owed to operational creditors to the extent of the first 18  

are then represented on the Committee of Creditors together, with  

a representative of the workers. If allottees who have funded a real  

estate project of the corporate debtor to the extent of 100% are  

neither financial creditors nor operational creditors, the  

mechanism of the Committee of Creditors, who is now to take  

decisions after the Code is triggered as to the future of the  

corporate debtor, will be non-existent in a case where there are no  

operational creditors and no secured creditors, because 100% of  

the project is funded by the allottees. Even otherwise, as correctly  

argued by the learned Additional Solicitor General, it would in fact  

be manifestly arbitrary to omit allottees from the Committee of  

Creditors when they are vitally interested in the future of the  

corporate debtor as they have funded anywhere from 50% to  

100% of the project in most cases.    

55. On this point, we were referred to the Insolvency and  

Bankruptcy Code (Amendment) Bill, 2019, which has just passed

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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), the following sub-section shall  be inserted, namely-  

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

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

Given the fact that allottees may not be a homogenous group, yet  

there are only two ways in which they can vote on the Committee  

of Creditors – either to approve or to disapprove of a proposed  

resolution plan. Sub-section (3A) goes a long way to ironing out  

any creases that may have been felt in the working of Section 25A  

in that the authorised representative now casts his vote on behalf  

of all financial creditors that he represents. If a decision taken by  

a vote of more than 50% of the voting share of the financial  

creditors that he represents is that a particular plan be either

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accepted or rejected, it is clear that the minority of those who vote,  

and all others, will now be bound by this decision. As has been  

stated by us in Swiss Ribbons (supra), the legislature must be  

given free play in the joints to experiment. Minor hiccups that may  

arise in implementation can always be sorted out later. Thus, any  

challenge to the machinery provisions contained in Sections  

21(6A) and 25A of the Code must be repelled.  

The doctrine of ‘Reading Down’  

56. Several counsel appearing on behalf of the Petitioners  

made alternative submissions stating that if the Constitutional  

validity of the impugned provisions is to be upheld, then the  

amendment to the Code needs to be read-down so as to make it  

conform with Article 14 and 19(1)(g) and 300-A. Different  

suggestions were given as to reading down these provisions by  

different counsel. According to some of them, before an order  

admitting a Section 7 application is made, all the financial creditors  

of the corporate debtor could be called to the NCLT so that the  

NCLT can then ascertain their views. If the vast majority of them  

were to state that they would prefer to remain outside the Code,  

then the Section 7 application filed by a single allottee ought to be  

dismissed.  Another learned counsel stated that there should be a

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threshold limit by which at least 25% of the total number of  

allottees of the project should be reached before they could trigger  

the Code. Other learned counsel suggested that at the stage of  

the Section 7 application, an inquiry be made to see if the  

corporate debtor is otherwise well-managed and is solvent, in  

which case the Section 7 application ought to be dismissed. Shri  

Jayant Bhushan, learned Senior Advocate appearing on behalf of  

some of the Petitioners, also suggested that allottees ought not to  

be allowed to trigger the Code at all, but that if the Code is  

otherwise triggered, they can be members of the Committee of  

Creditors to take decisions that will be beneficial to them. It was  

also suggested that, before the Code is triggered by an allottee,  

there should be a finding of “default” from the authorities under  

RERA. This is not unknown to law, and this Court has itself stated,  

in another context, that a jurisdictional finding by the Telecom  

Regulatory Authority of India must first be obtained before the  

Competition Commission of India gives a finding on unfair  

competition in the telecom sector, and the case of Competition  

Commission of India v. Bharti Airtel Limited and Ors. (2019) 2  

SCC 521 was relied upon for this purpose. All these arguments  

were really made based on the presumption that some allottees  

who may now want to back out of the transaction and get a return

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of their money owing to factors which may be endemic to them, or  

owing to the fact that the market may have slumped as a result of  

which the investment made by them in the flat/apartment would  

fall flat requiring them to pull out of the transaction, would then be  

able to trigger the Code mala fide, and a reading down of these  

provisions would, therefore, obviate such problem. All these  

arguments have been refuted in detail earlier in this judgment. In  

a Section 7 application made by an allottee, the NCLT’s  

‘satisfaction’ will be with both eyes open – the NCLT will not turn  

a Nelson’s eye to legitimate defences by a real estate developer,  

as outlined by us hereinabove. There is, therefore, no necessity to  

read into or read down any of these provisions. Also, in Cellular  

Operators Association of India v. TRAI (2016) 7 SCC 703, this  

Court held that when a provision is cast in definite and  

unambiguous language, it is not permissible either to mend or  

bend it, even if such recasting is in accord with good reason and  

conscience. This Court said:  

“50. But it was said that the aforesaid Regulation  should be read down to mean that it would apply  only when the fault is that of the service provider.  We are afraid that such a course is not open to  us in law, for it is well settled that the doctrine of  reading down would apply only when general  words used in a statute or regulation can be  confined in a particular manner so as not to

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infringe a constitutional right. This was best  exemplified in one of the earliest judgments  dealing with the doctrine of reading down,  namely, the judgment of the Federal Court  in Hindu Women's Rights to Property Act, 1937,  In re [Hindu Women's Rights to Property Act,  1937, In re, 1941 SCC OnLine FC 3 : AIR 1941  FC 72] . In that judgment, the word “property” in  Section 3 of the Hindu Women's Rights to  Property Act was read down so as not to include  agricultural land, which would be outside the  Central Legislature's powers under the  Government of India Act, 1935. This is done  because it is presumed that the legislature did  not intend to transgress constitutional  limitations. While so reading down the word  “property”, the Federal Court held: (SCC OnLine  FC)  

“… If the restriction of the general words to  purposes within the power of the legislature  would be to leave an Act with nothing or next to  nothing in it, or an Act different in kind, and not  merely in degree, from an Act in which the  general words were given the wider meaning,  then it is plain that the Act as a whole must be  held invalid, because in such circumstances it is  impossible to assert with any confidence that the  legislature intended the general words which 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 of Conciliation and  Arbitration, ex p Whybrow &  Co. [R. v. Commonwealth Court of Conciliation  and Arbitration, ex p Whybrow & Co., (1910) 11  CLR 1 (Aust)] and British Imperial Oil Co.  Ltd. v. Federal Commr. of Taxation [British  Imperial Oil Co. Ltd. v. Federal Commr. of  Taxation, (1925) 35 CLR 422 (Aust)] .”

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(emphasis in original)  

51. This judgment was followed by a  Constitution Bench of this Court  in DTC v. Mazdoor Congress [DTC v. Mazdoor  Congress, 1991 Supp (1) SCC 600 : 1991 SCC  (L&S) 1213] . In that case, a question arose as  to whether a particular regulation which  conferred power on an authority to terminate the  services of a permanent and confirmed  employee by issuing a notice terminating his  services, or by making payment in lieu of such  notice without assigning any reasons and  without any opportunity of hearing to the  employee, could be said to be violative of the  appellants' fundamental rights. Four of the  learned Judges who heard 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 on this 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 of recasting the statute can be applied  in limited situations. It is essentially used, firstly,  for saving a statute from being struck down on  account of its unconstitutionality. It is an  extension of the principle that when two  interpretations are possible—one rendering it  constitutional and the other making it  unconstitutional, the former should be preferred.  The unconstitutionality may spring from either  the incompetence of the legislature to enact the  statute or from its violation of any of the  provisions of the Constitution. The second  situation which summons its aid is where the  provisions of the statute are vague and  ambiguous and it is possible to gather the  intentions of the legislature from the object of the  statute, the context in which the provision occurs  and the purpose for which it is made. However,  when the provision is cast in a definite and

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unambiguous language and its intention is clear,  it is not permissible either to mend or bend it  even if such recasting is in accord with good  reason and conscience. In such circumstances,  it is not possible for the court to remake the  statute. Its only duty is to strike it down and leave  it to the legislature if it so desires, to amend it.  What is further, if the remaking of the statute by  the courts is to lead to its distortion that course  is to be scrupulously avoided. One of the  situations further where the doctrine can never  be called into play is where the statute requires  extensive additions and deletions. Not only it is  no part of the court's duty to undertake 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  

be constitutionally valid, and considering that its language is clear  

and unambiguous, it is not possible to accede to the contentions  

of the Petitioners to read down the clear provisions of the  

Amendment Act in the 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  

beginning of this judgment. What has been argued by learned  

counsel on behalf of the Petitioners is that Section 5(8)(f), as it  

originally stood, is an exhaustive provision which must be read  

noscitur a sociis, and if so read, sub-clause (f) must take colour  

from the other clauses of the provision, all of which show that the

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sine qua non of a “financial debt” is a loan of money made with or  

without interest, which must then be returned as money. This,  

according to the learned counsel for the Petitioners, is clear from  

even a cursory reading of Section 5(8). Secondly, according to  

learned counsel for the Petitioners, by no stretch of imagination,  

could an allottee under a real estate project fall within Section  

5(8)(f), as it originally stood and the explanation must then be read  

prospectively i.e. only on and from the date of the Amendment Act.  

Several sub-arguments were made on the effect of deeming  

fictions generally and on the functions of an explanation to a  

Section. Let us address all of these arguments.    

59. First and foremost, a 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  otherwise requires, -  

xxx xxx xxx  

(11) “debt” means a liability or obligation in  respect of a claim which is due from any person  and includes a financial debt and operational  debt;  

This definition in turn takes us to the definition of “claim” in Section 3(6)  

and “default” in Section 3(12) of the Code which read as follows:  

“(6) “claim” means-

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

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

xxx xxx xxx  

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

60. Thus, in order to be a “debt”, there ought to be a liability or  

obligation in respect of a “claim” which is due from any person.  

“Claim” then means either a right to payment or a right to payment  

arising out of breach of contract, and this claim can be made  

whether or not such right to payment is reduced to judgment. Then  

comes “default”, which in turn refers to non-payment of debt when  

whole or any part of the debt has become due and payable and is  

not paid by the corporate debtor. Learned counsel for the  

Petitioners relied upon the judgment in Union of India v. Raman  

Iron Foundry (1974) 2 SCC 231, and, in particular relied strongly  

upon the sentence reading:  

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

It is precisely to do away with judgments such as Raman Iron  

Foundry (supra) that “claim” is defined to mean a right to payment  

or a right to remedy for breach of contract whether or not such  

right is reduced to judgment. What is clear, therefore, is that a debt  

is a liability or obligation in respect of a right to payment, even if it  

arises out of breach of contract, which is due from any person,  

notwithstanding that there is no adjudication of the said breach,  

followed by a judgment or decree or order. The expression  

“payment” is again an expression which is elastic enough to  

include “recompense”, and includes repayment. For this purpose,  

see Himachal Pradesh Housing and Urban Development  

Authority and Anr. v. Ranjit Singh Rana (2012) 4 SCC 505 (at  

paragraphs 13 and 14 therein), where the Webster’s  

Comprehensive Dictionary (International Edn.) Vol. 2 and the Law  

Lexicon by P. Ramanatha Aiyar (2nd Edn., Reprint) are quoted.  

61. The definition of “financial debt” in Section 5(8) then goes  

on to state that a “debt” must be “disbursed” against the

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consideration for time value of money. “Disbursement” is defined  

in Black’s Law Dictionary (10th ed.) to mean:   

“1. The act of paying out money, commonly from  a fund or in settlement of a debt or account  payable. 2. The money so paid; an amount of  money given for a 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  

real estate developer for the particular purpose of funding the  

real estate project in which the allottee is to be allotted a  

flat/apartment. The expression “disbursed” refers to money  

which has been paid against consideration for the “time value of  

money”. In short, the “disbursal” must be money and must be  

against consideration for the “time value of money”, meaning  

thereby, the fact that such money is now no longer with 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  

of advance payments made towards construction of the real  

estate project. We were shown the ‘Dictionary of Banking  

Terms’ (Second edition) by Thomas P. Fitch in which “time value  

for money” was defined thus:  

“present value: today’s value of a payment or a  stream of payment amount due and payable at

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some specified future date, discounted by a  compound interest rate of DISCOUNT RATE.  Also called the time value of money. Today’s  value of a stream of cash flows is worth less than  the sum of the cash flows to be received or  saved over time. Present value accounting is  widely used in DISCOUNTED CASH FLOW  analysis.”  

That this is against consideration for the time value of money is  

also 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 is legally obliged to give money’s equivalent back  

to the allottee, having used it in the construction of the project, and  

being at a discounted value so far 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 pay for the ultimate price of the  

flat/apartment).   

62. Shri Krishnan Venugopal took us to the ACT Borrower’s  

Guide to the LMA’s Investment Grade Agreements by Slaughter  

and May (Fifth Edition, 2017). In this book “financial indebtedness”  

is defined thus:  

“Definition of Financial Indebtedness  (Investment Grade Agreements)  

“Financial Indebtedness” means any  indebtedness for or in respect of:  

(a) moneys borrowed;

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

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

(d) the amount of any liability in respect of any  lease or hire purchase contract which would,  in accordance with GAAP, be treated as a  balance sheet liability [(other than any liability  in respect of a lease or hire purchase contract  which would, in accordance 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 to the extent they are sold on  a non -recourse basis);  

(f) any amount raised under any other  transaction (including any forward sale or  purchase agreement) of a type not referred  to in any other paragraph of this definition  having the commercial effect of a borrowing;  

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

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

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

157    

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 are concerned, it is clear that money alone  

is given against consideration for time value of money and a  

transaction which is a pure sale agreement between “borrowers”  

and “lender” cannot possibly be said to fit within any of the  

categories mentioned in Section 5(8). He relied strongly on the  

passage in Slaughter and May’s book which are extracted  

hereinbelow:  

“Any amount raised having the  “commercial effect of a borrowing”  

A wide range of transactions can be caught  by paragraph (f), including for example  forward purchases and sales of currency and  repo agreements. Conditional and credit sale  arrangements could also be covered here as  could certain redeemable shares.  

The precise scope of this limb can be  uncertain. Ideally, from the Borrower’s  perspective, if there are additional categories  of debt which should be included in “Financial  Indebtedness”, these should be described  specifically and this catch- all paragraph,  deleted. A few strong Borrowers do achieve  that position. Most, however are required to  accept the “catch-all” and will therefore need  to consider which of their liabilities might be

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caught by it, and whether specific exclusions  might be required.”  

64. What is clear from what Shri Venugopal has read to us is  

that a wide range of transactions are subsumed by paragraph (f)  

and that the precise scope of paragraph (f) is uncertain. Equally,  

paragraph (f) seems to be a “catch all” provision which is really  

residuary in nature, and which would subsume within it  

transactions which do not, in fact, fall under any of the other sub-

clauses of Section 5(8).  

65. And now to the precise language of Section 5(8)(f). First  

and foremost, the sub-clause does appear to be a residuary  

provision which is “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, would amount to a financial debt if they had  

the commercial effect of a borrowing. The expression “transaction”  

is defined by Section 3(33) of the Code as follows:  

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

As correctly argued by the learned Additional Solicitor General,  

the expression “any other transaction” would include an

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arrangement in writing for the transfer of funds to the corporate  

debtor and would thus clearly include the kind of financing  

arrangement by allottees to real estate developers when they pay  

instalments at various stages of construction, so that they  

themselves then fund the project either partially or completely.  

66. Sub-clause (f) Section 5(8) thus read would subsume  

within it amounts raised under transactions which are not  

necessarily loan transactions, so long as they have the  

commercial effect of a borrowing. We were referred to Collins  

English Dictionary & Thesaurus (Second Edition, 2000) for the  

meaning of the expression “borrow” and the meaning of 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  something equivalent back to the lender. 2.  to adopt (ideas, words, etc.) from another  source; appropriate. 3. Not standard. to lend.  4. (intr) Golf. To putt the ball uphill of the  direct path to the hole: make sure you borrow  enough.”  

xxx xxx xxx  

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

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sponsored advertisement on radio or  television.”  

67. A perusal of these definitions would show that even though  

the Petitioners may be right in stating that a “borrowing” is a loan  

of money for temporary use, they are not necessarily right in  

stating that the transaction must culminate in money being given  

back to the lender. The expression “borrow” is wide enough to  

include an advance given by the home buyers to a real estate  

developer for “temporary use” i.e. for use in the construction  

project so long as it is intended by the agreement to 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 a real estate agreement,  

which is done with profit as the main aim, such amount would be  

subsumed within Section 5(8)(f) as the sale agreement between  

developer and home buyer would have the “commercial effect” of  

a borrowing, in that, money is paid in advance for temporary use  

so that a flat/apartment is given back to the lender. Both parties  

have “commercial” interests in the same – the real estate

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developer seeking to make a profit on the sale of the apartment,  

and the flat/apartment purchaser profiting by the sale of the  

apartment. Thus construed, there can be no difficulty in stating  

that the amounts raised from allottees under real estate projects  

would, in fact, be subsumed within Section 5(8)(f) even without  

adverting to the explanation introduced by the Amendment Act.  

68. However, Dr. Singhvi strongly relied upon the report of the  

Bankruptcy Law Reforms Committee of November, 2015 and in  

particular paragraph 3 of ‘Box 5.2 – Trigger for IRP’ which states  

that financial creditors are persons where the liability to the debtor  

arises from a “solely” financial transaction. This Committee report,  

which led to the enactment of the Code, is an important guide in  

understanding the provisions of the Code. However, where the  

provisions of the Code, as construed in the light of the objects of  

the Code, are clear, the fact that from a huge report one word is  

picked up to indicate that all financial creditors must have debtors  

who owe money “solely” from financial transactions cannot  

possibly have the effect of negating the plain language of Section  

5(8)(f) of the Code. In fact, what is important is that the threshold  

limit to trigger the Code is purposely kept low – at only one lakh  

rupees – making it clear that small individuals may also trigger the

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Code as financial creditors (as financial creditors include  

debenture holders and bond holders), along with banks and  

financial institutions to whom crores of money may be due.  

69. That this amendment is in fact clarificatory is also made  

clear by the Insolvency Committee Report, which expressly uses  

the word “clarify”, indicating that the Insolvency Law Committee  

also thought that since there were differing judgments and doubts  

raised on whether home buyers would or would not be included  

within Section 5(8)(f), it was best to set these doubts at rest by  

explicitly stating that they would be 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 Section 5(8)(f) of the  

Code as originally enacted.  

70. And now some of the other arguments on behalf of the  

Petitioners need to be met. According to learned counsel for the  

Petitioners, the expression “means and includes” would indicate  

that that the definition section is exhaustive, and this being so,  

alien subject matter such as home buyers cannot be inserted  

therein. For this proposition, they relied upon P. Kasilingam and

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Ors. v. P.S.G. College of Technology and Ors. (1995) Supp (2)  

SCC 348 at paragraph 19 where this Court held as under:  

“19. We will first deal with the contention  urged by Shri Rao based on the provisions of  the Act and the Rules. It is no doubt true that  in view of clause (3) of Section 1 the Act  applies to all private colleges. The  expression ‘college’ is, however, not defined  in the Act. The expression “private college” is  defined in clause (8) of Section 2 which can,  in the absence of any indication of a contrary  intention, cover all colleges including  professional and technical colleges. An  indication about such an intention is,  however, given in the Rules wherein the  expression ‘college’ has been defined in Rule  2(b) to mean and include Arts and Science  College, Teachers' Training College,  Physical Education College, Oriental  College, School of Institute of Social Work  and Music College. While enumerating the  various types of colleges in Rule 2(b) the  rule-making authority has deliberately  refrained from including professional and  technical colleges in the said definition. It has  been urged that in Rule 2(b) the expression  “means and includes” has been used which  indicates that the definition is inclusive in  nature and also covers categories which are  not expressly mentioned therein. We are  unable to agree. A particular expression is  often defined by the Legislature by using the  word ‘means’ or the word ‘includes’.  Sometimes the words ‘means and includes’  are used. The use of the word ‘means’  indicates that “definition is a hard-and-fast  definition, and no other meaning can be  assigned to the expression than is put down  in definition”. (See : Gough v. Gough [(1891)  2 QB 665 : 60 LJ QB 726] ; Punjab Land

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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 to comprehend not only such  things as they signify according to their  natural import but also those things which the  clause declares that they shall include. The  words “means and includes”, on the other  hand, indicate “an exhaustive explanation of  the meaning which, for the purposes of the  Act, must invariably be attached to these  words or expressions”. (See  : Dilworth v. Commissioner of Stamps [1899  AC 99, 105-106 : (1895-9) All ER Rep Ext  1576] (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 that the definition of  ‘college’ is intended to be exhaustive and not  extensive and would cover only the  educational institutions falling in the  categories specified in Rule 2(b) and other  educational institutions are not  comprehended. Insofar as engineering  colleges are concerned, their exclusion may  be for the reason that the opening and  running of the private engineering colleges  are controlled through the Board of Technical  Education and Training and the Director of  Technical Education in accordance with the  directions issued by the AICTE from time to  time. As noticed earlier the Grants-in-Aid  Code contains provisions which, in many  respects, cover the same field as is covered  by the Act and the Rules. The Director of  Technical Education has been entrusted with  the functions of proper implementation of  those provisions. There is nothing to show  that the said arrangement was not working  satisfactorily so as to be replaced by the

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system sought to be introduced by the Act  and the Rules. Rule 2(d), on the other hand,  gives an indication that there was no  intention to disturb the existing arrangement  regarding private engineering colleges  because in that rule the expression ‘Director’  is defined to mean the Director of Collegiate  Education. The Director of Technical  Education is not included in the said  definition indicating that the institutions which  are under the control of Directorate of  College Education only are to be covered by  the Act and the Rules and technical  educational institutions in the State of Tamil  Nadu which are controlled by the Director of  Technical Education are not so covered.”   

71. On the other hand, the learned Additional Solicitor General  

countered this submission by reference to Krishi Utpadan Mandi  

Samiti v. Shankar Industries (1993) Supp (3) SCC 361 (2),  

where, at paragraphs 5 and 12, this Court held:  

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

“2. (a) ‘agricultural produce’ means such  items of produce of agriculture, 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 further includes gur, rab, shakkar,  khandsari and jaggery.”  

xxx xxx xxx  

12. We have considered the arguments  advanced on behalf of the parties and have  perused the record. A perusal of the

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definition of agricultural produce under  Section 2(a) of the Act shows that apart from  items of produce of agriculture, horticulture,  viticulture, piculture, sericulture, pisciculture,  animal husbandry or forest as are specified  in the Schedule, the definition further  ‘includes admixture of two or more such  items’ and thereafter it further ‘includes  taking any such item in processed form’ and  again for the third time the words used are  ‘and further includes gur, rab, shakkar,  khandsari and jaggery’. It is a well settled rule  of interpretation that where the legislature  uses the words ‘means’ and ‘includes’ such  definition is to be given a wider meaning and  is not exhaustive or restricted to the items  contained or included in such definition. Thus  the meaning of ‘agricultural produce’ in the  above definition is not restricted to any  products of agriculture as specified in the  Schedule but also includes such items which  come into being in processed form and  further 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  

quotation hereinabove, is without citation of any authority. In fact,  

in Jagir Singh & Ors. v. State of Bihar & Anr. (1976) 2 SCC 942  

at paragraphs 11 and 19 to 21 and Mahalakshmi Oil Mills v.  

State of Andhra Pradesh & Ors. (1989) 1 SCC 164, at  

paragraphs 8 and 11 (which has been cited in P. Kasilingam  

(supra)), this Court set out definition sections where the  

expression “means” was followed by some words, after which  

came the expression “and includes” followed by other words, just

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as in the Krishi Utpadan Mandi Samiti (supra) case. In two other  

recent judgments, Bharat Coop. Bank (Mumbai) Ltd. v. Coop.  

Bank Employees Union (2007) 4 SCC 685, at paragraphs 12 and  

23, and State of West Bengal and Ors. v. Associated  

Contractors (2015) 1 SCC 32 at paragraph 14, this Court has  

held that wherever the expression “means” is followed by the  

expression “and includes” whether with or without additional words  

separating “means” from “includes”, these expressions indicate  

that the definition provision is exhaustive as a matter of statutory  

interpretation. It has also been held that the expression “and  

includes” is an expression which extends the definition contained  

in words which follow the expression “means”. From this  

discussion, two things follow. Krishi Utpadan Mandi Samiti  

(supra) cannot be said to be good law insofar as its exposition on  

“means” and “includes” is concerned, as it ignores earlier  

precedents of larger and coordinate benches and is out of sync  

with later decisions on the same point. Equally, Dr. Singhvi’s  

argument that sub-clauses (a) to (i) of Section 5(8) of the Code  

must all necessarily reflect the fact that a financial debt can only  

be a debt which is disbursed against the consideration for the time  

value of money, and which permeates clauses (a) to (i), cannot be  

accepted as a matter of statutory interpretation, as the expression

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“and includes” speaks of subject matters which may not  

necessarily be reflected in the main part of the definition.  

73. In any event, as was correctly argued by learned Additional  

Solicitor General Mrs. Madhavi Divan, the legislature is not  

precluded by way of amendment from inserting words into what  

may even be an exhaustive definition. What is an exhaustive  

definition is exhaustive for purposes of interpretation of a statute  

by the Courts, which cannot bind the legislature when it adds  

something to the statute by way of amendment. On this score also,  

there is no substance in the aforesaid argument.  

74. It was then argued, relying on a large number of judgments  

that Section 5(8)(f) must be construed noscitur a sociis with sub-

clauses (a) to (e) and (g) to (i), and so construed would only refer  

to loans or other financial transactions which would involve money  

at both ends. This, again, is not correct in view of the fact that  

Section 5(8)(f) is clearly a residuary “catch all” provision, taking  

within it matters which are not subsumed within the other sub-

clauses.  Even otherwise, in Controller of Estate Duty v. Kantilal  

Trikamlal (1976) 4 SCC 643, this Court has held that when an  

expression is a residuary one, ejusdem generis will not apply. It  

was thus held:

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“21…We have also to stress the expression  “other right” in the explanation which is of the  widest import and cannot be constricted by  reading it ejusdem generis with “debt”. “Other  right”, in the context, is expressly meant  considerably to widen the concept and  therefore suggests a somewhat contrary  intention to the application of the ejusdem  generis rule. We may derive instruction from  Green's construction of the identical  expression in the English Act. [Section 45  (2)].  The learned author writes:  

“A disclaimer is an extinguishment of a right  for this purpose. Although in the event the  person disclaiming never has any right in the  property, he has the right to obtain it, this  inchoate right is a 'right' for the purposes of  Section 45(2). The ejusdem generis rule  does not apply to the words 'a debt or other  right' and the word 'right' is a word of the  widest import. Moreover, the expression 'at  the expense of the deceased' is used in an  ordinary and natural manner; and is apt to  cover not only cases where the  extinguishment involves a loss to the  deceased of a benefit he already enjoyed,  but also those where it prevents him from  acquiring the benefit.”  

Also, in Subramanian Swamy v. Union of India (2016) 7 SCC  

221, this Court held:  

“70. The other aspect that is being  highlighted in the context of Article 19(2) is  that defamation even if conceived of to  include a criminal offence, it must have the  potentiality to “incite to cause an offence”. To  elaborate, the submission is the words “incite  to cause an offence” should be read to give  attributes and characteristics of criminality to

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the word “defamation”. It must have 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 to  include a public law remedy in respect of a  grievance that has a collective impact but not  as an actionable claim under the common  law by an individual and, therefore, the word  “defamation” has to be understood in that  context, as the associate words are  “incitement to an offence” would so warrant.  Mr Rao, learned Senior Counsel, astutely  canvassed that unless the word “defamation”  is understood in this manner applying the  principle of noscitur a sociis, the cherished  and natural right of freedom of speech and  expression which has been recognised under  Article 19(1)(a) would be absolutely at peril.  Mr Narasimha, learned ASG would contend  that the said rule of construction would not be  applicable to understand the meaning of the  term “defamation”. Be it noted, while  construing the provision of Article 19(2), it is  the duty of the Court to keep in view the  exalted spirit, essential aspects, the value  and philosophy of the Constitution. There is  no doubt that the principle of noscitur a  sociis can be taken recourse to in order to  understand and interpret the Constitution but  while applying the principle, one has to keep  in mind the contours and scope of  applicability of the said principle.  

71. In State of Bombay v. Hospital Mazdoor  Sabha [State of Bombay v. Hospital  Mazdoor Sabha, AIR 1960 SC 610 : (1960) 2  SCR 866] , it has been held that it must be  borne in mind that noscitur a sociis is merely  a rule of construction and it cannot prevail in  cases where it is clear that wider words have  been deliberately used in order to make the  scope of the defined word correspondingly  wider. It is only where the intention of the

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legislature in associating wider words with  words of narrower significance is doubtful, or  otherwise not clear that the said rule of  construction can be usefully applied. It can  also be applied where the meaning of the  words of wider import is doubtful; but, where  the object of the legislature in using wider  words is clear and free of ambiguity, the rule  of construction in question cannot be pressed  into service.  

72. In Bank of India v. Vijay Transport [Bank  of India v. Vijay Transport, 1988 Supp SCC  47 : AIR 1988 SC 151] , the Court was  dealing with the contention that a literal  interpretation is not always the only  interpretation of a provision in a statute and  the court has to look at the setting in which  the words are used and the circumstances in  which the law came to be passed to decide  whether there is something implicit behind  the words actually used which would control  the literal meaning of the words used. For the  said purpose, reliance was placed on R.L.  Arora (2) v. State of U.P. [R.L. Arora  (2) v. State of U.P., (1964) 6 SCR 784 : AIR  1964 SC 1230] . Dealing with the said aspect,  the Court has observed thus: (Vijay  Transport case [Bank of India v. Vijay  Transport, 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 of a statute, the setting in  which such words are placed may be taken  into consideration, but that does not mean  that even though the words which are to be  interpreted convey a clear meaning, still a  different interpretation or meaning should be  given to them because of the setting. In other  words, while the setting of the words may  sometimes be necessary for the  interpretation of the words of the statute, but

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that has not been ruled by this Court to be 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 of construction, opined:  (SCC pp. 550 & 551, paras 81 & 83)  

“81. We are aware that the maxim of noscitur  a sociis may be a treacherous one unless the  “societas” to which the “socii” belong, are  known. The risk may be present when there  is no other factor except contiguity to suggest  the “societas”. But where there is, as here, a  term of wide denotation which is not free from  ambiguity, the addition of the words such as  “including” is sufficiently indicative of  the societas. As we have said, the word  “includes” in the present context indicates a  commonality or shared features or attributes  of the including word with the included.  

***  

83. Hence on an application of general  principles of interpretation, we would hold  that the word “luxuries” in Entry 62 of List II  means the activity of enjoyment of or  indulgence in that which is costly or which is  generally recognised as being beyond the  necessary requirements of an average  member of society and 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 that noscitur a sociis is a legitimate  rule of construction to construe the words in  an Act of Parliament with reference to the

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words found in immediate connection with  them. In this regard, we may refer to a  passage from Justice G.P. Singh, Principles  of Statutory Interpretation [ (13th Edn., 2012)  509.] where the learned author has referred  to the lucid explanation given by  Gajendragadkar, J. We think it appropriate to  reproduce the passage:  

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

‘This rule, according to Maxwell [  Maxwell, Interpretation of Statutes (11th  Edn., 1962) 321.] , means that when two or  more words which are susceptible of  analogous meaning are coupled together,  they are understood to be used in their  cognate sense. They take as it were their  colour from each other, that is, the more  general is restricted to a sense analogous to  a less general.’”  

The learned author on further discussion has  expressed the view that meaning of a word is  to be judged from the company it keeps i.e.  reference to words found in immediate  connection with them. It applies when two or  more words are susceptible of analogous  meanings are coupled together, to be read  and understood in their cognate sense.  [Principles of Statutory Interpretation by G.P.  Singh (8th Edn.) 379.] Noscitur a sociis is  merely a rule of construction and cannot  prevail where it is clear that wider and diverse  etymology is intentionally and deliberately  used in the provision. It is only when and  where the intention of the legislature in  associating wider words with words of  narrowest significance is doubtful or

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otherwise not clear, that the rule of noscitur a  sociis is useful.”  

75. It is clear from a reading of these judgments that noscitur a  

sociis being a mere rule of construction cannot be applied in the  

present case as it is clear that wider words have been deliberately  

used in a residuary provision, to make the scope of the definition  

of “financial debt” subsume matters which are not found in the  

other sub-clauses of Section 5(8). This contention must also,  

therefore, be rejected.    

76. It remains to deal with arguments on the effect of a  

deeming fiction. Under the explanation added to Section 5(8)(f),  

any amount raised from an allottee under a real estate project  

shall be deemed to be an amount having the commercial effect of  

a borrowing.    

77. In every case in which a deeming fiction is to be construed,  

the observations of Lord Asquith in a concurring judgment in East  

End Dwellings Co. Ltd. v. Finsbury Borough Council (1952)  

Appeal Cases 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 as real  the consequences and incidents which, if the  putative state of affairs had in fact existed,  must inevitably have flowed from or

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accompanied it…. The statute says that you  must imagine a certain state of affairs. It does  not say that, having done so, you must cause  or permit your imagination to boggle when it  comes to the inevitable corollaries of that  state of affairs.”  

These observations have been followed time out of number by the  

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  

of Income Tax, Bombay v. Bombay Trust Corporation AIR  

1930 PC 54 at 55, that the reason that a deeming fiction is  

introduced is that the subject matter of that fiction is not so in  

reality, which why Parliament requires such subject matter be  

treated as if it were real. To similar effect are the observations in  

K. Kamaraja Nadar v. Kunju Thevar and Ors. AIR 1958 SC 687  

at paragraph 28, where this Court put it thus:  

“The effect of such a legal fiction, however, is  that a position which otherwise would not  obtain is deemed to obtain under those  circumstances.”  

79. It was also argued, relying upon Delhi Cloth & General  

Mills Co. Ltd. and Anr. v. State of Rajasthan and Ors. (1996) 2  

SCC 449, that a deeming fiction can only be as to facts and cannot  

be the deeming of a legal position. It was further argued relying

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upon Daiichi Sankyo Company Limited v. Jayaram  

Chigurupati and Ors. (2010) 7 SCC 449, that a deeming  

provision cannot be destructive of the main provision and cannot  

be construed as such.  

80. A closer look at Delhi Cloth & General Mills Co. Ltd.  

(supra) would show that the judgment in essence followed this  

Court’s judgment in Shri Prithvi Cotton Mills Ltd. & Anr. v.  

Broach Borough Municipality & Ors. 1969 (2) SCC 283, in that  

the validating statute in question had not cured the defect that was  

pointed out. This becomes clear on a reading of paragraph 16 and  

17 of the judgment which read as follows:  

“16. The Validating Act provides that,  notwithstanding anything contained in  Sections 4 to 7 of the 1959 Act or in any  judgment, decree, order or direction of any  court, the villages of Raipura and  Ummedganj should be deemed always to  have continued to exist and they continue to  exist within the limits of the Kota Municipality,  to all intents and for all purposes. This  provision requires the deeming of the legal  position that the villages of Raipura and  Ummedganj fall within the limits of the Kota  Municipality, not the deeming of facts from  which this legal consequence would flow. A  legal consequence cannot be deemed nor,  therefrom, can the events that should have  preceded it. Facts may be deemed and,  therefrom, the legal consequences that  follow.

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17. Sections 4 to 7 remained on the statute  book unamended when the Validating Act  was passed. Their provisions were  mandatory. They had admittedly not been  followed. The defect of not following these  mandatory provisions in the case of the  villages of Raipura and Ummedganj was not  cured by the Validating Act. The curing of the  defect was an essential requirement for the  passing of a valid validating statute, as held  by the Constitution Bench in the case  of Prithvi Cotton Mills Ltd. [(1969) 2 SCC 283  : (1970) 1 SCR 388] It must, therefore, be  held that the Validating 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 a  

legal consequence cannot be deemed, whereas facts which  

preceded such consequence can so be deemed. In the present  

case, the deeming provision, as has been held by us, is only  

clarificatory of the true legal position as it already obtained. The  

present case does not concern itself with validating statutes at all.  

The ratio of this judgment, therefore, would have no application to  

this case.   

82. Equally, in Daiichi Sankyo Company Limited (supra), it  

was found that the deeming provision contained in sub-clause (2)  

of Regulation 2(1)(e) of the Securities and Exchange Board of  

India (Substantial Acquisition of Shares and Takeovers)  

Regulations, 1997 flew in the face of the very idea of “persons

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acting in concert”, as a result of which it was held that a deeming  

fiction cannot do away with the very concept of “persons acting in  

concert” contained in the main provision. In the present case  

however, far from doing away with the concept of a “financial  

creditor”, we have already found that the deeming provision is only  

clarificatory of the fact that allottees are to be considered as  

“financial creditors” for the reasons already given by us  

hereinabove.  

83. Although a deeming provision is to deem what is not there  

in reality, thereby requiring the subject matter to be treated as if it  

were real, yet several authorities and judgments show that a  

deeming fiction can also be used to put beyond doubt a particular  

construction that might otherwise be uncertain. Thus, Stroud’s  

Judicial Dictionary of Words and Phrases (Seventh Edition, 2008),  

defines “deemed” as follows:  

“Deemed”-, as used in statutory definitions  “to extend the denotation of the defined term  to things it would not in ordinary parlance  denote, is often  a convenient device for  reducing  the verbiage or an enactment, but  that does not mean that wherever it is used it  has that effect; to deem means simply to  judge or reach a conclusion about  something, and the words ‘deem’ and  ‘deemed’ when used in a statute thus simply  state the effect or meaning which some

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matter or things has- the way in which it is to  be  adjudged ; this need not import artificiality  or fiction; it may simply be the statement of  an indisputable conclusion.”  

84. In Hindustan Cooperative Housing Building Society  

Limited v. Registrar, Cooperative Societies and Anr. (2009) 14  

SCC 302, this Court in dealing with legal fictions generally quoted  

a large number of authorities thus at paragraph 17:  

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

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

After ascertaining the purpose full effect must  be given to the statutory fiction and it should  be carried to its logical conclusion and to that  end it would be proper and even necessary  to assume all those facts on which alone the  fiction can operate. [Ed.: This latter sentence  does not form part of what was observed by  James, L.J. in ex p Walton, (1881) 17 Ch D  746 : (1881-85) All ER Rep 548 (CA) but is a  paraphrase of what was observed by the  Supreme Court in State of  Bombay v. Pandurang Vinayak, 1953 SCR  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.]

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[See Hill v. East and West India Dock  Co. [(1884) 9 AC 448 (HL)] , State of  Travancore-Cochin v. Shanmugha Vilas  Cashewnut Factory [AIR 1953 SC 333]  , American Home Products Corpn. v. Mac  Laboratories (P) Ltd. [(1986) 1 SCC 465]  and Parayankandiyal Eravath Kanapravan  Kalliani Amma v. K. Devi [(1996) 4 SCC 76]  .] In an oft quoted passage, Lord Asquith  stated:  

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

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

‘… The word “deemed” is used a great deal  in modern legislation. Sometimes it is used to  impose for the purposes of a statute an  artificial construction of a word or phrase that  would not otherwise prevail. Sometimes it is  used to put beyond doubt a particular  construction that might otherwise be  uncertain. Sometimes it is used to give a  comprehensive description that includes  what is obvious, what is uncertain and what  is, in the ordinary 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.]

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

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

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

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

16. Whether the word ‘deemed’ when used in  a statute established a conclusive or a  rebuttable presumption depended upon the  context (see St. Leon Village Consolidated  School Distt. v. Ronceray [(1960) 23 DLR  (2d) 32] ).  

‘…. I … regard its primary function as to bring  in something which would otherwise be

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excluded.’ (Per Viscount Simonds  in Barclays 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’ and there is no implication of  steps to be taken before the opinion is formed  or the decision is taken. [See R. v. Brixton  Prison (Governor), ex p Soblen [(1963) 2 QB  243 : (1962) 3 WLR 1154 : (1962) 3 All ER  641 (CA)] at QB p. 315.]” [Ed.: As observed  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.]”  

In the present case, it is clear that the deeming fiction that is used  

by the explanation is to put beyond doubt the fact that allottees are  

to be regarded as financial creditors within the enacting part  

contained in Section 5(8)(f) of the Code.   

85. It was also argued that an explanation does not enlarge the  

scope of the original section and for this purpose S. Sundaram  

Pillai (supra) was relied upon. This very judgment recognises, in  

paragraph 46, that an explanation does not ordinarily enlarge the  

scope of the original Section. But if it does, effect must be given to  

the legislative intent notwithstanding the fact that the legislature  

has named a provision as an explanation. [See Hiralal Ratanlal  

Etc. v. State of U.P and Anr. Etc. (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 was added by the

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Amendment Act only to clarify doubts that had arisen as to  

whether home buyers/allottees were subsumed within Section  

5(8)(f). The explanation added to Section 5(8)(f) of the Code by  

the Amendment Act does not in fact enlarge the scope of the  

original Section as home buyers/allottees would be subsumed  

within Section 5(8)(f) as it originally stood as has been held by us  

hereinabove. As a matter of statutory interpretation, that  

interpretation, which accords with the objects of the statute in  

question, particularly when we are dealing with a beneficial  

legislation, is always the better interpretation or the “creative  

interpretation” which is the modern trend of authority, and which is  

reflected in the concurring judgment of Eera (through Dr.  

Manjula  Krippendorf) v. State (NCT of Delhi) and Anr. (2017)  

15 SCC 133 at paragraphs 122 and 127. This argument must,  

therefore, also be rejected.  

86. We, therefore, hold that allottees/home buyers were  

included in the main provision, i.e. Section 5(8)(f) with effect from  

the inception of the Code, the explanation being added in 2018  

merely to clarify doubts that had arisen.  

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Conclusion  

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  

Constitution of India.    

ii. The RERA is to be read harmoniously with the Code, as  

amended by the Amendment Act. It is only in the event of  

conflict that the Code will prevail over the RERA. Remedies  

that are given to allottees of flats/apartments are therefore  

concurrent remedies, such allottees of flats/apartments  

being in a position to avail of remedies under the Consumer  

Protection Act, 1986, RERA as well as the triggering of the  

Code.  

iii. Section 5(8)(f) as it originally appeared in the Code being a  

residuary provision, always subsumed within it allottees of  

flats/apartments. The explanation together with the  

deeming fiction added by the Amendment Act is only  

clarificatory of this position in law.  

Postscript  

87. We have been informed that most of the States and Union  

Territories have established/appointed adjudicating officers, the  

Real Estate Regulatory Authority, as well as the Appellate Tribunal

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as under the RERA. Yet, despite the fact that 1st May, 2017 has  

long gone, some recalcitrant States and Union Territories have yet  

to do the needful. We direct that in those States in which the  

needful has not been done, in that, only interim or no adjudicating  

officer/Real Estate Regulatory Authority and/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 a period  

of three months from the date of this judgment. Copies of this  

judgment be sent to the Chief Secretaries of all the States and  

Union Territories immediately. To be placed for compliance by  

affidavits filed by the Chief Secretaries of these States and Union  

Territories within 3 months as aforesaid. Post these matters in the  

second week of January, 2020.  

88. Given the declaration of the constitutional validity of the  

Amendment Act, it is absolutely necessary that the NCLT and  

the NCLAT are manned with sufficient members to deal with  

litigation that may arise under the Code generally, and from the  

real estate sector in particular. For this purpose, an affidavit be  

filed by the Union of India within three months from today as to  

the steps taken in this behalf. Copy of this judgment be sent to

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the Ministry of Law and Justice, Government of India  

immediately. To come up with the compliance report by States  

and Union Territories as aforesaid in the second week of  

January, 2020.   

89. All writ petitions and the civil appeal are disposed of in  

the light of this judgment. Stay orders granted by this Court to  

continue until the NCLT takes up each application filed by an  

allottee/ home buyer to decide the same in light of this judgment.  

No order as to costs.  

                                                                  ……………………J.          (R.F. Nariman)               ……………………J.          (Sanjiv Khanna)                                                                                                                                            ……………………J.          (Surya Kant)    New Delhi;  August 9, 2019