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

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E 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 xxxxxx

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 H

PIONEER URBAN LAND AND INFRASTRUCTURE LTD. 481 & ANR. v. UNION OF INDIA & ORS. [R.F. NARIMAN, J.]

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.” C

38Copy pinpoint38. 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 harshlyon 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 D 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) E 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 F 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 G 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)” H

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A 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. B

39Copy pinpoint39. 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/homebuyer who prefers an application under Section 7 of the C 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 D 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 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 homebuyer/allottee E 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 F 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 bonafides 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 G 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 inline to receive whatever is given to him in winding up. Given the reasons of the Insolvency Committee H

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Report, which show that 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).

40Copy pinpoint40. 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, 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 H

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A given of advance payments being made for turnkey projects and capital goods, where 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 information from information utilities under the Code, makes it easy for home buyers/ E 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 F that there cannot be said to be any infraction of equal protection of the laws.

41Copy pinpoint41. 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 G 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. H According to him, therefore, the object itself being discriminatory, the

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inclusion of real estate developers as financial debtors should 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 D 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 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 E 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 F 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.

42Copy pinpoint42. 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) G demonstrates that the presumption of constitutionality that attaches to the Amendment Act has not been displaced by the Petitioners.

43Copy pinpoint43. It was also argued with reference to Regulation 9A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution H

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A Process for Corporate Persons)Regulations, 2016 that homebuyers 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. B (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 C 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, in- cluding any or all of the following:— D (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.” E We have already held that given the fact that homebuyers/allottees give advances to the real estate developer and thereby finance the real estate project at hand, are really financial creditors. Given this finding, this plea of the Petitioners must also be rejected. This challenge must also, therefore, fail. F The Article 14 Challenge (II):Manifest arbitrariness; Article 19(1)(g) and Article 300-A

44Copy pinpoint44. 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 G 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: H

PIONEER URBAN LAND AND INFRASTRUCTURE LTD. 487 & ANR. v. UNION OF INDIA & ORS. [R.F. NARIMAN, J.]

S. o. FI DI GS I SWISS RIBBO S REASO FOR O - W.R.T. RATIO ALE BEHI D APPLICABILITY OF DISTI CTIO BETWEE DISTI CTIO BETWEE FCs B FI A CIAL A D and OCs (AS EXPLAI ED I OPERATIO AL CREDITORS SWISS RIBBO S) I CASE OF HOMEBUYERS/ ALLOTTEES

1. ature of security:

“it is clear that most financial Real estate allottees/ homebuyers are creditors, particularly banks and unsecured creditors and are therefore financial institutions, are secured more akin to OCs rather than FCs 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]

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 Real estate allottees make payments finance on a term loan or for working to the corporate debtors in lieu of capital that enables the corporate services rendered – i.e., construction debtor to either set up and/or operate of apartments. In several cases, its business. On the other hand, payments are also made on a contracts with operational creditors construction-linked payment basis. are relatable to supply of goods and services in the operation of business. Each individual allottee will be owed Financial contracts generally involve a sum that is often much smaller than large sums of money. By way of the amount owed to a single contrast, operational contracts have bank/financial institution. dues whose quantum is generally less.

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A In the running of a business, operational Real estate allottees are large in creditors can be many as opposed to number – often hundreds or financial creditors, who lend finance for the thousands, depending on the size of set up or working of business. It is obvious the developer and the number of that debenture holders and persons with development projects. 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 There are no repayment schedules financial institutions, would certainly be in apartment buyer agreements – as smaller in number than operational creditors the payments have been made by of a corporate debtor. allottees towards grant of possession of their units in a project – and the Also, financial creditors have specified date of possession is further subject repayment schedules, and defaults entitle to force majeure and other financial creditors to recall a loan in totality. circumstances. Refund of money by Contracts with operational creditors do not the developer only arises in the have any such stipulations. event that the allottee validly terminates/ cancels the agreement and not otherwise.

Agreements between allottees and Also, the forum in which dispute resolution developers have arbitration clauses. takes place is completely different. Further, there is often the possibility Contracts with operational creditors can and of a genuine dispute in case of do have arbitration clauses where dispute allottees’ claims – e.g., where date resolution is done privately. Operational of possession stands extended on debts also tend to be recurring in nature and account of force majeure the possibility of genuine disputes in case of circumstances and therefore operational debts is much higher when allottees’ right to receive refund has compared to financial debts. A simple not yet arisen, where there has been example will suffice. Goods that are delay on part of allottees in making supplied may be substandard. Services that payments to the developer, where are provided may be substandard. Goods termination/cancellation of the may not have been supplied at all. All these agreement is not as per terms of the qua operational debts are matters to be agreement, etc. These are not easily proved in arbitration or in the courts of law. verifiable/available and are required On the other hand, financial debts made to to be examined by a court of law / banks and financial institutions are well- during an arbitration. G documented and defaults made are easily verifiable.”

[Para 43, 44]

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3. Regarding role and involvement of FCs vis-à-vis OCs: Allottees are interested in securing their “financial creditors are, from the very single time investment, and not the beginning, involved with assessing the financial well-being of, or ensuring the viability of the corporate debtor. They continuity of, the corporate debtor as a can, and therefore do, engage in going-concern. Further, allottees in restructuring of the loan as well as different real estate projects of a B reorganization of the corporate debtor’s corporate debtor, may have different business when there is financial stress, interests confined only to that particular which are things operational creditors do development, with no interest in the not and cannot do. Thus, preserving the overall well-being or rearrangement or corporate debtor as a going concern, viability of the Company. If such while ensuring maximum recovery for allottees are vested with decision making all creditors being the objective of the powers concerning the business of the Code, financial creditors are clearly enterprise as a whole, it is unlikely that C different from operational creditors and sound financial decisions will be taken therefore, there is obviously an having regard to the overall status of the intelligible differentia between the two entity which will undoubtedly defeat the which has a direct relation to the objects very purpose and objective of the CIRP sought to be achieved by the Code.” process.

[Para 45] D

4. Regarding participation in the COC meetings: Allottees do not have the expertise or “Under the Code, the committee of information to be in a position to evaluate creditors is entrusted with the primary the feasibility and viability of resolution responsibility of financial restructuring. plans keeping in mind the business of the They are required to assess the viability corporate debtor as a whole. Expecting of a corporate debtor by taking into allottees to carry out such a function and account all available information as well role is entirely impractical. as to evaluate all alternative investment opportunities that are available. The Allottees are interested in securing their committee of creditors is required to single time investment, and not the evaluate the resolution plan on the basis financial well-being of, or ensuring the of feasibility and viability.” continuity of, the corporate debtor as a going-concern. “Since the financial creditors are in the business of money lending, banks and Allottees in different real estate projects financial institutions are best equipped to of a corporate debtor, may have different assess viability and feasibility of the interests confined only to that particular business of the corporate debtor. Even development, with no interest in overall at the time of granting loans, these banks well-being or rearrangement or viability and financial institutions undertake a of the Company. If such allottees are detailed market study which includes a vested with decision making powers techno-economic valuation report, concerning the business of the enterprise evaluation of business, financial as a whole, it is unlikely that sound projection, etc. Since this detailed study financial decisions will be taken having has already been undertaken before regard to the overall status of the entity sanctioning a loan, and since financial

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A creditors have trained employees which will undoubtedly defeat the very purpose to assess viability and feasibility, and objective of the CIRP process. Interests of they are in a good position to other stakeholders, including other financial evaluate the contents of a creditors, suppliers, small creditors, labour, etc. are resolution plan. On the other unlikely to be considered appropriately. hand, operational creditors, who provide goods and services, are involved only in recovering B amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business.”

[Para 67, 69]

C 5. Regarding process for initiation of corporate insolvency resolution process:

• Information with respect to debt incurred by • In practice, real estate allottees do not financial debtors: upload information in respect of amounts owed to them by developers with the D “It is clear from these Information Utilities. Sections that information in respect of debts • Most of the sources evidencing a incurred by financial financial debt as listed do not apply to debtors is easily real-estate allottees. available through information utilities which, under the E Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 [“Information Utilities Regulations”], are to satisfy themselves that information F 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.

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A 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 follo wing are other sources which evidence a financial debt: B

(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 issued by the registrar of companies (if the corporate debtor is a co mpany); (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 info rmation compan y; (h) Copies of entries in a bankers book in accordance with the Bankers Books Evidence Act, 1891.”

[Para 48, 49]

F * In the case of real estate allottees, ? With respect to set-offs: amounts are also due and payable by the allottees to the developer – i.e., “a set-off of amounts due from financial payments owed to the developer as per creditors is a rarity. Usually, financial debts the schedule under the Apartment point only in one way – amounts lent have Buyer’s Agreement, interest on delayed to be repaid.” payments. Set-off of amounts is G therefore quite co mmon in the case of [Para 55] allottees.

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A ? Requirement of proving ‘default’ in case of section 7 applications: ? In the case of real estate allottees, in most cases, the Whereas a “claim” gives rise to a default has not yet occurred “debt” only when it becomes “due”, a since the date of possession is “default” occurs only when a “debt” often extended on account of B becomes “due and payable” and is not force majeure and other paid by the debtor. It is for this reason circumstances. As a result, in that a financial creditor has to prove such a case, the right of the “default” as opposed to an operational allottees to terminate/cancel creditor who merely “claims” a right to their agreement with the payment of a liability or obligation in developer and seek a refund of respect of a debt which may be due. amounts paid would not have C When this aspect is borne in mind, the arisen in the first place. 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] D

45Copy pinpoint45. As has been pointed out by us hereinabove, it is clear that the context of Swiss Ribbons(supra) was a challenge under Article 14 E 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 H

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holders, applies on all fours to repel this argument based on another state facet of Article 14. In fact, the object of the Code, as originally set out in the paragraphs 27 and 28 of Swiss Ribbons (supra) is as follows: urred on is “27. As is discernible, the Preamble gives an insight into what is nt of sought to be achieved by the Code. The Code is first and other foremost, a Code for reorganisation and insolvency resolution of lt, in f the corporate debtors. Unless such reorganisation is effected in a ancel time-bound manner, the value of the assets of such persons will the deplete. Therefore, maximisation of value of the assets of such nd of persons so that they are efficiently run as going concerns is have 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 mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See Arcelor Mittal [Arcelor Mittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] at para 83, fn 3). G

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 H

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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 B 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 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 1test,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 G constitutionally valid law.

46Copy pinpoint46. 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 H

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with the other. Also, treatment of similarly situated creditors should be A 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 B 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.

47Copy pinpoint47. 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, H

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A and would therefore be persons to whom a 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.

48Copy pinpoint48. 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 C 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 D 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 other available options have failed. This argument again need not deter us further.

49Copy pinpoint49. 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 F 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 G 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.

50Copy pinpoint50. The answer to these contentions is provided by reading some of the provisions of RERA. Under paragraph 3 of the Statement of H

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Objects and Reasons of RERA, one of the important reasons for enacting A the RERA is to “establish symmetry of 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 B (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 C 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 Section7(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, 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 xxxxxx

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A (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; B (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 C common areas with photographs. (iv) status of approvals,- (A) Approvals received; (B) Approvals applied and expected date of receipt; D (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. 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 H

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forty-five days from the date on which such refund along with A 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 B 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 C 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 D payment of compensation and/or refund, entailing a dismissal of the said application. At this stage also, it is important 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. E 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.

51Copy pinpoint51. 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 adjudicate on “default”, the NCLT cannot, in such a summary proceeding, H

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A 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.

52Copy pinpoint52. 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 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

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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. xxx xxxxxx

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), C 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.” D

This argument must also therefore be rejected. Challenge to Section 21(6A) and 25A of the Code

53Copy pinpoint53. 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: 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; G c) Those who are yet to receive possession and seek possession, with or without delay compensation; or

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A 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.”

54Copy pinpoint54. 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 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.

55Copy pinpoint55. On this point, we were referred to the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, which has just passed through

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the Parliament, to amend the provisions of the Code in various aspects. A 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 B (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 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. F 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’

56Copy pinpoint56. Several counsel appearing on behalf of the Petitioners made G 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

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A 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. B Another learned counsel stated that there should be a 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 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 malafide, 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 H

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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 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) E

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A 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)] .” (emphasis in original)

B 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 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

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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)

57Copy pinpoint57. 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

58Copy pinpoint58. 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 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. F 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.

59Copy pinpoint59. First and foremost, a financial debt is defined as meaning a “debt”. “Debt” is defined by Section 3(11) of the Code as follows: G “3. Definitions.- In this Code, unless the context otherwise requires, - xxx xxxxxx H

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A (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: B “(6) “claim” means- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

C (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 xxxxxx D (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;”

60Copy pinpoint60. 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 F 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: G “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.”

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It is precisely to do away with judgments such as Raman Iron A 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 B 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 C (International Edn.) Vol. 2 and the Law Lexicon by P. Ramanatha Aiyar (2ndEdn., Reprint) are quoted.

61Copy pinpoint61. The definition of “financial debt” in Section 5(8) then goes on to state that a “debt” must be “disbursed” against the consideration for time value of money.”Disbursement” is defined in Black’s Law Dictionary D (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” E 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” F 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 G 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 some specified future date,

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A 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.” B 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).

62Copy pinpoint62. 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; (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)];

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(e) receivables sold or discounted (other than any receivables to A 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; B (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 C 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 D (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.”

63Copy pinpoint63. When compared with Section 5(8), it is clear that Section 5(8) seems to owe its genesis to the definition of “financial indebtedness” E 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 F 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” G A wide range of transactions can be caught by paragraph (f), including for example forward purchases and sales of currency

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A 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 B 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 caught by it, and whether specific exclusions might be required.”

64Copy pinpoint64. 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). D

65Copy pinpoint65. 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 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.

66Copy pinpoint66. Sub-clause (f) Section 5(8) thus read would subsume within it amounts raised under transactions which are not necessarily loan H

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transactions, so long as they have the commercial effect of a borrowing. A 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 B 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 xxxxxx C “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 sponsored advertisement on radio or D television.”

67Copy pinpoint67. 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. E 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” F 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 G “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 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 H

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A 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.

68Copy pinpoint68. However, Dr. Singhvi strongly relied upon the report of the B 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 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.

69Copy pinpoint69. 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 F 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.

70Copy pinpoint70. And now some of the other arguments on behalf of the G 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 Ors. v. P.S.G. College H

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of Technology and Ors. (1995) Supp (2) SCC 348 at paragraph 19 A 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 B 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 C 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 D 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 E ‘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 Development and Reclamation Corpn. F 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 G 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] H

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A (Lord Watson); Mahalakshmi Oil Mills v. State of A.P. [(1989) 1 SCC 164, 169 : 1989 SCC (Tax) 56] The use of the words “means and includes” in Rule 2(b) would, therefore, suggest 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 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.”

71Copy pinpoint71. 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: G “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

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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.” xxxxxxxxx

12. We have considered the arguments advanced on behalf of the parties and have perused the record. A perusal of the 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’ C and thereafter it further ‘includes taking any such item in pro- cessed 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 ‘ag- ricultural produce’ in the above definition is not restricted to any products of agriculture as specified in the Schedule but also in- cludes such items which come into being in processed form and further includes such items which are called as gur, rab, shakkar, khandsari and jaggery.”

72Copy pinpoint72. 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 F & 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 as in the Krishi Utpadan Mandi Samiti (supra) case. In two other recent judgments, Bharat Coop. Bank (Mumbai) Ltd. v. Coop. Bank G 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 H

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A 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 “and includes” speaks of subject matters which may not necessarily be reflected in the main part of the definition.

73Copy pinpoint73. In any event, as was correctly argued by learned Additional D 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. E

74Copy pinpoint74. It was then argued, relying on a large number of judgments that Section 5(8)(f) must be construed noscitur a sociiswith 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 F 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: G “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

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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 B ‘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 C 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: D “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 the word “defamation”. It must E 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 F “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 G 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 H

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A 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. B

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 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 E 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 F 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 G 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,

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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 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. B 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” C 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 D 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 E 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) F 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 words found in immediate connection with them. In this regard, we may G 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: H