Chitra Sharma & Ors. Versus Union of India and Ors.

(Writ Petition (Civil) NO 744 OF 2017, Judgment on 9th August 2018)

Question of law: – Re-commencing of Corporate Insolvency Resolution Process (CIRP).

  • Homebuyers main grievance was that despite being vital stakeholders they had no locus in the CIRP, therefore the provisions of the IBC should be declared ultra vires. They also wanted equal status as financial creditors as their claims were not covered under any of the provisions of the pre-amended IBC.
  • To ensure that homebuyers are protected, the Supreme Court nominated a senior counsel to represent the cause of the homebuyers in the Committee of Creditors (CoC).

Four Resolution Plans that complied with the IBC were placed before the CoC for its consideration. The CoC did not approve any of the Resolution Plans that were placed before it within the statutory time frame of 270 days. It is pertinent to note that shortly after expiry of the CIRP period for JIL, the IBC was amended by way of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018  (Ordinance) with effect from June 06, 2017.

  • The Ordinance included homebuyers as financial creditors under the IBC, which allows them to initiate CIRP and be a part of the CoC under Section 7 and Section 21 respectively.

SC Decision

  • The Supreme Court in its judgement passed certain significant directions, in effect re-commencing the CIRP.
  • In order to do justice to the interests of all the concerned stakeholders in the CIRP of JIL, and to prevent it from going into liquidation, the Supreme Court directed that the initial period of 180 days be revived with effect from August 09, 2018 (extendable by a further period of 90 days under the provisions of IBC, if required); and
  • A new CoC be constituted in accordance with the amended provisions of the IBC to enforce the statutory status of the homebuyers as financial creditors.

Supreme Court Reinforces Discipline of the IBC

  • The Supreme Court categorically observed that the provisions of Section 29A are intended to ensure that persons responsible for insolvency of the corporate debtor do not participate in the resolution process as their participation would undermine the salutary object and purpose of the IBC.
  • The Supreme Court also noted that the IBC at its time of enactment did not capture and recognise the interests of the homebuyers, which have now been safeguarded by way of the Ordinance.
  • The Supreme Court while recognising the homebuyers as financial creditors, has left the question open as to whether the homebuyers are secured or unsecured creditors.

 An important aspect of the judgment is that the Supreme Court did not accede to payment of amounts deposited by the promoter to homebuyers on the ground that it would be a preferential payment to one class of creditors.

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