How to Execute RERA Order through NCLT under IBC

how-to-execute-RERA-order-through-NCLT-under-IBC

Status as on 24/03/2020

Brief of RERA till date

The preamble of the Real Estate (Regulation and Development) Act, 2016 sets the objectives of the RERA as regulation of the sale of plots, apartments in a transparent manner to protect the interest of the consumers and to establish an adjudicating mechanism for speedy dispute redressal.

Though the process under RERA is streamlined and much quicker than those under older legislation like the Consumer Protection Act, and despite strong provisions within the RERA empowering homebuyers, the RERA Act at present is still a toothless tiger due to lack of execution process of RERA orders. The reliefs under RERA at the moment rest only in papers.

However, a ray of hope & success was evident for the home-buyers, when the home-buyers were included as Financial Creditors of a company/builder under Section 5(8)(f) of the Insolvency & Bankruptcy Code, 2016 by the Hon’ble Supreme Court of India. But the happiness of the homebuyers was short-lived, as the builders/developers sought another scheme to remove the homebuyers from claiming their rights under the Insolvency & Bankruptcy Code, 2016.

There has been strong and persistent lobbying by the builders/ developers of the real estate sector to remove the Insolvency and Bankruptcy Code as the court of the first instance for homebuyers. With the Insolvency and Bankruptcy Code (Second Amendment) Bill 2019, which was recently passed by the LokSabha it would seem that the real estate builders have succeeded in limiting the rights of homebuyers under the IBC.

HOW DO RERA PROVISIONS AND IBC COINCIDE?

A very prevalent pitfall under RERA is the lack of execution mechanisms in place. Thus though Homebuyers are getting their grievances redressed through RERA, but the ground reality in a lot of State level RERA’s is that the remedies do not exist beyond paper.

IBC in the initial stages did not recognize homebuyers as either operational or financial creditors. However, by the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 Homebuyers were given priority status by the amendment in the definition of “financial debt” under section 5 (8)(f) of the IBC so as to include:

“any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing” 

merely a years’ time the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 reverses the progress made towards the empowerment of Homebuyers by the introduction of ceiling thresholds and requirement of a joint application by allottees of real estate projects;

“Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent. of the total number of such allottees under the same real estate project, whichever is less:”

Thus the present amendment does not permit individual homebuyers to initiate insolvency proceedings under section 7 of the code.

However, it is important to note that the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors made the following observations with respect to RERA and IBC;

  1. The provisions of RERA are in addition to and not in derogation of the provisions of any other law for time being in force;
  2. Even by a process of harmonious construction, RERA and the IBC must be held to co-exist, and, in the event of a clash, RERA must give way to the IBC. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, the IBC;
  3. The remedies under RERA to allottees are additional and not exclusive remedies;
  4. The allottees of flats/apartments have concurrent remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the IBC.

It is vital for Homebuyers at the present stage to understand the harmonious nature of RERA through section 88 of the RERA Act;

“88. The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.”

The above 2 provisions of the RERA demonstrate that once a process against a Builder is started in RERA, a homebuyer is not necessarily confined within the scope of RERA alone. Remedies under RERA are remedies in persona i.e. they impose a liability upon the Builders on behest of an individual homebuyer for breach of contract. Thus in the event that the Builder breaches the agreement the homebuyer may seek a refund of the amount paid along with interest under RERA and if the same is granted it would make the homebuyer a decree-holder

Whether a person having RERA refund order is home-buyer?

Although, homebuyers can no longer file individual applications under section 7 of the IBC, however, a home-buyer having an order of refund in its favor from RERA can approach NCLT against a builder in the capacity of a decree-holder. As per Section 3(10) of the Insolvency & Bankruptcy Code, 2016 a Decree holder is also acknowledged as the creditor of a company/corporate debtor.

Section 3(10) of the IBC defines creditors as;

“(10) “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor, and a decree-holder;”

On approaching RERA for a refund, the Homebuyerasserts two things to finality, firstly there has been a breach of contractual obligation and secondly, the contract stands terminated. If the RERA assents to claims made by the homebuyer, in granting a refund order, the homebuyers cease to be an allottee of the builder and subsequently takes over the character of being a decree-holder of the builder.

Given that Refund Orders under RERA carry an interest component, they, therefore, constitute a financial debt under section 5 of the IBC. Further, a claim, which is prima facie important for filing a petition under IBC, also acknowledges the debt which is being reduced to writing by a judgment.

Section  3(6) of the IBC reads as:

” (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; 

(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;”

In other words, the decree becomes a proof of debt or claim, which has been reduced to writing by a competent court of law. Thus a Homebuyer though cannot initiate insolvency proceedings under section 7 individually as an “allottee” however a homebuyer being a Decree Holder of RERA Order is still within their rights to initiate insolvency proceedings under IBC.

To further, commemorate the Hon’ble National Company Law Tribunal, New Delhi in the matter Ashok Tripathi &Anr. Vs. M/s. Ansal Properties & Infrastructure Ltd. (which was handled and argued by Centrik Legalistic LLP), has vided its order dated 17.03.2020 sent M/s. Ansal Properties & Infrastructure Ltd. in Corporate Insolvency Resolution Process holding that a decree obtained by RERA is a proof of debt against the builder, which is being defaulted. By the virtue of being a decree-holder, the homebuyer ceased to be an allottee, as the decree attained finality by terminating the builder buyer agreement between the homebuyer and builder. Therefore, the decree-holder, in this case, was not barred by the second amendment.

Conclusion

Though the IBC 2nd Amendment 2019 has severely limited the rights of Homebuyers from triggering the insolvency process u/s 7 of IBC, it is imperative that Homebuyers consciously educate themselves on the legal rights available to them through all different forms of Indian Law so as to best suit the remedies they seek. For instance, Homebuyers should be cautious of approaching the IBC if the Builder is not financially sound as triggering the insolvency process would result in collective and competitive distribution assets of the builder against all other creditors. In the event all the Homebuyers seeks is the enforcement of the terms of the contract then RERA provides a more homebuyers centric approach while also imposing penalties on defaulting builders. Consumer Forums, on the other hand, have stronger judicial powers to direct builders to cure “deficiency in services” further appeals against the orders of the NCDRC lie with the Supreme Court, providing a greater sense of finality to litigious proceedings.

 

Disclaimer- The above article is based on the personal interpretation of related laws and judicial pronouncements, which may differ from person to person. The readers are expected to take expert advice before replying to the above article. The author can be reached at support@centrik.in

Comment

  1. Can a home buyer be considered as discenting Financial Creditor when he has voted against the plan and get liquidation value. There is only one class of FC in the matter that is home buyers

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