Status as on 18/06/2019
The two Acts passed by the parliament recently, Insolvency and Bankruptcy Code, 2016 (IBC) and Real Estate (Regulation and Development) Act, 2016 (RERA), clashed when the interest of home buyers was threatened by Jaypee Infratech Limited (JIL) facing Corporate Insolvency Resolution Process.
Home buyers are vital stakeholders in building projects. Many home buyers book their property in advance which helps builders raise funds for construction and development of the project. Some home buyers do this via home loans and other schemes which can leave them in a sticky situation if the project is delayed or stalled. They are left in debt without any property. This issue was raised in the case Chitra Sharma v. Union of India.
When JIL faced insolvency proceeding, home buyers were not protected by the IBC as they did not fall in the category of corporate debtors, financial creditors or operational creditors. Furthermore, they were also not a part of the Committee of Creditors formed under Sec. 21 of the IBC. An order of moratorium was issued under Sec. 14 by which the institution of suits and the continuation of pending proceedings, including execution proceedings was prohibited. This meant that home buyers would be prohibited from seeking relief or continuing proceeding against JIL under Consumer Protection Act and RERA, defeating the very purpose of RERA.
This situation demonstrates inadequacies every law contains. Even though home buyers are an integral part of the real estate sector, they were virtually ignored as creditors in the IBC. This conflict was resolved by Insolvency and Bankruptcy (Amendment) Ordinance, 2018 which deemed amounts raised by allottees for real estate projects as ‘financial debt’ for the purposes of the act. Thus, bringing allottees under the definition of financial creditors and involving their representation in the Committee of Creditors.
This case exposed the loophole in RERA and IBC; builders facing insolvency would have left home buyers without any relief. However, the Chitra Sharma case ended up consolidating the position of both laws and saved the interest of consumers of the real estate industry.