HOMEBUYERS NOW AT PAR WITH FINANCIAL CREDITORS: WAY FORWARD
This article has been authored by Manaswita Nakwaal, a third year student at Symbiosis Law School, Noida.
Big Relief to Homebuyers
NITI Aayog’s, approximation reveals that the real estate sector has a size of more than Rupees 8 trillion and contributes about 7% of India’s GDP. A significant improvement can be traced to the real estate industry in India when it comes to addressing the consumer redressal process. Not long ago, India has witnessed a tremendous hike in the ordeal faced by homebuyers at the hands of developers. Before the enactment of the Insolvency and Bankruptcy Code 2016 (IBC) and Real Estate Regulation and Development Act (RERA) 2016, homebuyers had only one option for registering a complaint against developers on account of their default by approaching the consumer courts. It is observed that in most of the cases the agreements were executed in the favour of developers and keeping a scope for arbitration open which was anyways costly and time-consuming for homebuyers. Additionally, such courts were overburdened and homebuyers had to wait for long to get refunds that too after multiple levels of litigation involving appeals and revisions till the time, the matter does not go upto the Supreme Court stage.
Post the enactment of IBC and RERA there is a swift upliftment in the on-going situations of homebuyers, as now they had more options for redressal of their grievances. Further, they have also achieved huge leverage as they are now been treated at par with “Financial Creditors.” The Government made an amendment to the definition of financial debt under Section 5(8) of the Code and eventually allowed the homebuyers to invoke the corporate insolvency resolution process (CIRP), which enables them to approach the National Company Law Tribunal (NCLT) concerning the default or delays dispute resolution.
Remedies available to the Homebuyers post Insolvency and Bankruptcy (Amendment) Ordinance, 2018
On June 6, President Ram Nath Kovind gave his assent to promulgate the aforementioned Ordinance which explicitly declared homebuyers as “financial creditors” for CIRP. The sole purpose or intent behind the Ordinance was to enable the homebuyers to participate in the insolvency resolution process in a much constructive and egalitarian manner.
It also brings to a close the ambiguous status of a homebuyer for instance in cases such as Jaypee-Infratech, wherein two sets of competing creditor claims were adjudicated (one from Jaypee Infratech Limited and the other from its holding company, Jaiprakash Associates Limited) and Amarpali Group, wherein the Supreme Court ruled in favour of homebuyers by warning the developers to refund the outstanding dues to the homebuyers else order for winding up of the project will be delivered.
This Ordinance has amended Section 5(8)(f) of IBC and added an ‘Explanation’, which states: “An amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.” As a result, the amount paid by any homebuyer in any real estate project is to be treated as financial debt under IBC.
On the other hand, the developers (builders) reached to Supreme Court claiming that homebuyers already had a remedy under RERA and this Ordinance is a mere duplication of the existing framework of the remedy under RERA. Though after court proceedings this petition was quashed by the Court because IBC Amendment Ordinance, 2020 has to be treated as another way out. . Court also suggested that RERA should be read in harmony with IBC. Eventually, it gives the homebuyers an option either to approach the NCLT or the National Company Law Appellate Tribunal (NCLAT) for dispute resolution.
Another significant development is that the sequence of asset distribution has been changed in case a builder goes bankrupt. Before the 2018 Ordinance the homebuyers were the last in the asset distribution queue post the amendment they have moved up and managed to be in the category of financial creditors, which means now they would be treated at par with banks. With this, they also get a right to participate in the insolvency proceedings, be a part of the panel of creditors or Committee of Creditors (CoC) and get the voting rights.
Analysing the Alternative Forums available for Remedy
Consumer Court and National Consumer Dispute Redressal Commission (NCDRC)
The Consumer Protection Act, 1986, successfully established various Redressal Forum at different levels. For instance, District forum, State Forum and the NCDRC. Jurisdictions for such forums are defined in terms of territory and the monetary value. If homebuyers face any grievances against the developer then a complaint can be filed under the said Act.
The Delhi High Court in M/S M3M India Pvt. Ltd. & Anr. Vs. Dr. Dinesh Sharma & Anr. held that remedies available to homebuyers under CPA, 1986 and RERA are concurrent in nature. Hence, jurisdiction of the forums/ commissions constituted under CPA is not ousted by RERA, particularly Section 79 thereof.
Real Estate Regulation and Development Authority (RERA)
It came into effect on May 1, 2016. This Act aims to regulate and boost investment in the real estate industry in India simultaneously safeguarding the interests of homebuyers, by speedily redressing the disputes. It was back in September 2019, the Hon’ble Delhi High Court ruled that homebuyers have the liberty to approach both; RERA and NCDRC on account of issues faced with developers (builders). The High Court subsequently also clarified that the nature of remedy available under the CPA and RERA are synchronous.
The thin line of difference is that NCDRC is approached by collective homebuyers on the other hand individual buyers approach RERA.
National Company Law Tribunal (NCLT)
This Tribunal was established by the Supreme Court to handle the laws with respect of companies. It is also a quasi-judicial body, established under Section 408 of the Companies Act, 2013 on June 1st, 2016. Any judgment passed by NCLT can be appealed to the National Company Law Appellant Tribunal (NCLAT) and subsequently to the Supreme Court of India.
NCLT can be seen as the most favourable choice among the homebuyers for seeking quick remedy or relief from deviant builders (developers). In the present day homebuyers can charge a case of insolvency against a developer and claim (equal to or more than rupees 1 lakh).
To address the issue of which redressal body to approach in case of grievances it is firmly suggested to build the capacity of RERA as the first point of grievance redressal. In case the parties fail to reach any solution and all other provisions get exhausted in such a case, the doors of NCLT should be knocked. Otherwise, NCLT which is to date a promising body will be in great chaos due to an overburdened workload. Instead of strengthening NCLT, the IBC Amendment will end up weakening the body. Hence the very purpose of the amendment will be defeated as no speedy and meaningful trial will take place. It is the need of the hour to address these issues and come up with an amicable solution for both; homebuyers and genuine developers.