Remedies for Home buyers in IBC & RERA

Hon’ble SCI, in its judgement(1) dated 09.08.2019, while upholding the constitutional validity of the status of the home buyers as “financial creditors” under IBC, has added new dimensions to the maintainability of  the application of home buyers, at the time of admission of application of home buyer U/s 7 of the Code(2).

For initiation of action under IBC(2), normally  a financial creditor has to prove the existence of debt & that the default has occurred. 

The  SCI in the para # 50 of the above judgement  has held, that once prima-facie default is made out on an application under section 7 of the Code, the burden shifts on the promoter / real estate developer to point out that 

(a) the allottee is himself a defaulter and not entitled to any relief, entailing a dismissal of the application; 

(b) the insolvency resolution process has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency; 

(c) 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; 

(d) the allottee does not want to go ahead with its obligation to take possession of the flat / apartment under RERA(3), 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 very difficult to accede that trigger-happy allottees 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.

Hon’ble SCI under  para 29 of the said judgement further ruled that:-.

# 29. As a matter of fact, the Code and RERA operate in completely different spheres. The Code deals with a proceeding in rem in which the focus is the rehabilitation of the corporate Debtor……….The object of RERA is to see that real estate projects come to fruition within the stated period and to see that allottees of such projects are not left in the lurch and are finally able to realise their dream of a home, or be paid compensation if such dream is shattered, or at least get back monies that they had advanced towards the project with interest.

Thus with the above ruling, SCI has clearly defined the objectives of IBC & RERA, which highlights  that IBC is Corporate Debtor centric, with the focus on rehabilitation, where as RERA’s prime object is to protect the interests of the home buyer.

The new dimensions added by the Hon’ble SCI, has made the task of home buyers difficult to initiate insolvency of the developer. Let’s analyse the advantages & disadvantages of initiating action under IBC / RERA.

Cost of initiation of action under IBC and expected outcome.

i). Application fee under IBC….…...Rs.25,000.00

ii). Advocate’s fee for filing of application ……...Approx. 25,000.00 to 50,000.00

iii). Usual time period for admission of application by NCLT……......14 days to 3 months. Immediately after the admission of the application by  NCLT, the applicant has to provide for the expenses of Public Notice, fee of IRP (Interim Resolution Professional) and other CIRP expenses, which may be around Rs.3 Lakh to Rs.5 Lakh. [Though these expenses will be reimbursed to the extent ratified by the CoC (Committee of Creditors)]

iv). Recovery period - As per IBC, period of 330 days have been specified for finding  the resolution of the CD (Corporate Debtor). In case no resolution is found during this period, the CD goes into liquidation. So normally the applicant (Home buyer) can expect recovery only after one year of the date of filing of application, provided resolution plan for the CD gets approval from CoC & NCLT. In liquidation process the recovery gets further delayed.

v). Quantum of Recovery - As far as the quantum of recovery is concerned, here lies the catch. Though home buyer is being treated as Financial Creditor, he is classified as the Unsecured Financial Creditor, for the purpose of distribution of funds out of resolution or the liquidation process & accordingly has 4th priority in distribution of funds under the IBC. Priority of distribution of funds under IBC is as under. 

1. Resolution process cost / Liquidation process cost

2. Worker’s salary, due for 24 months preceding resolution / liquidation commencement date &  Secured financial creditors.

3. Employees salary due for 12 months preceding resolution/ liquidation commencement date.

4. Unsecured financial debt (including home buyers) 

5. ……...etc. etc. 

As per the past experience of resolutions & liquidations under IBC, the distribution of funds had rarely crossed the third priority. So the home buyers are not likely to get any funds out of resolution / liquidation under the IBC. So, initiation of insolvency under IBC by a home buyer will be an exercise in futile.

Trigger for initiating action under  RERA Action for recovery under RERA can be initiated for any of the following reasons.

i). Cancellation of allotment by the builder - Unilateral and without sufficient cause.

ii). Loss or damage sustained by any person due to false / incorrect statement / information contained in the notice, advertisement or prospectus, or on the basis of any model apartment.

iii). Fails to complete or is unable to give possession of an apartment, plot or building, as per agreement for sale or, as the case may be, duly completed by the date specified therein

iv). Structural and other defects in workmanship, quality or provision of service or other obligations as per agreement to sale within a period of 5 years from the date of possession. Rectification of such defects without further charges, within 30 days Compensation for non-rectification of default.

Cost of initiation of action under RERA and expected outcome.
i). Application fee under RERA…………….…...Rs.1,000.00 to Rs.5,000.00, depending upon the State. (In Maharashtra it is Rs.5000.00 & in Uttar Pradesh it is Rs.1,000.00)
ii). Advocate’s fee for filing of application … …...NIL, as online application can be filed by the applicant. 
iii). Usual time period for admission of application by RERA…...NIL. online application. Processing of the application in RERA & proceedings before AA (Adjudicating Authority) are very simplified. There is no need to take the services of any Advocate. The applicant can himself handle the proceedings before AA . One can expect the decree against the developer, usually between 45 days to 3 months.
As per the provisions of RERA , the decree besides the refund of amount, provides for the interest from the date of payment by the home buyer upto the date of recovery, cost & compensation awarded by the AA.
iv). Timelines for refund. -The refund of any amount which is payable by the promoters to allottees along with the applicable interest, cost and compensation, if any, under the Act or the Rules and Regulations, shall be made by the Promoter / developer, through RTGS or NEFT or Demand Draft drawn on any Scheduled Bank to the allottee within 30 days from the date on which such refund along with applicable Interest and Compensation, becomes due and payable to the allottee, under information to the authority (RERA).
v). Further as per the provisions, If a promoter fails to pay any interest or penalty or compensation imposed on him, by the adjudicating officer or the Regulatory Authority or the Appellate Authority, as the case may be, under this Act (RERA) or the rules and regulations made there under, it shall be recoverable from such promoter, in such manner as may be prescribed, as an arrears of land revenue. So RERA offers much better chances of recovery for the home buyers.

Under IBC the claim amount, includes the interest calculated from the date, the amount becomes due, upto the date of commencement of resolution process / liquidation process. Standard agreement to purchase does not have any provision of refund except for  the cancellation of booking. So, in the absence of any repayment date under the agreement, the date promised for possession of the flat is being taken as the due date for the purpose of ascertaining default and while calculating interest in claim amount under resolution process.

There is no provision of compensation  in IBC. 

In the judgement mentioned supra above, the Hon’ble SCI has also ruled that (para -28)... Even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, the Code. 

Thus initiating action under IBC is not advisable for the home buyers. However in case the action is initiated by some other creditor of the developer under IBC, there is no escape for the home buyer, but to participate in the process, though the chances of recovery of his amount under IBC are almost negligible..

In the present environment of nearly stagnant pricing in real estate market, one should prefer ready to move in houses.

Appropriate time for initiating action under RERA

The action under RERA should be initiated immediately after the cause of action arises as mentioned above. (Trigger for initiating action under  RERA ). In one case, a friend of mine initiated the action under RERA, for not completing the project by the agreed date.The decree was granted by the AA under RERA for the refund of amount, interest from the date of payment, cost & compensation. Immediately after the grant of decree by the RERA, the concerned builder went into insolvency under IBC on an application filed by some operational creditor of the builder. The Resolution Professional handling insolvency process of the builder, while admitting the claims of allottees, adopted the following criteria.

1. Allottees with decree of RERA. Claims were admitted as per the terms of decree awarded by the RERA, i.e. (a) amount paid by the allottee. (b) interest on amount paid by the allottee, from the date of payment upto the date of commencement of insolvency, (c) cost & compensation granted by RARA under the decree .

2. Other Allottees. Claims were admitted for (a) amount paid by the allottee (b) interest on the amount paid by the allottee from the date of possession mentioned in the agreement upto the date of commencement of insolvency.

Thus my friend with RERA decree, ended in a better position, in respect of quantum of claim admitted under resolution process of IBC V/s the allottees  who had not initiated action under RERA. 

Further clause 3 of the order in the  decree awarded by AA under RERA in the above referred case provided as under:- 

# 3. The charge of the due and payable amount with interest, as ordered, be kept on the booked flat.

Here the question arises, whether such orders, as above, creates charge in the judicial process, on the concerned property / flat and effectively changes  the nature of credit from unsecured to a secured creditor, with a consequential effect on the quantum of recovery under IBC.

Reforms suggested for Real Estate Sector.

1. Model agreement to sale, as per the RERA  rules & regulations, to contain a clause, creating hypothecation charge on the concerned under construction flat / property, so that the home buyer acquires the status of Secured Creditor. This will increase the chances of recovery for the home buyers during insolvency of the developer. As the charge has to be registered under the present provisions of The Companies Act -2013, this will prevent the multiple booking of the concerned under construction flat / property. (details of charges created by a company are visible online on the website of the Ministry of Corporate Affairs) 

2. Compulsory Credit rating of the developer from two independent Credit Rating Agencies.

3. Introduce License to book under construction flat, which is to be issued by RERA Authorities keeping in view:-

i). Technical & financial strength of the Builder / Developer.

ii). Past track record of the Builder / Developer and its promoters / directors.

All the above suggested reforms can be implemented under the present set of rules & regulations.

References

(1) Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors. WP (C) No. 43/2019.

(2) Insolvency & Bankruptcy Code - 2016

(3)The Real Estate ( Regulation & Development) Act-2016

'Disclaimer: The sole purpose of this blog is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog