Conflict of operation between IBC and RERA: Assocham report

There is a fundamental contradiction between the Insolvency and Bankruptcy Code (IBC) and RERA as one tries to give primacy to creditors and other attempts to put consumers before creditors. In fact, both seem to be pitted against each other when it comes to resolving the interest of bankers and homebuyers, according to an Assocham report titled 'RERA as growth impetus: Does the promise hold out on the ground?'

While IBC was passed with the intention to smoothen the process of “closing the business”, RERA has been implemented to “regulate and formalise the real estate sector”. But, in case of insolvency, the objectives of these two acts are often getting pitted against one another, the report said.

What will prevail over other laws - RERA or IBC?

Since IBC was legislated in May 2016 after RERA was passed in March 2016, legal experts opined that the Insolvency Act will override RERA in case of a conflict. In some cases, that might undermine the actual objective of consumer security, with which RERA was enacted, the report prepared by Thought Arbitrage Research Institute (TARI) jointly with ASSOCHAM, said.

RERA not clear on the issue of insolvent developer

RERA is also not very clear on the issue of insolvency of a developer. Common understanding is that state regulator will take up the issue of home buyers in case of bankruptcy of the developer. However, the central legislation does not address this concern in a clear-cut manner. In fact, central RERA does not have anything to say on bankruptcy or insolvency of the developer. Apprehensions about builders taking recourse to insolvency if they are unable to complete projects in time have cropped up in recent times, notes the report.

The main concern is that the homebuyer is an unsecured creditor and therefore lower in the settlement priority. But it is also true that since a third party right has been created, whoever takes over the project for completion cannot rescind the right of the buyer.

Synchronised approach between RERA and IBC a must

In light of the recent legislation of Bankruptcy Act, RERA may not create separate provisions to deal with bankruptcy. Rather, synchronising Bankruptcy Act with RERA may be a better way to tackle this problem. Right of banks is subservient to that of a customer. But under RERA, it may be possible to create a solution by setting a requirement for the developer to provide additional security or collateral, the report said.

In the context of the real estate sector and effective implementation of RERA, it is imperative to clearly define homebuyers in the class of creditors. Putting them in the “unsecured creditor” category takes the control effectively away from RERA to IBC, and that definitely dilutes the objective of RERA. Therefore, a committee of legal experts may be formed, which in consultation with all the stakeholders can recommend a resolution of these possible conflicts between two of the most important legislations of the government, particularly in the context of real estate sector.

While IBC allows companies to file for bankruptcy to provide relief to debtors or creditors, RERA looks at providing relief to home buyers and seeks to hold developers or builders responsible if the project is delayed. Home buyers are “unsecured creditors” and as a result their priority to be compensated comes after those institutional or other creditors who have provided loans to the developer, it notes.

Conflicts so far

The conflict between IBC and RERA came to the fore in quite a few bankruptcy proceeding in the recent times. The National Company Law Tribunal (NCLT), Allahabad had earlier passed an order for insolvency proceedings against Jaypee Infratech at the legal insistence of its financier IDBI. A public interest litigation (PIL) was filed in Supreme Court against it by some home buyers and they expressed the fear that being “unsecured creditors” their money may not be repaid in case of liquidation of the company.

Supreme Court initially stayed the insolvency proceedings but subsequently vacated the stay order and appointed an amicus to “espouse the cause of the homebuyers and protect their interests” during creditor meetings.

This case highlights the specific conundrum that these two acts pose.

Similar puzzling situations have arisen in other pending cases with NCLT – involving real estate companies like Unitech and Amrapali Group projects. In the latest development in the case related to Amrapali Silicon City, the Supreme Court in February 2018 restrained the NCLT appointed resolution professional not to demand additional money from homebuyers stuck in the project. The court also sought a comprehensive plan from the developer about the delivery of over 40,000 units of homes.

While passing the order, Supreme Court also said that they were “worried only about the home buyers, their money should not be diverted anywhere else”. The Court is of the opinion that financial creditors cannot take over homes belonging to the buyers. In other words, Supreme Court upheld the rights of home buyers ahead of the creditors of Amrapali Developers, against which bankruptcy proceedings were started after the complaint of Bank of Baroda at NCLT.

Interestingly according to the counsel of the buyers, nearly 90% of the flats in Silicon City project are complete and apparently, 1000 families have already moved in.

Whether these considerations have played their role in the court order is an open-ended question, but definitely this case brings out the conflicts of two legislations (IBC and RERA) more than any other in recent times. Bankruptcy procedures were started against Amrapali Developers and resolution professional, under the umbrella of bankruptcy legislation, gave primacy to the creditor’s needs, but finally the apex court has to step in and secure the homebuyers’ rights.