Genuine homebuyers will have a say in committee of creditors and have the right to initiate insolvency proceedings, verdict clarifies.
In a major win for home buyers, the Supreme Court on August 9 upheld the amendment in the Insolvency and Bankruptcy Code that confers them the status of financial creditors.
This means that home buyers will be treated at par with banks and institutional creditors, and will be given priority while recovering dues from bankrupt or insolvent real estate companies.
Dismissing the plea of over 200 real estate companies that had pleaded that the IBC amendment was illegal and unconstitutional, a bench headed by Justice RF Nariman said the amendment provided homebuyers with an additional platform on which they could raise their grievances against real estate developers.
The order ensures buyers a seat at the Committee of Creditors’ table, and enables them to co-drive the process of resolution of the real estate firm. It recognises the rights of homebuyers who contribute equally in financing of a real estate projects. Previously, only financial institutions were recognised as financial creditors, giving them the sole power to decide on the future of the company under CIRP (corporate insolvency resolution process), completely ignoring the rights of home buyers who contributed equal, and in some cases more, funding than the financial institutions.
Builders had earlier this year challenged Section 5 (8) (f) of the IBC through writ petitions, and had argued that home buyers already had remedies under RERA, and amendments to the IBC amounted to duplication.
The order clarified that “not all forward sale or purchase are financial transactions, but if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f). Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8).”
Also, the amount of money given by home buyers as advances for their purchase is usually very high, and frequent delays in delivery of possession may thus, have a huge impact, the order noted.
The order cited the case of Chitra Sharma v. Union of India and noted that the amount owed to homebuyers, which was paid by them as advances, was claimed to be Rs 15,000 crore, more than what was due to banks.
“Despite this, banks are in a more favourable position under the Code since they are financial creditors. Moreover, the general practice is that these contracts are structured unilaterally by construction companies with little or no say of the home buyers. A denial of the right of a class of creditors based on technicalities within a contract that such creditor may not have had the power to negotiate, may not be aligned with the spirit of the Code,” the order said.
RERA to be read in harmony with IBC
The bench said that the RERA act, which regulates the real estate sector, should be read in harmony with the IBC amendments. RERA is not in derogation of any act, and in case of conflict between RERA and IBC, IBC prevails, the court made it clear.
The consumers have the option of seeking remedy under any provision — the Consumer Protection Act, IBC or RERA, it said.
“The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code,” the order said.
The bench said only genuine homebuyers can invoke insolvency proceedings against a builder, and asked the Centre to file an affidavit taking corrective measures.
"It's a landmark judgment as the amendment has been upheld," said Ashwarya Sinha, advocate who had represented some of the homebuyers in the case. "Additionally, it will settle a lot of teething issues faced by forums, including NCLT/consumer forums/RERA, across the country. Further, as per the judgment some additional defences unique to IBC have also been added."
Directs Centre to fill up vacancies in NCLT within three months
SC also directed the Centre to fill up vacancies in the National Company Law Tribunal and Appellate Tribunal to handle the rising number of cases filed against companies under IBC.
“We direct that in those States in which the needful has not been done, in that, only interim or no adjudicating officer/Real Estate Regulatory Authority and/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within a period of three months from the date of this judgment,” the order said.
The apex court directed that stay orders granted by it should continue until the NCLT takes up each application filed by an allottee/ homebuyer to decide the same in light of this judgment.
The Court was hearing a batch of petitions filed by over 200 real estate companies challenging the constitutional validity of the IBC amendment that gives homebuyers the status of financial creditor in the insolvency proceedings.
"The constitutional bench of the Supreme Court upholding the constitutional validity of the amendment in IBC to include homebuyers in the list of financial creditors is certainly a huge sigh of relief for aggrieved homebuyers," said advocate Aditya Parolia, PSP Legal, who represented homebuyers in the lead matter, Pioneer Urban Land and Infrastructure.
"The aggrieved homebuyers, now will not only be allowed to invoke insolvency code but will also be part of committee of creditors on parity with banks and other financial institutions. This will resuscitate the real estate companies, who are unable to complete the project despite taking huge money from the homebuyers," Parolia said.
The landmark judgment will prove to be a huge deterrent against fraudulent/unscrupulous builders, he added.
Earlier, the Centre had filed an affidavit in the apex court and said the law was amended to protect the interest of lakhs of homebuyers who had invested their hard earned money to purchase flats, but were cheated by the companies.
Pioneer Urban Land and Infrastructure had filed a plea in the Supreme Court in January 2019 challenging the constitutional validity of section 5 (8) (f) of the IBC 2016 under which homebuyers were conferred the right of financial creditors.A host of similar writs were by filed by developers such as BPTP, Supertech, Today Homes Noida, Ireo, CHD Developers, ATS among others.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.