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Homebuyers beware! More builders likely to seek insolvency cover to avoid RERA

With the Real Estate (Regulation and Development) Act 2016 (RERA) tightening the noose around the developer community, some of them may have found liquidation proceedings or the bankruptcy law as an avenue to escape the ambit of the state regulator

August 18, 2017 / 02:10 PM IST

With the Real Estate (Regulation and Development) Act 2016 (RERA) tightening the noose around the developer community, some of them may have found liquidation proceedings or the bankruptcy law as an avenue to escape the ambit of the state regulator, say legal experts.

Insolvency cases are likely to go up going forward, they say, adding through this method builders will be able to transfer the losses to property owners.

The Allahabad bench of the National Company Law Tribunal on Wednesday declared Jaypee Infratech as an insolvent company. There are reports that more developers may be declared insolvent. After Amrapali, other developers such as Earth, Era and Gardenia have expressed their inability to pay up their debts.

As per reports, Corporation Bank has decided to auction Gardenia’s corporate office located in Vasundhara, Ghaziabad. Union Bank of India has gone to court against Era Developers. Earth Infrastructure has stated in court that they do not have the wherewithal to repay bankers and Noida Authority.

Will the application of the insolvency code dilute the obligation of companies to comply with RERA? 


The Insolvency and Bankruptcy Code 2016 lays down the process to deal with insolvency proceedings against companies and individuals. In case of Jaypee-NCLT issue, the NCLT has appointed insolvency professional Anuj Jain as CEO of Jaypee Infratech. The board of directors of the company has been replaced by Jain who has been given six months to revive the company. This period can be extendable by another three months.

Also Read: Banks may deny loans to projects not listed under RERA

While homebuyers have been given two weeks (until August 24) to raise claims related to their investment in the Jaypee projects, under the Code, they cannot file cases in courts for recovery of money after the company has been classified as insolvent.

Watch : How RERA Is Going To Change Your Homebuying Experience

“Any recovery proceedings against the company will now remain stayed or transferred to NCLT until the restructuring exercise is complete. All orders of compensation against the company will also be dealt by NCLT. Any claim in any other court will also be dealt by NCLT,” said a legal expert.

Also Read: What is RERA and how will it impact the real estate industry and home buyers?

Having said that, their rights under RERA are secure and if the developer, who has in this case registered under UP RERA, is found to be violating its norms, it can be taken to task, say experts.

Official sources dealing with UP RERA say that if a complaint is received from homebuyers against the developer for violating RERA provisions, there will be an enquiry and action will be taken.

The insolvency code will not in any manner dilute the obligation of companies to comply under RERA. “They will have to comply with the registration process laid down under RERA,” says Sudip Mullick of Khaitan & Co.

“My understanding is two of Jaypee Group companies (Jaypee Infratech and Jaypee Associates) are involved for the purpose of developing and handing over the possession of residential projects. I understand that both the companies have applied for registration under RERA. They must have set a new date for completion and handing over the projects,” he says.

Jaypee Infratech has filed for insolvency under the new Insolvency and Bankruptcy Code, 2016.  “The Code, will trigger moratorium against coercive action/initiation of legal proceedings for enforcement against Jaypee Infratech for six months when the insolvency professional makes plans for revival of the company. Mere application under the Code does not mean Jaypee Infratech has become insolvent and will not be able to deliver. Assuming that Jaypee Infratech gets liquidated (or if under the terms of the resolution  plan there is a transfer of interest to a new developer)  whosoever take over the right, title and interest in the concerned leases where Jaypee Infratech is lessee will be bound by the obligations of Jaypee Infratech - - meaning its obligation towards home buyers. Further, Jaypee Infratech’s filing of insolvency proceedings under the Insolvency and Bankruptcy Code, does not absolve Jaypee Associates of their obligation,” explains Mullick.

Also Read: RERA effect: Homebuyers can now exit the real estate project at any stage

Also, if the company has proposed fresh timelines for completion of the units, the regulatory authority or RERA has the right to reduce the timeline if the same is unreasonable. Once new timelines are fixed and they breach it, the authorities would be will within the powers to penalise them as per RERA provisions, say experts. RERA can even revoke their registration if terms and conditions are not met.

What happens if more companies are declared bankrupt?

“State authorities will have to intervene. After the assets restructuring process is complete, the government will have to intervene and appoint an administrator who will not only monitor the cash flows of the real estate firm but also ensure that the project is completed either by the developer himself or a third party is brought in to complete it,” says Pravin Jain, CMD, Tulip infrastructure and Vice president Naredco.

It must be noted that the UP government had on December 13, 2016, approved an exit settlement policy to resolve multiple issues faced by builders and homebuyers. Builders opting for the policy had to submit their applications by June 15.

The policy gives realtors an exit route from projects they are unable to execute. Under the policy, a builder can exit a project by surrendering the part of the plot allotted to it on which construction is yet to begin. Until now owners of two realty projects — Wave Infratech and a project by Unitech Group — have surrendered land under the scheme.
Vandana Ramnani
first published: Aug 17, 2017 05:19 pm

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