Supreme Court upholds law giving them status of ‘financial creditors’

The Supreme Court on Friday upheld a central law which empowered harassed home buyers to initiate bankruptcy proceedings against errant real estate builders.

The judgment gains significance as many real estate builders have been under fire for incomplete projects leaving home buyers in dire straits.

A three-judge Bench led by Justice Rohinton Nariman confirmed the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act of August 2018, which gave home buyers the status of “financial creditors” with power to vote in the Committee of Creditors.

The Act had brought the home buyers on par with the creditor banks of the property builder. Prior to the law, the home buyers were often left in the lurch. With their dreams of owning a home shattered, they were made to wait blindly for a solution to come up, either in the form of a completed apartment or a refund.

Before the Amendment Act of 2018 came into existence, the assets of the bankrupt builder were divided among his employees, creditor banks and other operational creditors. Home buyers had hardly figured, though their hard-earned savings may have provided a major chunk of the housing project.

The Amendment Act allowed home buyers, as financial creditors, to trigger bankruptcy proceedings under the Insolvency and Bankruptcy Code of 2016 and have their “rightful place” on the Committee of Creditors (CoC). The CoC, by voting, makes important decisions on the future of the bankrupt builder. These calls include what to do with his assets and who should finish the pending housing projects.

The builders had challenged the Amendment Act. They said making home buyers financial creditors was like “forcibly inserting a square peg in a round hole.” The builders argued that home buyers were already armed with the Real Estate (Regulation and Development) Act (RERA), another piece of legislation which protected the interests of the individual investor in real estate projects. Adding the Amendment Act to the armoury of the home buyers was like using a sledgehammer to kill a gnat, the builders argued.

Justice Nariman dismissed these contentions. The judge reasoned that the IBC and the RERA operate in different spheres and can be used harmoniously for the interest of home buyers. The IBC deals with the replacement of the bankrupt builder from the helm of affairs and hit upon a resolution plan to benefit all the stakeholders. The RERA’s purpose is to protect individual home buyers by requiring the promoter to strictly adhere to the purchase deal and complete the project within a stated period.

The builders said home buyers were a large, amorphous group. Their presence in the CoC would be a nuisance. Here, the judgment referred to the submissions made by Additional Solicitor General Madhavi Divan, who had argued that home buyers finance from 50% to even 100% of a housing project. Their absence from the CoC and denying them a voice on future plans would be “manifestly arbitrary.”

The court further reasoned that no home buyer would frivolously move the National Company Law Tribunal under the IBC. This is because ironing out a resolution plan under the IBC is a long-drawn process.

“An allottee/home buyer who prefers an application under Section 7 of the Code takes the risk of his flat/apartment not being completed in the near future, in the event of there being a breach on the part of the developer. Under the Code, he may never get a refund of the entire principal, let alone interest…On the other hand, if such allottee were to approach the Real Estate Regulatory Authority under the RERA, it is more than likely that the project would be completed early or full amount of refund and interest together with compensation and penalty, if any, would be awarded... Thus, it is only an allottee who has completely lost faith in the management of the real estate developer who would come before the NCLT under the Code hoping that some other developer takes over and completes the project,” Justice Nariman reasoned.

The court further directed the Centre to fill up the vacancies in the NCLT and its appellate tribunals so as to deal with the rising number of bankruptcy litigation in the real estate sector. The government was ordered to file compliance affidavit in this regard within three months.

The court also ordered copies of the judgment to be sent to chief secretaries of States and Union Territories. Those States and Union Territories who have still not set up a Real Estate Regulatory Authority and Appellate Tribunal have been given three months to do it. The court would take up the issue in January 2020.