The Hon’ble Supreme Court in Vishal Chelani and others v. Debashish Nanda held that Homebuyers under RERA and IBC cannot be treated differently from other financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC) merely because they have obtained orders from the authorities under the real estate laws in India. The insolvency framework under the IBC provides a time-bound resolution process for homebuyers and the compensation under the real estate laws addressing homebuyers financial issues is different.
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Background: Real Estate Sector and Legal Challenges
The Real Estate (Regulation and Development) Act, 2016 (RERA) faces several legal challenges in insolvency due to regulatory issues, legal disputes, and jurisdictional issues.
Crisis in the Real Estate Sector:
The persistent delays, such as in approvals, legal complexities, and the resolution process, in real estate projects have left homebuyers without possession or refunds. Under RERA, the projects are often delayed with no option of solving the insolvency issue. The lack of clarity on homebuyers’ rights under insolvency laws created further challenges and lead to procedural delays, issues in claim settlement, and their rights might not be adequately represented in the corporate insolvency resolution process (CIRP) under the IBC.
Need for Reform:
RERA aims to address grievances specific to the real estate sector by providing a dispute resolution mechanism. Buyers can file complaints with the Real Estate Authority for violating the provisions of RERA. The IBC introduced structural reforms for resolving insolvency, such as including a strict time limit for completing the insolvency process, a system where the creditors are in control of major decisions in the resolution process, and appointment of resolution professionals for managing the affairs of the corporate debtor.
Homebuyers’ Status as Financial Creditors
Financial creditors under section 5(20) of the IBC are someone who is owed a financial debt, or to whom the debt has been legally transferred. Homebuyers have come under the definition of financial creditors through amendments to the IBC and judicial precedents.
Key Legal Milestones:
The Insolvency and Bankruptcy (Second Amendment) Act, 2018 classified homebuyers as financial creditors. The Hon’ble Supreme Court’s decision in Pioneer Urban Land and Infrastructure Ltd. v. Union of India affirmed the constitutionality of homebuyers’ recognition as financial creditors under IBC, upholding the Amendment Act of 2018. The Amrapali case highlighted the interplay between IBC and RERA in protecting homebuyers’ interests. The decision in demonstrates the priority of homebuyers’ rights over other creditors using RERA to cancel the developer’s registration and appoint a new agency to complete delayed projects, with the insolvency process under the IBC.
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Benefits for Homebuyers Under IBC:
The benefit of the Amendement Act, 2018 enhanced the homebuyer’s rights under the IBC, they can initiate CIRP against developers or builders, participate in the Committee of Creditors (CoC), and partake in forming the resolution plan.
- Representation in CoC: Homebuyers as financial creditors mean that they can participate in and vote at meetings of the CoC. Individual homebuyers have the right to submit their claims to the resolution process. Hence, homebuyers have a voice in decision-making regarding resolution plans.
- Equal Treatment: By being allowed to initiate CIRP against insolvency real estate developers, homebuyers have equal footing with other creditors. This ensures that the proceeds from the sale of assets. are equally distributed among the creditors, including home buyers.
Interplay Between IBC and RERA
The time-bound process under IBC has proved to be more effective when immediate action is required to protect the interests of the homebuyers. RERA provides for compensation and imposes penalties on insolvent developers. Understanding the interplay between IBC and RERA is important to understand the rights of homebuyers.
Comparative Framework:
RERA focuses on regulating and ensuring the timely delivery of real estate projects, providing remedies like compensation or refunds. IBC emphasizes the resolution or liquidation of distressed companies, ensuring maximum recovery for stakeholders.
Harmonization of IBC and RERA:
Homebuyers can approach both RERA for specific grievances and IBC for collective remedies during insolvency. The courts have stressed the need for a harmonious interpretation of IBC and RERA to avoid conflicts. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India the court held that in an overlapping case regarding provisions of RERA and IBC, as per section 238 of the IBC, IBC has an overriding effect. There remain difficulties in establishing jurisdiction in such insolvency cases. Courts often apply the doctrine of harmonious construction to interpret both laws simultaneously, considering the intent of the legislation and finding ways to reconcile seemingly conflicting provisions.
Challenges Faced by Homebuyers Under IBC
There are many challenges under the IBC for homebuyers:
Procedural Complexities:
Homebuyers face procedural complexities such as gathering a significant number of other homebuyers to file an application initiating CIRP, lack of clarity regarding their position compared to other creditors, challenges in proving their claims, and many other legal and procedural hurdles that require expert guidance.
Collective Representation:
Homebuyers are represented by an authorised representative within the CoC. There are multiple stakeholders involved in the resolution process, which means that there many hindrances in adequate representation of their interests.
Limited Recoveries:
As per section 53 of the IBC, financial creditors are the first to be repaid from the proceeds of the sale of the corporate debtor’s assets. In certain cases, the liquidation value of a developer’s assets may be insufficient to compensate all creditors, including Position of Homebuyers under RERA and IBC.
Advantages of Homebuyers’ Recognition Under IBC
Protection of Rights:
Through the Amendment Act, 2018, and court decisions, Position of Homebuyers under RERA and IBCare no longer treated as unsecured creditors, but as financial creditors. Homebuyers have a clear legal standing and remedies under the IBC, such as their right to initiate the resolution process and the right to representation and participation.
Efficient Resolution:
By having participation in the meetings of the CoC and collective decision-making in the insolvency process ensures that the financial issues are resolved more efficiently and effectively.
Legal Precedents:
With the help of judicial clarity and case laws, the Position of Homebuyers under RERA and IBC confidence has increased. This has resulted in homebuyers pursuing claims under the IBC and increasing the recovery rates.
Recommendations for Strengthening Homebuyer Protections
There have been many changes to the rights of homebuyers when dealing with an insolvent developer or builder:
Streamlining Processes:
By simplifying the procedure for filing claims under the IBC, there has been a significant reduction in the legislative issues for homebuyers. Ensuring that IBC resolution plans for real estate projects also comply with RERA regulations, provides additional safeguards for Position of Homebuyers under RERA and IBC.
Enhancing Awareness:
It is necessary to conduct awareness campaigns to educate Position of Homebuyers under RERA and IBCabout their rights under both RERA and IBC by the Insolvency and Bankruptcy Board of India (IBBI). This avoids any conflict of interest among all the stakeholders and may resolve the issue of jurisdiction between RERA and the IBC.
Strengthening RERA-IBC Coordination:
It is recommended to develop a standardized framework to harmonize overlapping jurisdictions between RERA and IBC. For instance, establish a communication channel between RERA authorities and the IBBI to facilitate a ground for sharing information, incorporating land authorities into the CoC meetings, etc.
Conclusion : Position of Homebuyers under RERA and IBC
The recognition of Position of Homebuyers under RERA and IBCas financial creditors under IBC has been a landmark reform in addressing their grievances during insolvency proceedings. Before the Amendment Act, of 2018, homebuyers were considered consumers having the right to seek redress against developers for project delays. However, being treated as a financial creditor under IBC means that they can participate in insolvency proceedings against a defaulting developer and partake in the resolution process if a builder goes bankrupt.