SC upholds homebuyers' status as financial creditors in insolvency law

Last year, the government amended the IBC to include homebuyers as financial creditors with the ability to sit in the meetings of the committee of creditors
In a big setback for real estate developers, the Supreme Court on Friday upheld the amendments made to the Insolvency and Bankruptcy Code (IBC) that classified homebuyers as financial creditors. Holding that the Real Estate Regulation and Development Act (RERA) is to be read harmoniously with the IBC, a three-judge Bench led by Justice Rohinton Fali Nariman said while the two pieces of legislation must co-exist, “in the event of a clash, RERA must give way to the Code”.

“Remedies that are given to allottees of flats or apartments are therefore concurrent remedies… such allottees of flats or 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 Bench said.

Last year, the government amended the IBC to include homebuyers as financial creditors with the ability to sit in the meetings of the committee of creditors (CoC) and have voting rights when it came to choosing a resolution plan. This was affirmed in a judgment by the National Company Law Appellate Tribunal (NCLAT), which held that amounts raised by developers under the assured return schemes had the “commercial effect of a borrowing”, and thus homebuyers would be financial creditors.

Developers and builders had challenged the government's decision as well as the NCLAT ruling, pleading it could lead to a situation wherein companies that had completed their projects on time and were in every way compliant with the law could be “jeopardised” by insolvency applications moved by individual homebuyers.

This would then mean that “a perfectly good management which has several projects on its hands can be removed at the instance of one allottee and either replaced – in which case the massive funds infused by the developer himself would be set at naught”, developers said in their arguments.

“Worse still, (the insolvency application would) lead to commercial death, in that, if there are no resolution plans or all resolution plans are rejected either by the committee of creditors or by the authorities under the Code, a perfectly solvent firm would then be wound up, which would not be in the interest of anybody,” they said.

The plea was, however, rejected by the court, which said the onus of proving that some allottees of flats and apartments were using the code just to blackmail them lay on them once the case was admitted in the NCLT.

“The real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency. This the real estate developer may do by pointing out, for example, that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat or apartment,” the apex court said.

Acceding to the contention of builders and homebuyers that since the NCLT is given only 14 days to decide whether the company is in default or not, the apex court has asked the central government to ensure that both “the NCLT and the NCLAT are manned with sufficient members to deal with litigation that may arise under the Code generally, and from the real estate sector in particular”. “For this purpose, an affidavit be filed by the Union of India within three months from today as to the steps taken in this behalf,” the top court said.

Apart from members at the NCLT and NCLAT level, the SC Bench also asked all the states and Union territories to ensure that they had permanent members in RERA and its appellate tribunal. Such vacancies must be filled within three months from Friday, the court said.

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