Homebuyers' Quandary Over IBC And RERA

Analysis

The Insolvency and Bankruptcy (Second Amendment) Act, 2018 has revised Clause (8) of Section 5 of the Code, and it is effective as of June 6, 2018.^[3] It is now abundantly clear, given the explanation included in the revised definition, that any amount raised from an allottee under a real estate project will be deemed to have the commercial effect of a borrowing and will fall under the Code's definition of "Financial Debt."^[4] The definition of 'Financial Debt' has been amended to remove any cloud and to specifically include dues of the home buyers. The Amendment Act leaves no doubt that home buyers are 'Financial Creditors'.^[5] Accordingly, allottees/home buyers being "Financial Creditors" in terms of Explanation to Section 5 (8) (c) of the Code,^[6] can initiate Corporate Insolvency Resolution Process against the defaulting builder or developer.^[7] However, rights under IBC framework can only be used by meeting certain conditions, The 2020 Amendment Act replaced the Insolvency and Bankruptcy Code (IBC) 2019 ordinance, which set a minimum threshold for homebuyers to initiate Corporate Insolvency Resolution Processes (CIRPs). In accordance with the provisions outlined in Section 7 of the law, a group of at least 100 homebuyers, or 10% of all homebuyers, whichever is lesser, may commence insolvency proceedings against a builder.^[8] This criterion was established to prohibit individual homebuyers from triggering insolvency procedures directly. The intention was to demonstrate that such proceedings were typical of a significant portion of purchasers rather than individual cases.

In the Case of SCSL Buildwell Private Limited vs Pal Infrastructure and Developers Private Limited,^[9] An agreement was made between the respondent, a corporate debtor, and the applicant, a financial creditor, whereby the financial creditor agreed on buying 20 apartments in the "Icon Tower" real estate project, at Sector 70-A, Gurgaon, Haryana, the corporate debtor proposed to establish this project. An agreement between the parties executed on December 17, 2010, specified the purchase price of these 20 flats by the financial creditor. To date, the corporate debtor received payments from the financial creditor totaling INR 7.92 Crore, accompanied by copies of the receipts attesting to these payments. As per the terms of the agreement, the corporate debtor was required to deliver the apartments by on or before November 11, 2013. The agreement further stated that the corporate debtor would be responsible for paying the financial creditor in the event that the debtor delayed finishing the construction and giving over possession of the apartments. The amount paid by the financial creditor would be divided by the monthly compensation rate of 1%. The main objections of the respondent corporate debtor were that the applicant does not come under the definition of 'Financial Creditor' and the debt claimed is not a 'Financial Debt'. However, this objection was rejected by the NCLT Principal bench of New Delhi.

It is also appropriate to note that in accordance with Section 18 of the Real Estate (Regulation and Development) Act, 2016) (RERA),^[10] the promoter shall return the money received in relation to the apartment, plot, or building, together with any prescribed interest, and shall compensate the allottee for any loss incurred by him. This requirement arises if the promoter is unable to complete the project or give possession of the building in accordance with the terms of the sale agreement. In a similar vein, Section 19 of RERA grants the allottee the right to reclaim possession of the apartment, plot, or building, as applicable, or a refund of the money paid, plus interest, in compliance with the conditions of the contract.^[11] The Maharashtra Real Estate Regulatory Authority (MahaRERA) issued an order in the matter of Sapna Shukla and others v. Sanket International Limited, instructing a builder to repay the whole money paid by the complainants, who had reserved a flat in a residential project. In 2013, Sapna Shukla and Vivek Gaonkar,^[12] the complainants, reserved a 715 square foot carpeted apartment on the ninth level of a free-sale building. They had paid the entire purchase price, but they hadn't received the apartment after nearly ten years of waiting. Within two months of the MahaRERA order, the builder was required to return the entire purchase price plus interest at the State Bank of India's Marginal Cost of Funds-Based Lending Rates (MCLR) plus 2%. If the builder doesn't follow this order within the allotted time, there will be a penalty of Rs. 5,000 every day until the entire amount, including the interest that has accumulated, is returned. This fine would be imposed starting on the last day of the two-month term and continuing until the order's actual compliance date.

Answering the Quandary

The National Company Law Tribunal (NCLT) and the Real Estate Regulatory Authority (RERA) are both fast courts. Allottee choice between the two should depend on your specific needs and objectives. RERA is the right option if you want to force the builder to finish the project and get paid for any delivery delays. It specializes in handling real estate industry-related structured problems, such as those involving possession and delay compensation. Nonetheless, the NCLT can help if your goal is to recover your real estate project investment with interest. The NCLT mostly deals with matters pertaining to insolvency and company law. It has the power to compel developers or builders into insolvency and liquidation through its enforceable orders. Even though they cater to distinct industries, the NCLT and the RERA Act are both useful in settling real estate disputes. The procedure of submitting an execution application with RERA can be time-consuming, which causes many homeowners to prefer the NCLT for rapid resolution of possession certificate-related concerns. Due to its tighter timelines for issue resolution, the NCLT places substantial pressure on builders. Another argument for preferring NCLT over RERA is that section 18 of the RERA Act requires a written agreement between the builder and the buyer specifying the date of possession. The builder will only be required to make compensation or issue a refund with interest if the builder causes a delay in the delivery of the possession certificate in accordance with this agreement.

In the event of a dispute, homebuyers' rights are safeguarded under the Real Estate (Regulation and Development) Act (RERA) and the Insolvency and Bankruptcy Code (IBC). Nevertheless, there are particular requirements for activation of the IBC process. It can't be started by just one homeowner. Instead, it requires the participation of either 100 or 10% of the total number of homebuyers interested in a project. Once these criteria are met, the National Company Law Tribunal (NCLT) protects homebuyers' rights by enforcing its orders within stipulated timeframes.

However, depending on the pecuniary jurisdiction of their case, an individual homeowner can appeal to the Consumer Courts or RERA for immediate relief. When the requirements for initiating the IBC are not fulfilled, these bodies provide alternate channels for resolving disputes. It's crucial to remember that although IBC and RERA have comparable goals, their objectives and procedures differ. RERA seeks to safeguard homebuyers and guarantee the completion of real estate projects, whereas IBC concentrates on the resolution of financial crisis and the maximization of creditor recovery. When choosing a course of action to settle their problems, homebuyers ought to take these distinctions into account.

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