IBA and Jaypee group have been asked to reply on a plea that sale proceeds of the project should go to homebuyers only if the builder fails to deliver the property.
The Supreme Court on Monday sought response from the Centre, RBI, the Indian Banks’ Association and the Jaypee group on a petition seeking to declare that the real estate projects are “third party assets” held by builders in trust for the homebuyers. The sale proceeds of the project, thus, should go to the homebuyers only if the builder fails to deliver the property.
A Bench, led by Justice SA Nazeer, issued notices to ministries of corporate affairs and law and justice, the Indian Banks’ Association, RBI, embattled real estate firm Jaypee Infratech, its parent company Jaiprakash Associates on a petition by Sachin Sudheer, a homebuyer of the Jaypee group. The petition alleged that in the absence of such a declaration, all the homebuyers were likely to lose their money to the secured lenders due to misunderstanding of the appropriate legal position in this regard.
According to Sudheer, Section 11(4)(h) of the Real Estate (Regulation and Development) Act, 2016, prohibits mortgage of the plot/home/apartment allotted to a homebuyer by the builder. If mortgage has been created on these assets before such allotment, the same has the approval of the secured creditor. The latter, by voluntarily surrendering their security interests in favour of homebuyers, lose their security right on the mortgage so created, he said. Thus, an allottee is the beneficial owner of the plot, apartment or building allotted to him and the secured creditor has no right or preferential claim, whatsoever, on the real estate project.
The mortgage, created by the developer in favour of lenders on the assets, is prohibited after entering into an agreement for allotment with a homebuyer. In any case, such mortgage shall not affect the rights and the interests of the homebuyer, he said.
“No law of the land permits robbing Peter to pay Paul. If homebuyers are treated as unsecured creditors for all the purposes of the Insolvency and Bankruptcy Code 2016, for the distribution of liquidation assets under Section 53 of IBC the homebuyers stand to lose the entire amount paid by them to the builder,” the petition filed through counsel Balaji Srinivasan stated.
According to the counsel, the assets so created with the homebuyers’ money will be sold as liquidation assets, the secured creditors will recover their dues and the homebuyers will get nothing. This, according to him, is neither intended by the code nor by the Rera Act.
He further stated that the homebuyers, being treated as financial creditors and unsecured creditors, will in no way undermine their position as “third parties”, whose assets are held by the corporate debtor in “trust” for the purposes of Section 53 of the Code.
Citing the earlier SC judgment in Pioneer Urnban Land and Infrastructure vs UoI that held that RERA is to be read harmoniously with the Code, the counsel argued there is no conflict between the two as the Code had adopted the definitions of “allottee” and “real estate project” as given in RERA. Even both the enactments make homebuyers the beneficial owners of the assets so created.