Those at bottom of real estate pyramid shouldn’t start celebrating yet

August 21, 2019 3:23 AM

Where building work has not come to a standstill and construction is going on, homebuyers could approach the NCLT with the expectation of out-of-court settlement

real estate, real estate pyramid, RERA, IBC, real estate company, real estate news, NCLT, financial express editorial, financial expressIt also remains to be seen how the NCLT would cope with the deluge of cases that could potentially be filed before it by disgruntled homebuyers. (Image: PTI)

By Shlok Chandra

In 2018, the Centre pushed through a major amendment to Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016. An ‘explanation’ was added to that section with effect from June 6, 2018, which allowed homebuyers to be treated as financial creditors and allowed them to approach the National Company Law Tribunal (NCLT) in case of default by real estate developers in handing over units. Thousands of homebuyers got relief from the NCLT in the ensuing months. But the joy for homeowners was short-lived, as the amendment to the IBC was stayed by the Supreme Court in the Pioneer Urban Land and Infrastructure Limited vs Union of India case in January 2019.

The strength of the NCLT as a forum was the speed at which relief could be obtained by homebuyers. Builders who did not want to lose control of their companies and believed in the inherent commercial viability of their projects soon entered into out-of-court settlements with homebuyers, with a range of customised agreements, such as refund of interest, waiver of part cost, etc. Now, in a judgment delivered on August 9, 2019, the Supreme Court cleared the dark clouds hanging over the fate of homebuyers and affirmed the constitutional validity of the amendment to Section 5(8)(f). In addition, it has mandated that the Real Estate (Regulation and Development) Act and IBC have to coexist. In the event of a clash, RERA is to give precedence to IBC.

The Supreme Court also clarified it would be open to the developer to put forth its defence that the homebuyer is himself a ‘defaulter’ or a speculative investor, and not a person who is genuinely interested in purchasing a flat/house. These are bona fide observations by the apex court to allay developer fears that a floodgate of litigation would be opened. The subject would have been well-served had the court elaborated on these points and set out clear guidelines in this regard. Nevertheless, it is a matter of time before the court is called upon to adjudicate in detail on these issues.

In the light of the safeguards set out in the Pioneer Urban Land judgment, it remains to be seen if a minor default in payment of an instalment by the homebuyer would be sufficient ground to disentitle the homebuyer from seeking remedy before the NCLT. Hopefully, the NCLT will examine the payment history to determine whether the homebuyer can be deemed a ‘defaulter’.

It also remains to be seen how the NCLT would cope with the deluge of cases that could potentially be filed before it by disgruntled homebuyers. The Supreme Court has adjudicated that homebuyers can pursue their remedies simultaneously before consumer courts, RERA and the NCLT. It has also directed that states in which RERA is not operational should operationalise RERA within three months, and vacancies of NCLT members are also to be filled up within three months.

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Homebuyers would be advised not to rush to the NCLT in all cases. Where construction is ongoing and building work has not come to a standstill, homebuyers could approach the NCLT with the expectation of out-of-court settlement. They should factor in the fact that upon initiation of the corporate insolvency resolution process, there is a 180-day moratorium on institution of new legal proceedings or continuation of existing suits or proceedings. Developers in serious financial strife may be relieved to get a 180-day moratorium from paying off their debts and initiation of the corporate insolvency resolution process, and may want to get a troublesome monkey off their back. Thus, things are not all that rosy for homebuyers in projects where developers are in genuine financial strife—the path remains hazy. The government may consider the feasibility of compulsory insurance of real estate projects and a central levy on real estate transactions whose proceeds can be made available to entities (for example, NBCC) nominated to salvage real estate projects that have run into trouble, albeit without an element of fraud or diversion of funds.

The Supreme Court has passed a strong judgment in the interest of homebuyers. But much work remains to deliver solace to those at the bottom of the real estate pyramid.

The author is an advocate practising in NCLT

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