By DR. Anup P. Shah
Chartered Accountant
INTRODUCTION
The Insolvency and
Bankruptcy Code, 2016 (‘the IBC’ or ‘the Code’) has probably seen the maximum
amount of litigation of all statutes that a three-year-old enactment can
witness. In addition to the disputes at the NCLT and the NCLAT level, the
Supreme Court has also delivered several landmark and innovative judgements
under the IBC. The Code deals with the insolvency resolution of stressed
corporate debtors and, where resolution is not possible, then their
liquidation. The government has also been very proactive in amending the Act to
take care of deficiencies, changing circumstances and situations.
It is interesting to note
that the maximum cases under the IBC have been from the real estate sector. As
of 30th June, 2019, 421 real estate cases were referred to the NCLT
under the IBC; of these, in 164 cases companies have been ordered to be
liquidated and 257 cases are still on. It is a well-known fact that most real
estate projects, especially those in the residential sector, are reeling under
debt stress. This has led to incomplete projects, prolonged delays in handing
over possession, etc. Aggrieved home buyers tried to avail the remedy of
seeking relief under the Code. There were several decisions which held that
home buyers could drag a realtor to proceedings under the Code.
Ultimately, the Code was
amended in 2018 to expressly provide that home buyers were financial creditors
under the Code and could trigger the Code. This was done by adding an
Explanation to section 5(8)(f) of the Code in the definition financial debt
– ‘any amount raised from an allottee under a real estate project shall be
deemed to be an amount having the commercial effect of a borrowing.’
It further provided that
representatives of home buyers could be appointed on the Committee of
Creditors. Thus, the 2018 Amendment empowered home buyers to a great extent.
Another remedy available to
home buyers was to seek relief under the provisions of the Real Estate
(Regulation and Development) Act, 2016 or RERA. Yet another remedy
available is to approach the consumer forums under the Consumer Protection
Act, 1986 since various judgements have held that a flat buyer is also a
consumer under that Act.
However, an interesting
issue which arises is whether these three Acts are at conflict with one
another? And in the event of a conflict, which Act would prevail? This
interesting issue was before the Supreme Court in Pioneer Urban Land
& Infrastructure Ltd. vs. UOI, [2019] 108 taxmann.com 147 (SC). Let
us dissect this judgement and some developments which have taken place pursuant
to the same.
PIONEER’S CASE
Challenge:
The real estate developers challenged the 2018 Amendment to the IBC on the
grounds that it was constitutionally invalid. Further, since there was a
specific enactment, RERA, which dealt with real estate, the IBC, which was a
general statute, could not override the same. Further, RERA also contained a non-obstante
clause and hence it must be given priority over the IBC.
Twin
non-obstante clauses: The IBC contains a non-obstante
clause in section 238 which provides that it overrides all other laws in force.
RERA also has a similar provision in section 89 but it also has section 88; and
section 88 provides that RERA shall be in addition to, and not in derogation
of, the provisions of any other law for the time being in force.
The Supreme Court negated
all pleas of the developers and upheld the supremacy of the IBC. It held that
the non-obstante clause of RERA came into force on 1st May,
2016 as opposed to the non-obstante clause of the Code which came into
force on 1st December, 2016. IBC had no provision similar to section
88 of RERA. It was clear that Parliament was aware of RERA when it amended the
Code in 2018. The fact that RERA was in addition to and not in derogation of
the provisions of any other law for the time being in force also made it clear
that the remedies under RERA to allottees were intended to be additional and
not exclusive remedies. The Code as amended, was later in point of time than
RERA, and must be given precedence over RERA, given section 88 of RERA.
Further, the Code and RERA
operated in completely different spheres. The Code dealt with a proceeding in
rem in which the focus is the rehabilitation of the corporate debtor by
taking over its management. On the other hand, RERA protects the interests of
the individual investor in real estate projects by requiring the promoter to
strictly adhere to its provisions. The object of RERA was to see that real
estate projects came to fruition within the stated period and that allottees
were not left in the lurch and were finally able to realise their dream of a
home, or be paid compensation if such dream was shattered, or at least get back
monies that they had advanced towards the project with interest. Given the
different spheres within which these two enactments operated, different
parallel remedies were given to allottees.
Wrong classification plea: Another challenge was that home buyers being classified as financial
creditors and not operational creditors, was constitutionally invalid. The
Court set aside this plea also. It held that real estate developers were a
unique case where the developer who was the supplier of the flat is the debtor
inasmuch as the home buyer / allottee funds his own apartment by paying amounts
in advance to the developer for construction. Another vital difference between
operational debt and allottees is that an operational creditor has no interest
in the corporate debtor, unlike the case of an allottee of a real estate
project who is vitally concerned with the financial health of the corporate
debtor. Further, in such an event no compensation, nor refund together with
interest, which is the other option, will be recoverable from the corporate
debtor. One other important distinction is that in an operational debt there is
no consideration for the time value of money – the consideration of the debt is
the goods or services that are either sold or availed of from the operational
creditor. Payments made in advance for goods and services are not made to fund
the manufacture of such goods or the provision of such services. In real estate
projects, money is raised from the flat allottee as instalments for flat
purchase. What is predominant, insofar as the real estate developer is
concerned, is the fact that such instalment payments are used as a means of
finance qua the real estate project.
It is
these fundamental differences between the real estate developer and the
supplier of goods and services that the legislature has focused upon and
included real estate developers as financial debtors. Hence, the Supreme Court
held it was clear that there cannot be said to be any infraction of equal
protection of the laws. Thus, even though flat allottees were unsecured
creditors, they were placed on the same pedestal as financial creditors like
banks and institutions. It held that the definition of the term ‘financial
debt’ u/s 5(8)(f) of the Code (‘any amount raised under other transaction,
including any forward sale or purchase agreement, having the commercial effect
of a borrowing’) would subsume within it amounts raised under transactions
which, however, are not necessarily loan transactions so long as they have the
commercial effect of a borrowing. It is not necessary that the transaction must
culminate in money being given back to the lender. The expression ‘borrow’ was
wide enough to include an advance given by the home buyers to a real estate
developer for ‘temporary use’, i.e. for use in the construction project so long
as it was intended by the agreement to give ‘something equivalent’ to the money
to the home buyers. That something was the flat in question.
Defeats
value maximisation: The Court also negated the
argument that classifying allottees as financial creditors was directly
contrary to the object of the Code in maximising the value of assets and
putting the corporate debtor back on its feet. It held that if the management
of the corporate debtor was strong and stable, nothing debarred it from
offering a resolution plan which may well be accepted by the Committee of Creditors.
It was wrong to assume that the moment the insolvency resolution process
started, liquidation would ensue. If the real estate project was otherwise
viable, bids from others would be accepted and the best of these would then
work in order to maximise the value of the assets of the corporate debtor.
Retrospective
nature: The Court held that this Amendment [insertion of Explanation to
section 5(8)(f) of the Code] was clarificatory in nature, and this was also made clear by the
Insolvency Committee Report which expressly used the word ‘clarify’, indicating
that the Insolvency Law Committee also thought that since there were differing
judgements and doubts raised on whether home buyers would or would not be
classified as financial creditors u/s 5(8)(f), it was best to set these doubts
at rest by explicitly stating that they would be so covered by adding an
Explanation to section 5(8)(f). Therefore, the Court held that home buyers were
included in the main provision, i.e. section 5(8)(f) with effect from the
inception of the Code, the Explanation being added in 2018 merely to clarify
doubts that had arisen.
Defence for developers: The Court also laid down the defence available to developers against
initiation of proceedings under the Code. The developer may point out that the
allottee himself was a defaulter and would, therefore, on a reading of the flat
agreement and the applicable RERA Rules and Regulations, not be entitled to any
relief including payment of compensation and / or refund, entailing a dismissal
of the said application. Under section 65 of the Code, the real estate
developer may also point out that the insolvency resolution process has been
invoked fraudulently, with malicious intent, or for any purpose other than the
resolution of insolvency. The Court gave instances of a speculative investor
and not a person who was genuinely interested in purchasing a flat / apartment.
Such persons could not claim relief. Developers may also point out that in a
falling real estate market, the allottee did not want to go ahead with its
obligation to take possession of the flat / apartment under RERA and, hence,
wanted to jump ship and really get back, by way of this coercive measure, the
monies already paid by it. Hence, there were enough safeguards available to
developers against false triggering of the Code.
Parallel
remedies: The Supreme Court held that another parallel
remedy is available and is recognised by RERA itself in the proviso to section
71(1), by which an allottee may continue with an application already filed
before the Consumer Protection Forum, he being given the choice to withdraw
such complaint and file an application before the adjudicating officer under
RERA.
Supremacy:
It therefore held that even by a process of harmonious construction, RERA and
the Code must be held to co-exist and, in the event of a clash, RERA must give
way to the Code. RERA, therefore, cannot be held to be a special statute which,
in the case of a conflict, would override the general statute, viz. the
Code.
SOME SUBSEQUENT DECISIONS
The NCLT Delhi applied the
above Pioneer case in Sunil Handa vs. Today Homes Noida
India Ltd. [2019] 108 taxmann.com 517 (NCLT – New Delhi). In this case,
home buyers stated that as per the flat agreement, the possession of the flat
had to be handed over latest by the year 2016. Despite having received almost
90% of the purchase value of the flats, the corporate debtor had till date
neither handed over the possession of the said units nor refunded the amount
paid by the financial creditors. Hence, they applied for corporate insolvency
resolution under the Code. The NCLT applied the decision in the Pioneer
case and held that in the event of a conflict between RERA and IBC, the IBC
would prevail. Hence, the petition was admitted.
Again, in Rachna
Singh vs. Umang Realtech (P) Ltd. LSI-598-NCLT-2019 (PB), the NCLT
Principal Bench took the same view and upheld insolvency proceedings against
the realtor.
However, a very interesting
decision was delivered in the case of Nandkishore Harikishan Attal vs.
Marvel Landmarks Pvt. Ltd. [LSI-617-NCLT-2019 (Mum.)].
In this case, the NCLT
observed that the intention of the petitioner was only to extract more
compensation from the realtor. He did not take steps for taking possession of
the flat by clearing his pending dues in spite of repeated reminders. Thus, the
defence laid down in the Pioneer case would come to the
developer’s rescue. The NCLT held that the petitioner was a speculative
investor who had purchased flats in a booming real estate market and now wanted
to escape his liability when the real estate market was facing bad times. It
held that ‘the Flat is ready for possession but the petitioner is adamant on
taking refund… The intention of the petitioner is only to extract more
compensation from the corporate debtor rather than the resolution of the
corporate debtor…’.
A very telling observation
by the NCLT was that ‘where hundreds of flat buyers are involved, when
compensation of this magnitude is acceded as demanded or CIRP is ordered, we
are afraid that it may lead to utter chaos in the real estate market in the
country and it will affect the real estate sector wholly and a situation may
arise that no investor will be forthcoming to invest in real estate sector.
This is not a case where many of the home buyers are duped or the corporate
debtor / developer had collected the money and done nothing.’
RERA in a
bind: Press reports indicate that RERA authorities across India are now
in a fix as to how they should approach all cases given the Supreme Court’s
decision in Pioneer. They fear that RERA’s authority would now be
diluted given the supremacy of IBC. What would happen if proceedings were
pending under RERA and one of the homebuyers moved a petition under the IBC?
Thus, even one flat buyer could stall RERA proceedings. Accordingly, the RERA
officials have approached the Ministry of Housing and Urban Affairs for clarity on this aspect.
In one
of the complaints before the MahaRERA in the case of Majestic Towers Flat
Owners Association vs. HDIL, Complaint No. CC006000000079415 a
complaint was pending before the MahaRERA. The developer contended that it has
been admitted for corporate insolvency resolution under the CIRP and, hence, a
moratorium u/s 14 of the Code applied to all pending legal proceedings.
Accordingly, the MahaRERA disposed of the complaint by stating that though the
complainant was entitled to reliefs under the provisions of RERA, the said
relief could not be granted at this juncture due to the pending IBC resolution
process. Of course, if the IBC resolution process ultimately does not survive,
then the proceedings under the RERA could be revived since the moratorium is
only for the duration of the process. More such cases would be seen in the
coming months as a fallout of the Pioneer decision.
PROPOSED LEGISLATIVE CHANGES
While the 2018 Amendment to
the IBC and the SC’s decision in Pioneer were meant to protect
home buyers, it also means that a single buyer (with a default of only Rs. 1
lakh) can drag a realtor to insolvency resolution, stall all proceedings under
RERA and thereby hold up all other flat buyers who could run into hundreds or
even thousands. Even if those other buyers do not wish to be a party, the
developer would have to endure the entire process under the IBC. This is a very
dangerous situation and one which the law-makers seem to be taking cognisance
of. Press reports indicate that the government is planning to amend the Code to
stipulate that the number of homebuyers required to file an insolvency case
must be at least 100, or they must collectively account for a minimum of 5% of
the outstanding debt of the realty developer, whichever is lower. However, they
will continue to enjoy the status of financial creditors. The planned amendment
is expected to be applicable only prospectively and will have no bearing on
those real estate cases that have already been admitted by the NCLT. The
government is also said to be mulling increasing the default limit to Rs. 10
lakhs.
CONCLUSION
Time and again the Supreme
Court has come to the rescue of the IBC by stating that it comes up trumps
against all other statutes – the Income-tax Act, RERA, labour laws, etc. While
it is a law meant to speed up recoveries and unclog the debt resolution system
in India, probably the time has come to consider whether it could actually
cause more harm than good. The proposals being considered by the government should
be implemented urgently. The real estate sector is already in a mess and needs
urgent salvation.
