Homebuyers entitled to an additional remedy against builders
On 9 August 2019, a three-judge bench headed by Justice Rohinton F Nariman of the Supreme Court of India (“Supreme Court”) upheld the constitutional validity of the amendment to the Insolvency and Bankruptcy Code, 2016 (“Code”) confirming the status of ‘financial creditors’ given to the allottees of a real estate project. With this ruling, the Supreme Court has opened gates for homebuyers to now approach the NCLT against defaulting developers in addition to seeking remedies before the Consumer Forum and the Real Estate Regulatory Authority.
A series of petitions led by Pioneer Urban Land and Infrastructure Limited were filed by developers challenging the constitutional validity of the 2018 Bill for amendment to the Code (“2018 Amendment”) which granted the allottees of a real estate project status of ‘financial creditors’ and entitled them to be represented in the Committee of Creditors through their authorised representatives.
The amendment to the Code was necessitated from certain decisions of the NCLT which held that the amounts raised by the developers under assured return schemes had the commercial effect of a borrowing and thus the allottees were to be held as ‘financial creditors’.
Arguments of The Petitioners
The following arguments were inter alia made on behalf of the petitioners
What the Supreme Court Observed and Held
The Supreme Court while upholding the 2018 Amendmentmade inter alia the following observations:
Further Directions by the Supreme Court
The Supreme Court with a view to consolidate its decision has directed (i) all States which have not established/appointed adjudicating officers, the Real Estate Regulatory Authority, as also the Appellate Tribunal as required under RERA, to do so within 3 months from the date of the judgment; (ii) NCLT and the NCLAT should be sufficiently staffed to deal with litigation that may arise under the Code on account of this amendment; and (iii) NCLT to decide applications in light of this judgment.
While this judgment has added a new weapon to the arsenal of the homebuyers by granting them an additional remedy against the developers, it has not left the developer in a lurch as it has also provided an array of defences that can be opted by the developer to keep wily allottees at bay. In this context, the question whether the allottee is a speculative purchaser or a genuine homebuyer will assume great significance. In all probability, the real estate developers may opt to complete construction and only thereafter dispose of the completed inventory to homebuyers. In such circumstances a developer may only run the risk of success of the project and be only required to deal with the lenders. If the developers do move to such a business model, it may lead to increase in real estate prices. This increase in prices however depends upon other factors i.e. unsold stock in the market, new projects etc.
Further the judgment has given NCLT a breather by clarifying that time period of 14 days given to adjudicate an application under the Code is directory and not mandatory thereby giving the NCLT authorities the time to adjudicate the application after considering all relevant aspects and without feeling the heat of time.
- Sudip Mullick (Partner) and Abhiraj Gandhi (Principal Associate)
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