Uncertainty over how RERA provisions will play out for realty firms in NCLT

The Insolvency Law Committee in its review of the operations of the Insolvency and Bankruptcy Code (IBC) has sought to give a voice to stressed-out homeowners where the developer is going through a bankruptcy resolution process. However, the relief for stranded homebuyers is limited. They get a seat in the Committee of Creditor that decides on the resolution process, albeit as “unsecured” financial creditors. What this means is that financial creditors will get the first right in the debt servicing waterfall among creditors. The turn of unsecured financial creditor will come next.

Adding another bout of uncertainty for home buyers is how the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA), play out for real estate companies that enter the bankruptcy process.

Clash of two laws

Legal experts point out that typically in cases where two laws conflict with each other, the more specific law trumps the general law. But since both, the IBC and the RERA deal with two distinct but specific areas, namely corporate insolvency and interest of homebuyers, respectively, there is a lack of clarity on which will prevail.

“Eventually, the courts will have to take a call,” says Suharsh Sinha, senior associate in the restructuring and insolvency group at AZB & Partners.

Insolvency practitioners and legal experts appear divided over the extent of relief that homeowners will get under the IBC and the RERA. According to Nilesh Sharma, director, RR Insolvency Professionals, the primary objective of the RERA is to create a transparent system between homebuyers and builders so that their respective rights and obligations are clearly defined and the conflicts between them are minimised. The IBC, on the other hand, becomes applicable for resolving the bankruptcy situation or for distributing the sale proceeds of the assets of the company that undergoes liquidation.

“Provisions of the IBC shall override provisions of the RERA in case of a conflict as tge IBC deals with a special situation in an otherwise RERA-governed entity,” says Sharma.

Legal experts point out that the IBC is an Act notified (May 2016) later than the RERA (March 2016). So, technically the IBC could override the RERA, they add. The RERA is in play when the developer’s business is a going-concern and operational, says Samantak Das, Knight Frank’s chief economist and national director (research).

However, decisions taken under the RERA may not remain effective if it goes against the IBC, he adds.

What galls many experts is that the IBC, despite best intentions, limits the relief that homeowners get even if the recommendations of the Insolvency Law Committee are accepted. Legal experts note that in the Committee of Creditors homeowners get a right to vote any resolution proposal. However, homeowners collectively will get veto power on any proposal only if their total debt is 25 per cent of the total financial debt of the company (or 34 per cent if the recommendations are accepted), says Nilang Desai, partner, AZB & Partners.

Many experts feel that homebuyers should not be treated as simple unsecured financial creditors. “Treatment of the flat buyer as proposed in the report of the Insolvency Law Co­m­mittee is not fair to them. The flat buyers should be treated as owners of the flat and that the lender’s right should be treated as secured to the extent of the consideration remaining unpaid by the flat buyers,” says Sharma. Knight Frank’s Das agrees with this point of view. “Home­buyers may not get much relief from the IBC if they are to take a haircut to the extent of 70-80 per cent on their investments,” he says. In course of last one year or so of operation of the bankruptcy code proceedings, financial cre­ditors have taken haircuts on their investments to the tune of 70 per cent to 90 per cent. “While business entities can re-coup losses through other deals, but not home buyers,” says Das.

Several practitioners feel that any on-going case under the RERA brought by homebuyers should not get subsumed if the real estate company is admitted for bankruptcy proceedings. Sharma says the proceedings under the RERA should continue simultaneously with the IBC proceedings. Any issue relating to the determination of some rights of the buyer could be dealt under the RERA, while the recovery proceedings could be treated as per the provisions of the IBC, he suggests.

Shades of grey

Legal experts point out that the recommendations of the Insolvency Law Committee are silent on how the collective representation of homebuyers in the Committee of Creditors will be arrived at. “There is scope for clarity on the treatment of home loans taken by homebuyers. Will the banks/financial institutions that have lent to homeowners have any voice or role in the process,” asks Sinha. What is also not clear whether a decision or order by the RERA will be upheld under the IBC, adds experts. What also does not help matter is that most states are yet to put in place the administrative framework for regulating the real estate sector.