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SC upholds IBC amendments giving financial creditor status to home buyers

Press Trust of India  |  New Delhi 

The Supreme Court Friday upheld the constitutional validity of amendments made to the Insolvency and Bankruptcy Code (IBC) which conferred the 'financial creditors' status to homebuyers and entitled them to be a part of the Committee of Creditors (CoC) to safeguard their interest.

The apex court's verdict came as a big relief for lakhs of harassed homebuyers who are facing difficulties due to delayed possession and incomplete real estate projects.

As financial creditors now, they will have a say in the resolution process of a cash-strapped realtor.

A three-judge bench headed by Justice R F Nariman held as "constitutionally valid" the amendments made to the IBC in August 2018 and said it "does not infringe" upon the rights of real estate developers and is neither "arbitrary" nor "discriminatory".

It can be seen that the Insolvency Law Committee found, as a matter of fact, that delay in completion of flats/apartments has become a common phenomenon, and that amounts raised from home buyers contributes significantly to the financing of the construction of such flats/apartments, said the bench, also comprising Justices Sanjiv Khanna and Surya Kant.

"This being the case, it was important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the code under section 7 and have their rightful place on the CoC when it comes to making important decisions as to the future of the building construction company, which is the execution of the real estate project in which such home buyers are ultimately to be housed," the bench said.

As per section 7 of the IBC, a home buyer, who is now a financial creditor, may trigger the insolvency proceedings against the real estate developer.

The bench said that since home buyers give advances to the real estate developer and finance the project, they are really the "financial creditors".

The top court said the Real Estate (Regulation and Development) Act (RERA), 2016, which regulates the real estate sector, is to be "read harmoniously" with the IBC and in case of conflict, the IBC would prevail.

"The fact that RERA is in addition to and not in derogation of the provisions of any other law for the time being in force, also makes it clear that the remedies under RERA to allottees were intended to be additional and not exclusive remedies," it said.

The bench said that even by a process of harmonious construction, RERA and the IBC must be held to "co-exist".

"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 (IBC)," it said.

The bench also dealt with the arguments advanced by the real estate developers that any "trigger happy" allottee, who may himself being a defaulter, could initiate the insolvency proceedings before the National Company Law Tribunal (NCLT).

The bench noted that in such cases, the home buyer would have to make out a prima facie case of default relating to amounts due and payable to him in his or her application under section 7 of the IBC.

"Once this prima facie case is made out, the burden shifts on the promoter/real estate developer to point out in their reply and in the hearing before the NCLT, that the allottee is himself a defaulter and would, therefore, on a reading of the 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," it said.

The apex court said it is "absolutely necessary" that the NCLT and the National Company Law Appellate Tribunal (NCLAT) are manned with sufficient members to deal with litigation that may arise under the IBC, particularly from real estate sector.

"For this purpose, an affidavit be filed by the Union of India within three months from today as to the steps taken in this behalf. Copy of this judgment be sent to the Ministry of Law and Justice, Government of India immediately. To come up with the compliance report by states and union territories as aforesaid in the second week of January, 2020," it said.

It noted that most of the states and union territories have established or appointed adjudicating officers, the Real Estate Regulatory Authority as well as the appellate tribunal under the RERA.

"Yet, despite the fact that May 1, 2017 has long gone, some recalcitrant states and union territories have yet to do the needful," it said.

The bench directed those states and union territories, where the needful has not been done yet, to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and appellate tribunal within three months.

The top court asked the chief secretaries of states and union territories to file compliance affidavits within three months.

The verdict came on a batch of pleas filed by builders who have argued that remedies to home buyers were available under the RERA Act and the amendments to IBC only enables duplication.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, August 09 2019. 20:55 IST