Are Home Buyers Financial Creditors ? Read Article compiled by MUDS Management


Buying a home is every person’s desire. A homebuyer works day in and out to earn bread and butter to meet his livelihood. In the ongoing work cycle the goal is not only to meet the routine life expenses but also save a certain fraction of money from the hard-earned cash. The intent of savings is to secure the after retirement life and also to have sources of investment to meet unforeseen circumstances. The planned small savings are given specific shape over a period of time. The savings are capitalized by purchasing gold, diamonds or real estate. 

It is rightly said that “women’s love diamond and gold whereas men love cars and real estate”. 

At present owing a house in like a daydreaming thought. To fulfill the desire of purchasing a house homebuyer needs to part with his saving that have been accumulated over a span of time. Even after investing the hard earned savings in the real estate there is no guarantee that the dream of owning the house will be satisfied. This is because buying a home in today’s time is not less than playing a gamble. The lengthy processes, complicated legal formalities, risks of delay in securing timely possession have significantly contributed in making the desire of purchasing home a nightmare for many homebuyers. Inspite of the odds the homebuyers invest their savings for the sake of satisfying their desire to own a home,

After putting the hard earned savings at stake to meet the desire to purchase a home, the homebuyers were bestowed with legal protection. They were a safe state as there were judicial authorities who were there to assist them and listen to their grievances. 

In the previous blog we had lucratively discussed the recovery weapons available to homebuyers against the defaulting builders. If you are also an aggrieved homebuyer then you may visit https://www.muds.co.in/recovery-weapons-home-buyers/ for gaining an insight of the weapons you possess.

At the onset there were civil courts and consumer courts that were there to resolve the grievances of the homebuyers. Under the Consumer Protection Act 1986, there were bifurcated consumer redressal agencies at various levels in the form of district forum, state commission and National consumer dispute redressal commission. Though the Consumer Protection Act, 1986 was available as a forum to the homebuyers in the real estate market the remedies therein were not appropriate to address the concern of the homebuyers. 

Soon the civil courts and consumer courts began to lose efficiency due the increasing number of cases that began to be filed. The pilling burden of unheard files was an alarming signal to have in place a special legislation that would cater to the grievances of the home buyers and provide them speedy resolution.

To take up the rising burden of civil courts and consumer courts, there was a dire need to have in place a central legislation specifically crafted to provide speedy relief to the homebuyers. It was on 1st May 2016 when Real Estate (Regulation and Development) Act (RERA), 2016 came into force. The primary emphasis of the RERA was to the interest of the homebuyers. Under the RERA the State Real Estate Regulatory Authority were constituted as government body to help homebuyers in redressing their grievances against the defaulting builders.

The RERA was successful in proving relief to the aggrieved homebuyers. Prior to the coming of RERA in force there was no penal action highlighted against the defaulting builder neither did he had to suffer any consequences for the delay in completion of the project. After the alignment of RERA in place there were proper remedies listed in favour of home buyers. In the Scenario where the builder delayed the completion of the project beyond the promised time span then he would be liable to reimburse the amount with interest taken as advance from the homebuyers. The rate of interest would be equivalent to the EMI being paid by the homebuyer to the bank.

The homebuyers were reaping satisfactory relief and remedy via the RERA. But over a period of time the relief mechanism under the RERA began to be complicated and time consuming. The RERA was well drafted and implemented but it was seen that it could not spread its wings the way it was thought. Inspite of being a detailed legislation numerous shortcomings came up during the implementation phase of the legislation. The lead time in seeking relief via RERA rose to approx. 5 to 8 years. It was a signal for having a legislation that could overcome the shortcomings of RERA and at the same time provide timely relief to the homebuyers.

It was in December 2016 that the Insolvency and Bankruptcy Code (IBC), 2016 was implemented and brought in force. The IBC was implemented for reorganization and revival of corporate persons, individual and Partnership firms. The sole objective of IBC was to have result oriented and time bound processes. IBC was the biggest economic reform in the history of India. The code had within its purview the robust roadmap to deal with the distressed business. The IBC made a powerful entry as in its entry phase it overruled and repealed the existing legislation. Prior to implementation of IBC India ranked 136 out of 189 BRICS nation thereby clearing portraying low ease of doing business. At the time of implementation of IBC the World Bank in its report stated that it takes approx. 4 years to windup a company in India and at the same time it takes around 5 to 6 years to recover a pending debt that is due since long. 

It would not be wrong to say that the IBC provided the biggest missing piece in the then existing jig saw of laws by establishing time bound processes for recovering pending debts. Today we can proudly say that India has an internationally comparable insolvency and bankruptcy framework. The IBC brought an altogether change in the debtor creditor relationship. Now the creditors are no longer required to approach the debtors for recovering the outstanding payments instead it’s the debtors who chase the creditors for repayment of debts to avoid recovery hassle. IBC can be categorized as a major economic reform that took place in the year 2016 in the corporate legislation.

Today the IBC has come a long way since its inception. The IBC has completed 3 years in the legal domain. In the 3 years journey the IBC has been amended thrice with the intent of strengthening the code and making it master piece legislation. Initially when the code was drafted and brought into execution in the year 2016 it was a bit liberal as a result of which the people at large began to file frivolous applications under the code without having gained a clear insight of the code. To curb such frivolous applications the code was amended in the year 2017 for the first time and through the amendment two new sections i.e. Section 29A and Section 235A were added in the code to reduce the filling of frivolous applications thereby saving the precious time of NCLT to resolve serious matters.

The scope and horizon of IBC is increasing day by day. Even after the amendments in the year 2017 there remained a need to amend the code to outline the intent of the code. The motive of the second amendment was to balance the interests of various stakeholders in the code, especially the interest of homebuyers and micro, small and medium enterprises. 

Through the second amendment the definition of financial debt as stated in section 5(8)(f) was amended to include explanation by which any amount raised from homebuyers under a real estate project would fall within the purview and have the commercial effect of borrowing and so the home buyers were granted the position of financial creditors under the IBC. The day of 6th June 2018 was a blessing and remarkable gift for homebuyers as on this day they were granted the status of financial creditors. 

The status of financial creditor was important as in the real estate projects; the money is raised from the homebuyers against the consideration for the time value of money. The NCLAT on 21st July 2017 in Nikhil Mehta and Sons (HUF) vs. AMR Infrastructure Ltd. had held that the amount raised by developers under assured return schemes has the commercial effect of a borrowingIt was observed by the insolvency law committee that delay in completion of flats/apartments had become a common phenomenon and that the amount raised from the homebuyers contributed significantly in the financing of the construction of such flats/apartments. 

The Supreme Court was always ready to safeguard the rights and interest of homebuyers under the code after seeing the homebuyers ongoing disadvantageous position. The supportive hand of Supreme Court has been observed in the recent cases like Chitra Sharma vs. Union of India and Bikram Chatterji vs. Union of India.

Therefore, it was important to clarify that the homebuyers are treated as financial creditors so that they may trigger the code under section 7 and have their rightful place in the committee of creditors when it comes to making important decisions as to the future of the real estate company, which is the execution of the real estate project in which such homebuyers are ultimately to be housed.

With the amendment the home buyers became more powerful as now they had multiple legislations in their favor aiding to fulfillment of their dream of owning a home/flat. The homebuyers have concurrent remedies under the Consumer protection Act, 1986, RERA and IBC. It is important to highlight that for the homebuyers remedies under RERA are additional and not exclusive remedies. The homebuyers need to note that the RERA is a special enactment dealing with real estate development projects. The provisions of RERA and IBC co-exist.

The classification of homebuyers as financial creditor though being a landmark decision was being heftily criticized by the real estate companies. This was because of the fact that now with this amendment in place the homebuyers will have more power against the real estate companies than they previously had. The legislature had understood and correctly appreciated the need of the homebuyers and thus the objects of the code are sub served by treating the homebuyers as financial creditors. Several petitions were then filed by homebuyers under the Code against the real estate developers. The homebuyers after attaining the status of financial creditor filed petition against big real estate developers like Jaypee Infratech Ltd., Amrapali group

Though the amendment was a big relief and a cause of happiness for the aggrieved homebuyers but the granted happiness did not last long. The real estate developers were of the view that the amendments made are excessive and disproportionate thereby being manifestly arbitrary. Writ petitions began to be filed by the builders/developers challenging the amendment vide which the homebuyers were granted the status of homebuyers. There were approx. 180 petitions filed in the high court in challenge to the legal and constitutional authenticity of the amendment in relation to classification of homebuyers as financial creditors.    

In the ongoing conflict of granting tag of financial creditor to home buyers, there arose questions on RERA vs. IBC. The developers contented that RERA looks after all possible difficulties of homebuyers. At first instance the aggrieved homebuyers can invoke the arbitration clause as contained in the buyer builder agreement for resolution of disputes with the real estate developers. The developers pleaded that insolvency laws and other laws should be harmoniously constructed. The harmony gets disrupted when the code is applied to cases which fall within the purview of RERA. It was highlighted that RERA is a special act as opposed to the Code, which is a general act.

Though RERA is a viable alternative for homebuyers but there are still many loopholes in terms of meaningful and result oriented remedies for homebuyers. Its been long that RERA has been in force but still one sided agreements by real estate developers are in practice to outcaste the relationship between homebuyer and real estate developer.  

It is significant to highlight that RERA has shut down the consumer forums. This is due to the fact that the consumer forums were unable to resolve the cases filed by the aggrieved homebuyers in time bound manner. Thereafter the National Consumer Disputes Redressal Commission decided that the Consumer Protection Act, 1986 was an additional remedy to the remedies provided under RERA. 

When a homebuyer approaches the NCLT after admission of the insolvency petition against the defaulting developer, then in such a scenario the homebuyer does not get his money recovered instantly instead the homebuyer has to stand in line and wait for resolution plan via which he receives the certain percentage of the money owed to him. In the event of winding up of the defaulting developer the homebuyers have to wait in que and accept whatever is available for distribution.

There are 5 stages at which it is open for the real estate developer to compromise with the homebuyer before the aggrieved homebuyer knocks the door under the code. The settlement can take place at the below mentioned stages:

  1. Stage of Section 7 itself before replies are filed by the real estate developers
  2. After NCLT issues notice based on section 7 application and before admission
  3. After the hearing and before the order admitting the matter
  4. Post admission and before formation of committee of creditors when NCLT and NCLAT may use their inherent powers to permit settlement.
  5. After formation of Committee of Creditors whereby settlement may be arrived under section 12A of the code  

The amendment of classifying the homebuyers as financial creditors though being a strong move in favour of homebuyer could be misused by the homebuyers. There may be scenarios after this amendment where the happy homebuyers may with malafide intend invoke the code to put undue pressure on the developers to refund the money paid as advance. Also, it would be wholly incorrect to drag a highly solvent real estate company in NCLT and then get it wound up under the code. It would be fatal situation for the real estate developers that one single homebuyer could destabilize the management of the developer. 

It was finally decided on 9th August 2019 in the matter of Pioneer Urban Land and Infrastructure Limited vs. Union of India and other petitions that the explanation added to section 5(8)(f) of the code which stated that “any amount raised as advance from homebuyer under a real estate project shall be deemed to be an amount having the commercial effect of borrowing ” is justifiable and was held to valid from legal point of view.

The amendment act was successful in clarifying doubts that had arisen as to whether homebuyers were subsumed within section 5(8)(f) had become buzzword and a topic of discussion. It was finally decided and clarified by the supreme court that the homebuyers are to be considered as financial creditors because the contribution of homebuyers in financing a real estate project is significant and it’s because of the financing made by the homebuyers that the project gets completed in timely manner. Post clarification of the ongoing query numerous directions were being made to the NCLT and NCLAT.

Now that the query related to the status of homebuyers has been lucratively resolved by the Supreme court, the homebuyers will no longer be duped by the real estate developers and will be able to fulfill the dream of owning a home.

 

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