Inclusion of Real Estate Allottees under IBC

Manprit Singh*

Introduction

With the introduction of the Insolvency and Bankruptcy Code in 2016, the resolution of disputes related to repayment to creditors took a new turn. The question, however, which remained unaddressed was whether the payment by real estate allottees would lie in this Code. After initial hesitance, IBC was amended to cover real estate cases as well. This article expands on the application of IBC upon real estate industry and the laws governing the same.

Enacted in 2016, the Insolvency and Bankruptcy Code (“IBC”) provides resolution to the repayment of debt to two classes of creditors: financial creditors and operational creditors. The classification of the two classes stems from the source of and the nature of the debt obtained. A financial creditor would involve a person or entity that is financing an entity with cash or other monetary support. Whereas, an operational creditor entail providing a debt via granting a service or operational support.

The question of law arising out of here is: Whether people who have been allotted flats/real estate by a realtor would come under the definition of either?

Analysis

A cursory look at the legal point of view would make one understand that real estate allottees would not qualify to be operational creditors as they do not provide a service to the real estate company. Therefore, the next best option is to analyse the position of real estate allottees as financial creditors.

Under the Real Estate (Regulation and Development) Act of 2016, (“RERA”) an ‘allottee’ has been defined as “any person to whom an apartment or plot in a real estate project has been allotted or sold.” If we go into the fundamentals of the relationship between an allottee and the real estate developer, we will find that the payment for the sale of the apartment/plot is made usually in parts. One part of the payment – also known as advance – is paid at the initial stage of the contract. The rest of the amount is paid via loan arrangements or in full amount. The amount paid as advance or booking amount of an ongoing real estate project is used in part towards the completion of the ongoing project. Hence, in one way, the allottees are financing the project or at least a part of it.

Therefore, a case can be made for allottees to be classified as a financial creditor. In fact, the Supreme Court in the Pioneer Urban Land and Infrastructure Ltd. v. Union of India case applied the same rationale for upholding the rights of allottees to move against developers under IBC.

2nd Amendment Act, 2018

The amendment in 2018 brought real estate under the ambit of IBC. Under the definition of financial debt, an explanation was added: “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”. Further, the terms ‘allottee’ and ‘real estate project’ were given the same meaning as RERA Act.

The amendment to IBC was challenged in the Supreme Court of India by hundreds of real estate developers. Finally, in the case of Pioneer Urban Land and Infrastructure Limited vs. Union of India, Apex Court upheld the validity of the amendments and ruled in favour of the Union of India and emphasised that the amounts raised from home buyers contribute significantly to the financing of the construction of flats/apartments in a project. The court also clarified that home buys could not constitute operational creditors.

While the case, clarified on the stand with respect to the application of IBC to real estate projects, it did not rule upon the number of allottees who can petition or the minimum amount that must be involved for each project.

Amendment Act 2020

Following the Supreme Court’s ruling upholding the constitutionality of provisions regarding real estate under IBC, the government introduced a further amendment with respect to the above. Through an amendment in 2020, a proviso was added in Section 7 of the IBC clarifying  the resolution process for home-buyers.

It said that for initiating CIRP in against a real estate project, the following condition must be met:

• It must be filed jointly by at least one hundred  allottees under the same real estate project, or

• It must be filed jointly by at least ten percent of the total number of allottees under the same real estate project, whichever is less.

Thus, putting a numerical threshold to the case for home-buyers under the Insolvency Code.

Real Estate under IBC: Key Issue

The trinity of Consumer Protection Act, RERA and IBC: Under RERA, a complaint can be filed against the developer for delays, false representations, unfair practices, irregularities and non-compliances. Significant breaches can lead to revocation of registration, or transfer of the project to a competent authority or a new promoter. Similarly, under IBC buyers can file applications before the NCLT against defaulting developers to initiate a resolution process. Furthermore, Consumer forum also has the authority to entertain complaints of the homebuyers if they qualify under the definition of ‘consumer’ under the Consumer Protection Act, 1986 (which has been repealed by the Consumer Protection Act, 2019). This overlap of different laws creates multiple redressal systems and thus adds to the confusion.

The conundrum of redressal mechanisms under RERA and Consumer Protection Act was clarified by the Supreme Court in Imperial Structures Limited v. Surinder Anil Patni and Another. The Supreme Court held that the RERA does not bar the jurisdiction of the Consumer Protection Act to deal with the complaints filed by consumers who are homebuyers or allottees of real estate projects registered under RERA. It further held that the provisions of Section 71(1) of the RERA Act gives a choice to the allottees, whether they want to initiate appropriate proceedings under the CP Act or file an application under the RERA. Furthermore, in the Pioneer judgment the Supreme Court acknowledged the existence of remedies under the RERA and held that these remedies, along with those available under the Consumer Protection Act, 1986 were concurrent with remedies under the IBC.

It is interesting to note that during the liquidation process under IBC, section 14 of the code provides for moratorium. The purpose of the section is to prohibit the institution of suits or continuation of pending suits or proceeding against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority. However, the Supreme Court failed to acknowledge the inherent flaw of parallel litigation in both of the above mentioned judgments.

Centre and State Domain: While RERA is a state enacted law with state ruled authorities adjudicating over the matters, IBC is centrally enacted wherein the matters are adjudicated by Tribunals. Since land comes under the state list and RERA is a legislation enacted specifically to govern and resolve real estate issues, bringing an insolvency angle might end up diluting the RERA. The speculation here could further be enlarged realising that the highest appellant authority under IBC is Supreme Court while under RERA there is still incoherence with respect to involvement of the High Court or Apex Court.

Unsecured Creditors: Within the class of financial creditors, there are secured creditors and unsecured creditors. It is unclear whether home-buyers are secured or unsecured creditors, as while they have not taken anything as a security for the amount they have advanced to the developer, but they do have the deed of registration for the flat/plot allotted to them. Therefore, the position remains unclear. Under the Code, secured creditors are higher up on the priority list for repayment than the unsecured ones. Further, during the CIRP, more of the creditors can present and join the claims for the resolution proceedings. A secured creditor is given priority over the others, then it is followed by payment of employee wages, and then payment to all the unsecured creditors.

A class within a class: The constitutional validity of the distinction between operational and financial creditors have been challenged several times (whether be it in Swiss Ribbons case or the popular case of The Essar Steel Judgment) and the Apex Court has ruled that the provision is not discriminating. However, there have been demands that forming a numerical threshold for real estate allottees while already having a numerical threshold of default of Rs. 1 crore is unfair and discriminatory. Thereby, forming a class within a class.

Conclusion

As a specialised legislation, IBC aims to target the resolution of debt by corporate defaulters. The process under IBC is simple, easy and codified. By bringing the property of real estate under the IBC there is an attempt to resolve the issues faced by home-buyers in a quick and centralised manner. The application of IBC in addition to state-enforced RERA, as well as consumer protection laws, echoes a triple resolution to the same issue. Nevertheless, IBC trumps the other legislations and unofficially overrides the others.

*Manprit Singh is a fifth-year student at Symbiosis Law School, Noida.