Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. (Suprme Court)

Homebuyers’ Rights as Financial Creditors under IBC upheld by Supreme Court

A Major Win for Homebuyers!

The August 9 verdict of the Supreme Court, validating the amendment in the Insolvency and Bankruptcy Code (IBC), conferring the rights of financial creditors on homebuyers, is a landmark judgment which will go a long way. 

The validation of the amendment by the Apex Court has undoubtedly brought relief to lakhs of disgruntled homebuyers who are and were immensely troubled by delayed possession or incomplete projects. 

The Case!

The amendment of IBC in regards to the status of homebuyers being treated as financial creditor was introduced in August, 2018. In reaction to this, more than 180 real estate companies filed petitions challenging the constitutional validity of the inclusion under Section 5 (8) (f) of the IBC. 

The need of such an amendment was felt for a long time as the homebuyers were being duped by fraudulent companies that swindled the funds, cheated them and never delivered the promised property. 

Also Read- Analysis of Pioneer Judgment on constitutional validity of status of allottees as financial creditors

The Verdict!

A three-judge bench headed by Justice R F Nariman, Sanjiv Khanna and Surya Kant,  not only upheld the constitutional validity of the amendments of Section 5 (8) (f) of the IBC but also stressed that it “does not infringe” in anyway upon the rights of real estate developers and cannot be labeled as “arbitrary” or “discriminatory”.

Justifying the verdict the three-judges bench very categorically stated, “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 in 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.”  

Benefits for Homebuyers!

Additional platform to highlight their grievances: This judgment’s biggest benefit for homebuyers is that it has been awarded an additional tool under which he can initiate legal action against home builder.  

Now an aggrieved homebuyer can seek legal action against building contractor under any of the three laws:  Real Estate (Regulation and Development) Act (RERA), Consumer Protection Act and IBC. 

A seat in the Committee of Creditors (CoC): The newly acquired status of the homebuyers as financial creditors bestows on them the right to be part of the CoC. This step will surely go a long way in helping them to ensure their rights and interests as they will be treated at par with other stakeholders. Till now only the Banks and Institutional Creditors were given the privilege of being financial creditors in proceedings under the IBC. 

Can initiate action under Section 7 of IBC: The verdict by the Supreme Court has basically widened the scope of IBC by introducing Section 5 (8) (f). This section gives an exclusive inclusiveness to the disgruntled homebuyers who have been taken for granted by unscrupulous builders, who delayed the projects limitlessly or never delivered them.  

The apex court has safeguarded the rights of homebuyers in a scenario where the process of recovering dues from bankrupt or insolvent real estate companies is taken up. 

Apex Court’s Clarification on Various Provisions!

On Constitutional Legality:

The basic plea by the real estate companies through various writ petitions in the Supreme Court was to challenge the constitutional legality of Section 5 (8) (f) on the argument that the amendments to the IBC amounted to duplication as the home buyers already had remedies under RERA Act India.

The constitutional legality was established by the Bench and it clarified that, “not all forward sale or purchase are financial transactions, but if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f). Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8).”

Another point that was highlighted by the Apex Court was that the homebuyers gave huge amounts of money as advance payments to the builders towards the purchase but very often it was not delivered on time, causing great financial loss and mental trauma. 

The Bench went on to observe that, “The general practice is that these contracts are structured unilaterally by construction companies with little or no say of the home buyers. A denial of the right of a class of creditors based on technicalities within a contract that such creditor may not have had the power to negotiate, may not be aligned with the spirit of the Code.

RERA V/S Consumer Act V/S  IBC:

As consumers the homebuyers can avail any of the three available options: RERA Act, India, IBC or the Consumer Act. Especially in relation to all the remedies available, the Court specified that, “The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.”

Furthermore, making its stand clear on RERA it said, “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.”

The bench further pronounced that only genuine homebuyers can invoke insolvency proceedings and take legal action against a builder. The Apex Court has asked the Centre to file an affidavit taking corrective measures in this regard. 

Apex Court on Future Actions!

Taking the verdict further towards its practical applicability the Supreme Court has directed the Centre to fill up vacancies in the National Company Law Tribunal and Appellate Tribunal so that they are adept in handling the rising number of cases filed against erring companies under IBC.

In a clear cut missive the Bench order says, We direct that in those States in which the needful has not been done, in that, only interim or no adjudicating officer/Real Estate Regulatory Authority and/or Appellate Tribunal have been appointed/established, such States/Union Territories are directed to appoint permanent adjudicating officers, a Real Estate Regulatory Authority and Appellate Tribunal within a period of three months from the date of this judgment.”

The top Court has also instructed the Chief Secretaries of the States and Union Territories to file compliance affidavit within three months.

In addition to this, the Bench has directed that the stay orders that have been granted by it shall continue and the NCLT will take up each application filed by an allottee/ homebuyer, and accordingly take decision on the same in light of this judgment.

Conclusion

The Supreme Court’s judgment in favour of homebuyers has brought hapiness in the community which is hugely tortured by the unscrupulous builders. This positive step hopefully will bring defaulters to book and also ensure that it works as a strong deterrent for the real estate companies in the future.

The aggrieved homebuyers were forced to sign one-sided agreements which did not safeguard their rights in any manner and the advance payments given by them were misused and redirected elsewhere. They were left to despair as their hard earned money was locked up in incomplete projects or delayed projects. The double whammy faced by them was that on the one hand they stay in rented apartments and paid for it and on the other they took loans from banks and paid EMIs for the apartment they had booked. Non delivery or delayed projects caused acute financial burden on them and therefore, to get an effective legal tool in the form of IBC is very welcome. 

The verdict has surely bought a much needed relief to the distressed homebuyers who have been duped, deceived and fooled by many fraudulent companies. These individuals are now empowered to take legal action against building contractor through the provisions of IBC.  The industry has come up with a very guarded response at the moment and this is natural as many big companies had filed the writ application in hopes that homebuyers shall be kept out of the entire process. 

The outcome of this landmark judgment is that the Apex Court has emphatically backed the rights of homebuyers who have substantial stakes in the real estate companies. Any wrongdoing by the builders or companies which keep the homebuyers future prospects in jeopardy by not delivering on time will see legal repercussions. 

The motive of such regulations are straight and simple; follow rules and be accountable for your actions and keep your company safe!

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