Key takeaways from 2 honourable Supreme Court judgments of 1) Amarpali & 2) Pioneer as pronounced on 23rd July 2019 & 9th Aug 2019 respectively for Real Estate Stakeholders
The striking down of Article 370 by our honourable PM and HM at unprecedented speed has similar parallel in honourable Supreme Court also in last fortnight. The speedy disposal of 2 landmark judgments under IBC is an eye opener for whole Real Estate Industry. Earlier the nexus of politicians, bureaucrats, bankers with Real estate developers especially in NOIDA/Greater NOIDA, who were of firm, believe that they can take on ride HOME BUYER are seeing the stars in daylight. After these judgments Real Estate Developer might be feeling that laws of land is above all & they committed the blunder by treating the HOME BUYER as their slaves rather than kings on whose dynasty they were prospering. Now let’s see the big takeaways from these 2 judgments for each stakeholder –
1. For Real Estate Developers :-
1.1. It is the moral responsibility to hand over the homes to buyer from whom you have taken the money otherwise ghost of RERA,IBC, Consumer Court etc shall catch you & either throw you out of the business or make you to handover projects as per law. Any biased builder-buyer agreement shall not come to your rescue.
1.2. NBCC or Similar organizations/associations are there to complete the Projects & your monopoly no longer exists in your projects built with Home Buyer’s money.
1.3. Any diversion of funds shall be detected by forensic auditors and unfurl the curtain for courts. Consequently or otherwise Enforcement Directorate (ED), I-Tax etc are there to investigate money divergent trail including money laundering and recover from your personal properties or put you behind bar also for criminal offences.
1.4. Courts can go to the extent of appointing receiver also to whom all rights shall be transferred. He shall be empowered to sell your personal properties also without your consent.
1.5. Statutory authorities who collided with you shall also be over ridden and directed to do the registries for home buyers even if you haven’t paid your statutory dues to them.
1.6. The IBC amendment act dated 17th Aug 2018 which empowers home buyer as Financial Creditor u/s 5(8)(f) does not infringe Articles 14, 19(1)(g) read with Article 19(6) or 300-A of the Constitution of India as pleaded vehemently before honourable Supreme Court.
1.7. However there is one big solace whereas honourable Supreme Court vide para 50 of the order (Pioneer’s case) has addressed some of the genuine grievances of the real estate developers and expect NCLT to consider the followings before admitting sec 7 application from them :-
1.7.1. Whether the allottee himself has been a defaulter in his payments ;
1.7.2. Looking at the agreements as well as applicable RERA Rules and Regulations, whether the Allottee is entitled to any refund or compensation ;
1.7.3. Whether the insolvency process has been initiated fraudulently, with malicious intent, or for any other reason other than the resolution of the insolvency ;
1.7.4. Whether the allottee is a speculative investor and not a person who is genuinely interested in purchasing a flat/ apartment ;
1.7.5. Whether in a falling real estate market such as the present, the allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/ apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it.
All these are indicative only and present practice of passing admission order by NCLT on every delay treating them as default as per sec 3(12) of IBC 2016 without going deep in to it shall be halted. Now onwards every application by Home buyers needs to be presented with full facts also. Here it is pertinent to note that it shall become mandatory for NCLT to adhere time line of 14 days as per IBC amendment brought w.e.f 6th Aug 2019 u/s 9 (5) for admission of application u/s 7 from Home Buyers.
2. For Statutory Authorities
2.1. This time honourable court restricted itself for not punishing the government officers but warning to them is very loud & clear. They have simply been directed to complete all stalled projects as per RERA and no more fraud with home buyers.
2.2. The courts have come out very heavily on auditors also & directed the ICAI to take disciplinary action against them for colliding with Real Estate Developer for foregoing there statutory duties of True & Fair reporting. The day isn’t far off when moneys may be recovered in proportion of loss from CA’s. But here it is pertinent to note that same irregularities have been unearthed by another auditor and helped court to understand the truth behind this.
2.3. All states where permanent ‘Adjudicating Officer’, a ‘Real Estate Regulatory Authority’ or ‘Appellate Tribunal’ had not been appointed; the same must be done within 3 months from the date of the judgment.
2.4. NCLT and NCLAT must be manned by sufficient members to deal with litigations under the IBC and especially with respect to the Real Estate Sector in particular.
2.5. NCLT to hear all cases in light of this judgment and the stay orders passed by this Court would operate until the NCLT takes up the insolvency applications.
2.6. There is no mandatory period of 14 days within which the NCLT is to decide the insolvency application.
3. For Homebuyers
3.1. You (Allottees) aren’t helpless & slaves of Real estate developers to whom you have given your life time’s saving for a dream house. Courts & Modi Govt is with you and you will get your dream home as per law.
3.2. You are financial creditor in terms of sec 5(8) (f) of IBC 2016 and have priority in payment as per sec 53 and full right to vote. The explanation and deeming fiction added by the Amendment act was only clarificatory in nature and further strengthened your stand. Further as per as per IBC amendment brought w.e.f 6th Aug 2019 u/s 25A, by insertion of new sub cause 3A, the absenteeism in voting is going to be fatal. In other words Voting responsibilities have also been casted along with right of being a Financial Creditor.
3.3. Remedies to the Allottees under various statutes such as the RERA, the Consumer protection act, and the IBC 2016 are concurrent subject to IBC 2016 shall prevail over all in case of conflict.
Conclusion:- The honourable SC has come out with the unprecedented judgments to end the ills of Real Estate sector. However the time will test its results. The pertinent questions remained to be answered are as follows:-
1. First, an allottee would need to prima facie show a default by the real estate developer and for that purpose, he would need to refer to the Agreement to Sell as well as the information as registered with the RERA. The information registered with RERA in fact is to be used as the information provided by ‘Information Utilities’ similar to cases alleging default by other financial creditors. This issue may seem innocuous at first, however, what would be very interesting to see is whether for a project which was earlier delayed and therefore presumably there was a default, would still fall within the same parameters once a new date for possession has been agreed to by the RERA authorities since all continuing projects were required to be registered with them.
2. In case of Amarpali, there are no timelines laid down for NBCC to complete the projects yet. Nearly 42,000 homes are to be handed over requiring additional funding of Rs 7,714.71 Crores. Will the land sale etc of group companies be able to generate funds? What will happen for projects other than Amarpali where no fund generation is possible or NBCC like entity isn’t willing to work at 8% Management Fees.
3. Buyers have been asked to deposit balance payments due in a separate escrow account. Will this be enough to finish the projects, apparently not?
4. The court order in case of Amarpali says that unsold inventory can be sold and money realized. But in those cases where construction hasn’t started or at initial stages, inventory has no value.
5. How the bank loans against Land where construction yet to be started and real estate developers is in red shall ever be started.
6. Once registration is cancelled under RERA, RERA authorities are empowered to exercise power under section 8 of The Real Estate (Regulation & Development) Act, 2016 for completion of the project through buyer’s association or otherwise. Will RERA be active enough to take such measure?
7. How the tripartite agreement between (i) Statutory Authorities, (ii) home buyer, and (iii) the Court Receiver on behalf of the developer shall work without stated timelines. However the occupation certificate (part or full) shall be issued by the statutory authorities without non-payment of dues by the real estate developer.
Brief of Author: – Manoj Kumar Anand is Delhi based Chartered Accountant and Insolvency Professional and involved in around 10 assignments as IRP/RP/Liquidator/Process Advisor under IBC 2016. He has co-authored a book on Valuation also and is founder President of `AIIPA’ an association of Insolvency Professional. He can be contacted at 9811280787 or [email protected]