Clarity needed in the conflict zone

Venket Rao

Past few years have not been fruitful for the real estate industry. While on the one hand slowdown turned massive projects into ghost towns, on the other liquidity-starved builders have been struggling to complete projects. Trust and credibility, too, have taken a severe beating with the number of litigations going up drastically.  

Though, reforms in the form of RERA, GST and demonetisation have resulted in more organised players entering the sector, the realty industry is still struggling to cope with legacy issues.

The controversial judgment

From the developers’ perspective, the recent SC judgment has surely sent shock waves. They fear that a perfectly good management, which has several projects on its hands, can either be removed or replaced at the instance of just one allottee with a meagre exposure of Rs 1,00,000.

From the perspective of buyers, there may be a risk of developers taking the cover of insolvency and the moratorium declared thereunder to avoid fulfilling their statutory obligations and obligations towards the allottees. 

Interpretation is the key

While gauging the impact of SC judgment, it becomes evident that much depends on the manner in which the courts and authorities will choose to interpret it. 

The SC has itself clarified that the provisions of the two legislations i.e IBC & RERA need to be read harmoniously, giving precedence to IBC over RERA only  in the event of a conflict. In fact, the Apex court has observed that there is little to no conflict between the two legislations as the two operate at different levels altogether. 

While the insolvency code operates at the company level, the focus of RERA regime is a real estate project. The provisions of the two statutes need to be construed harmoniously and not read in isolation.

The code provides for taking over the affairs of a company by a Resolution Professional and running it as a going concern. The Act, on the other hand, primarily deals with registration, disclosure of all relevant information to the allottees and timely completion of real estate projects. The regulatory authority must be allowed to exercise full control over projects as provided for under the Act even though the promoter company might be facing insolvency proceedings.

The object of the insolvency code is to keep the company running and eventually to revitalise it. The authority’s function is to protect the interests of the homebuyers and to facilitate the timely completion of projects which can’t come in the way of running the company. If anything, under RERA’s watchful eye, projects are more likely to see the light of the day bringing the company out of its financial woes.

 The regulatory authority, which is an arm of the State is under a mandate to promote  orderly and transparent growth of the real estate industry and protect the interest homebuyers, whereas a  Resolution Professional  is usually an independent professional certified and governed by  the Insolvency Board. 

Precedence to IBC can weaken RERA?

A blanket preference and precedence given to the Insolvency and Bankruptcy Code and the Resolution Professional appointed under it, over the Real Estate Act and the Real Estate Authority would considerably weaken the authority and it would be next to impossible for it to achieve its foremost tasks of protecting the consumers and timely completion of projects. 

A homebuyer who can make a prima facie case of default of just over Rs 1 lakh is now “empowered” to trigger insolvency proceedings against a company. All complaints filed before the regulatory authority against the company get stayed due to the provision of declaration of moratorium period. If the authority is further restrained from exercising its regulatory powers with respect to such company, it might just turn into a toothless tiger. 

Need for checks and balances

No doubt a strong and exceptional tool in the form of IBC is necessary to protect the interest of homebuyers, it will be better to allow some checks and balances to avoid its unscrupulous and opportunistic use. For example  for initiating CIRP (Corporate Insolvency Resolution Process) by the homebuyers  the consent of a minimum of 10 per cent of homebuyers across projects in a company or prior reference or prior consent from Real Estate Regulatory Authority should be made mandatory.

This judgment has come at a time when the authorities appointed across the states were just finding their feet after the initial teething troubles. If the judgment is misconstrued in a way that the regulatory authority’s powers get curtailed, then it would damage the earnest efforts being made by realty regulators all over the country for the growth and development of the real estate industry. 

If the law is seen in its correct perspective, even the Resolution Professional appointed by the National Company Law Tribunal after an insolvency petition is admitted would need to abide by the Real Estate Act and the rules and regulations framed thereunder. Any other interpretation threatens the very objective of the enactment of the Real Estate (Regulation and Development) Act.

— The writer is Founder & Managing Partner of  Intygrat Law Offices LLP Advisory (P) Ltd & Legal  Advisor to UPRERA (With inputs from Avi Pandey, Sr. Associate Partner, Intygrat)

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The context

The Supreme Court in its recent judgment in Pioneer Urban Land and Infrastructure Ltd. vs Union of India, has held that in the event of any clash or conflict between the Real Estate (Regulation and Development) Act, 2016 and the Insolvency and Bankruptcy Code, 2016, the latter would prevail. This has put to an end, at least for the time being, the uncertainty that was looming over the simultaneous operation of the two landmark legislations and the possibility of conflict and contradiction between the two. 

SC further observed that the remedies that are given to allottees of flats or apartments were concurrent remedies and such allottees were in a position to avail of remedies under the Consumer Protection Act, 1986, Real Estate (Regulation and Development) Act, 2016 as well as the triggering of insolvency proceedings under  the Insolvency and Bankruptcy Code. 

Moreover, the Apex court upheld the constitutional validity of the  amendment to the Code whereby homebuyers were granted the status of financial creditors entitling them to be a part of the committee of creditors which was under challenge in the matter. However, it was clarified that insolvency can only be triggered by a genuine homebuyer and not by a speculative investor. This was one of the safeguards to protect the interests of the developers.