Where do Developers go from here under the IBC - Pioneer Judgment by the Supreme Court

Bar & Bench August 10 2019
Supreme Court, Vaibhav Gaggar

Vaibhav Gaggar

The judgment delivered by the Hon’ble Supreme Court of India in the Pioneer case, (popularly known as the flat buyers case) under the Insolvency & Bankruptcy Code (IBC) has settled a huge challenge mounted by the developers against the amendments brought about to the IBC by virtue of which allottees of real estate projects were deemed to be ‘Financial Creditors under’ the IBC.

The Court while dismissing a large number writ petitions filed by the developers upheld the constitutional validity of the August 17, 2018 amendment by virtue of which ‘Allottees’ were brought within the ambit of Financial Creditors and further held as under  :

  1. The amendment act does not infringe Articles 14, 19(1)(g) read with Article 19(6)  or 300-A of the Constitution of India.
  2. Remedies to the Allottees under various statutes such as the RERA, the Consumer protection act, and the IBA are concurrent.
  3. In case of conflict between the RERA and the IBC, the IBC would prevail.
  4. Allottees were always subsumed within the definition of section 5(8)(f) and the explanation and deeming fiction added by the Amendment act was only clarificatory in nature.

The Court further went on to direct :

  1. 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. 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. 
  3. 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.
  4. There is no mandatory period of 14 days within which the NCLT is to decide the insolvency application.

Looking at the aforesaid it appears like a clear knock out punch for the Real Estate developers and a massive victory for the consumers at large. Having said that, according to the author, though all the legal and constitutional contentions of the Petitioners have been dismissed, in fact the Court has done a great balancing act which would go a long way to address some of the genuine grievances of the real estate developers and how they were being dealt with by the NCLT in such adjudications prior to this judgment.  For instance, prior to this judgment the NCLTs invariably held that once it was shown by the allottee that there was a delay in the project, that was the end-all and be-all and they did not have the right to even determine whether there was a genuine default or breach by the allottee since disputes could not be looked into. Now, however, the developers would be entitled to raise certain defences and the NCLT would be required to address the same. For instance :

  • First, an allottee would need to prima facie show a default by the 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. 

The aforesaid 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. 

Further, for the purpose of determining default, the NCLT would also need to determine  (if the issues are raised appropriately by the developers) :

  • Whether the allottee himself has been a defaulter in his payments ;
  • looking at the agreements as well as applicable RERA Rules and Regulations, whether the Allottee is entitled to any refund or compensation ;
  • whether the insolvency process has been initiated fraudulently, with malicious intent, or for any other reason other than the resolution of the insolvency ;
  • whether the allottee is a speculative investor and not a person who is genuinely interested in purchasing a flat/ apartment ;
  • 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.  

As can be seen above, a number of defenses now open up for the developers and in some ways indirectly brings the concept of dispute within the ambit of the proceedings, something that was not envisaged in the strict sense for financial creditors and was certainly not being looked into by the NCLTs at large. Clearly now it's not going to be a straightforward cakewalk for all the allottees en masse and a filtration process to determine genuine cases has been read into the entire process. A number of developers would also heave a sigh of relief as at least now they have a fair chance of putting forth their defense.

Vaibhav Gaggar is a Partner at the law firm, Gaggar & Partners

Read Judgment:

SC - IBC Homebuyers Judgment - August 2019

 

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