SC upholds status of homebuyers as financial creditors

In a big setback for real estate developers, the Supreme Court on Friday upheld the amendments made to the Insolvency and Bankruptcy Code (IBC) that classified homebuyers as financial creditors. Holding that the Real Estate Regulation and Development Act (RERA) is to be read harmoniously with the IBC, a three-judge Bench led by Justice Rohinton Fali Nariman said while the two pieces of legislation must co-exist, “in the event of a clash, RERA must give way to the Code”.

“Remedies that are given to allottees of flats or apartments are therefore concurrent remedies… such allottees of flats or apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code,” the Bench said.

Last year, the government amended the IBC to include homebuyers as financial creditors with the ability to sit in the meetings of the committee of creditors (CoC) and have voting rights when it came to choosing a resolution plan. This was affirmed in a judgment by the National Company Law Appellate Tribunal (NCLAT), which held that amounts raised by developers under the assured return schemes had the “commercial effect of a borrowing”, and thus homebuyers would be financial creditors.

Developers and builders had challenged the government's decision as well as the NCLAT ruling, pleading it could lead to a situation wherein companies that had completed their projects on time and were in every way compliant with the law could be “jeopardised” by insolvency applications moved by individual homebuyers.

This would then mean that “a perfectly good management which has several projects on its hands can be removed at the instance of one allottee and either replaced – in which case the massive funds infused by the developer himself would be set at naught”, developers said in their arguments.

“Worse still, (the insolvency application would) lead to commercial death, in that, if there are no resolution plans or all resolution plans are rejected either by the committee of creditors or by the authorities under the Code, a perfectly solvent firm would then be wound up, which would not be in the interest of anybody,” they said.

The plea was, however, rejected by the court, which said the onus of proving that some allottees of flats and apartments were using the code just to blackmail them lay on them once the case was admitted in the NCLT.