HOMEBUYERS V. DEVELOPERS: A LIGHT AT THE END OF THE ROAD?

Certain grievances have been plaguing both, homebuyers and developers, ever since the Insolvency and Bankruptcy (Amendment) Ordinance, 2019 (“Ordinance”) was notified on 28.12.2019. One side highlights the grievances faced by homebuyers, now exacerbated by the Ordinance. The other highlights some very real fears faced by developers in as much as pre-Ordinance; even a single trigger happy homebuyer could have initiated Corporate Insolvency Resolution Process (“CIRP”) against a developer. The present article will collate a list of comprehensive yet succinct grievances faced by both sides and how a viable solution can be reached so as to satisfy both, the homebuyers and the developers.

The Ordinance amends certain provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”) relating to homebuyers whereby (i) 100 homebuyers or 10% of total allottees have to jointly file an application for initiation of CIRP against a developer, (ii) for the petitions that already have been filed and not yet admitted, the requirement would have to be fulfilled and the petitions amended within a period of 30 days failing which they would be dismissed as withdrawn. At least at this stage, in writ petitions filed by homebuyers and the Association of Karvy Investors challenging the validity of the Ordinance, the Hon’ble Supreme Court has directed that status quo be maintained with regard to the petitions already pending before the National Company Law Tribunals (“NCLT”). The constitutional validity of the Ordinance is to be scrutinized by the Hon’ble Supreme Court in these petitions. However, the Order granting status quo says nothing about any fresh petitions to be filed therefore, as of the notification of the Ordinance; it will be neigh impossible for homebuyers to file an appropriate petition against developers due to the compliances involved.

ORDINANCE A ROADBLOCK TO HOMEBUYER IBC ACCESS

As the first half of the argument, the grievances faced by homebuyers under the Code and the Ordinance can be stated as under:

1.      Putting aside the status quo ordered by the Hon’ble Supreme Court for a moment, the Ordinance amendment prescribes that all petitions would have to be modified within 30 days to comply with the requirement of minimum number of allottees otherwise the petitions would be dismissed as withdrawn. This would include petitions that have reached the final stages of adjudication and also those matters which are reserved for orders post hearings. The result would be that the Ordinance would cause an utter waste of the valuable judicial time and litigant’s efforts & money, fed behind the litigation in all the petitions that have been filed up till the Ordinance.

2.      The Ordinance acts directly against the judgment passed by the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. wherein the constitutional validity of the August 2018 amendment in the Code has been upheld. It is vide this amendment that ‘allottees’ were clarified as within the ambit of Financial Creditors. It may be worth noting that in the course of the hearing of this matter, the developers had raised the contention that a threshold of a minimum number of allottees is made mandatory for initiation of CIRP against a developer and had prayed for minimum 2/3 of total allottees as the requirement. However, such submission had been rejected by the Hon’ble Supreme Court. Today, the Ordinance seems appears to be working exactly counter to the decision of the Court.

3.      Another practical grievance faced by the homebuyers will be that how would they even find the necessary information regarding other allottees so as to fulfill the requirement of having 100 allottees or 10% of total allottees. A majority of the projects against who petitions for initiation of CIRP has been filed are under-construction projects. There is no mechanism for the average homebuyer to get the relevant data about other allottees in a project at all. Thus, such a requirement of having a particular minimum number allottees to file a petition will necessarily block homebuyers’ access to the NCLT against developers.

4.      The effect of the Ordinance is also that it saddles homebuyers with an additional requirement. This is in sharp contrast to other financial creditors who have no such requirement over their heads. This contrast would be completely against the law and jurisprudence that has evolved under Insolvency and Bankruptcy law in India since it creates a separate class within a class of creditors. It is trite law that all members of a particular class of creditors are to be treated alike. In this background, the requirement for only homebuyers from within all financial creditors to fulfill additional criteria clearly discriminates against them. The amendment in the Ordinance would also be in violation of the test of manifest arbitrariness.

5.      The Insolvency and Bankruptcy Code is a beneficial piece of legislation. But the Ordinance rather than barring homebuyers from misusing the Code, it appears to bar homebuyers from using the Code altogether. While it is true that homebuyers have other avenues to approach like the Consumer Court and the authority under RERA Act, tangible results through these forums are few and far between.

THE DREAD OF A TRIGGER HAPPY HOMEBUYER

On the flip side of the coin, developers’ apprehensions have been steadily growing since the amendment in 2018 whereby homebuyers were confirmed as financial creditors. I say confirmed because the judgment in Pioneer (supra) clarified that homebuyers were always financial creditors; this judgment in itself was seen as a massive victory for allottees at large. This is despite the fact that the Pioneer judgment also granted a number of defenses to developers against homebuyers including that (i) developers could prove that a petitioner homebuyer is himself a defaulter, or (ii) the CIRP has been invoked fraudulently, or with malicious intent or for any purpose other than resolution, or (iii) the homebuyer who has filed the petition is, in fact, a speculative investor and not a legitimate buyer having invested his life earnings (iv) the developer could prove that the homebuyer does not want to go ahead with his obligation to take possession and really wants to jump ship and coercively get back his monies. Even if such defenses available to developers, their apprehensions that a trigger happy homebuyer would be able to ignite the process of corporate insolvency resolution against developers or that homebuyers could misuse their position as financial creditors, were not allayed. They say there is no smoke without fire, and it is true that pre-Ordinance, even a single homebuyer could malafide withdraw from an otherwise healthy project by the threat of initiating CIRP against a developer. The concerns had heightened so much so that the national body for developers, CREDAI (Confederation of Real Estate Developers’ Association of India), wrote to the Prime Minister’s office after the Pioneer judgment, praying for appropriate amendments in the Code. The result seems to come through the Ordinance, which rather than bar any potential misuse of the Code by homebuyers would bar any relief under the Code altogether.

 THE WAY FORWARD

In the IBC Round Table Conference 2020 conducted by Mumbai law firm, The Law Point, the controversy as regards the Ordinance was discussed by a group including General Counsels of large real estate division companies, experienced litigation advocates conversant with the practical difficulties faced in such matters, Resolution Professionals and the MahaRERA Chairman Mr. Gautam Chatterjee.

The discussion fructified in the conclusion that there is a need of a practical meld between the provisions of the Code and the Real Estate (Regulation and Development) Act, 2016 (“RERA”) or a harmonious construction as stated in the Pioneer judgment. This meld would really take advantage of the process of initiation of CIRP against a developer, without the risks of malafide proceedings. It was proposed that RERA can be made a part of the process of resolution under IBC when even a single homebuyer approaches the Adjudicating Authority against a developer. A mechanism can be developed where a technical report is called for from the authority under RERA on the practical revival feasibility of the project of the developer against whom CIRP is sought to be initiated. A specific time limit may be dedicated to this purpose and only after analyzing the report received from the authority under RERA, should the NCLT take any step in that regard. If there is scope for the project to the revived then the entire proceedings could be completed by the Regulatory Authority in association with the NCLT under the Code. This would overcome a significant flaw under RERA that the authority therein is unable to enforce its orders. Only when the project is completely unviable, should the CIRP process as we know it, be continued against the Developer.

This change in the law would effectively protect developers against any and all trigger happy homebuyers, while at the same time, keeping the gates of the NCLT open for homebuyers. Such a resolution between the provisions of the two Acts would even make the Ordinance amendment unnecessary. In the interregnum, similar to the provisions of the dealing with the resolution process against personal guarantors to corporate debtors, an interim or partial moratorium process could be brought in to safeguard the enterprise value of the developer project so that the same is not eroded by any party.

In addition to the above, Mr. Chatterjee’s view was that on the RERA front, financial institutions who have given loans or guarantees, i.e. financial creditors of a developer can be made a part of the RERA framework in order to resolve a stressed building project in conjunction with RERA. One of the major flaws in the RERA is that, unlike under the Code, it does not recognize Financial Creditors as a stakeholder. Financial Creditors obviously form a major part as they fund the project by way of Bank Guarantees, loans, and other such agreements which can create an underlying interest in the land or other assets that form the fundamental cornerstones of the project. The assistance of financial creditors would be pivotal in finding a new developer in taking over an abandoned project. It was also indicated by Mr. Chatterjee that meetings with bodies of Resolution Professionals have already taken place so that their involvement can be increased in the processes before RERA. Even in the interim moratorium, if applied, Resolution Professionals would prove invaluable in the functioning of the project till the time another developer is found in the RERA process or through a Resolution Applicant under the Code.

It may be noted that the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) has endorsed the view that the NCLT before admitting a case can find out whether the application has been filed by a trigger happy allottee, in Navin Raheja vs. Shilpa Jain and Ors. in Company Appeal (AT) No.864 of 2019. This would tie in with the mechanism of calling for a report from RERA as to the feasibility of a project and the rationale behind a homebuyer approaching the NCLT. In this matter, the NCLAT has taken cognizance of the fact that a number of times, petitions by homebuyers are in fact by speculative investors who want to get out of a project.

To conclude, the mechanism as proposed by the IBC Round Table Conference 2020 would ensure that such speculative buyers are weeded out, which would also be in favour of genuine homebuyers approaching the NCLT. At the same time, this mechanism would not excessively hamper a homebuyer’s rights to approach the NCLT against a developer as the Ordinance risks doing.