SC comes to homebuyers’ aid, approves their status as financial creditors

A bench headed by justice Rohinton Fali Nariman upheld the amendment that treats homebuyers as financial creditors. The bench said the Real Estate (Regulation and Development) Act, or Rera, has to be read “harmoniously with the Consumer Protection Act and IBC" and, in case of any conflict, IBC will prevail.

This means that an aggrieved homebuyer has the option to seek relief under three laws—Rera, Consumer Protection Act and IBC.

The apex court verdict empowers homebuyers to initiate bankruptcy proceedings against a developer by expanding the scope of the IBC, treating them on a par with banks and institutional creditors, besides protecting their rights.

Over 180 batch petitions were filed before the Supreme Court by real estate firms earlier this year, challenging the amendment to the IBC. All have been disposed of with this order.

The ruling implies that a homebuyer can now start corporate insolvency resolution proceedings before the National Company Law Tribunal (NCLT). The government said in its reply that the amendment was inserted as an explanation clause under Section 5(8) (f) for the purpose of “abundant clarity".

“...This is a landmark judgment so far as genuine homebuyers are concerned. However, this may not be happy news for the investor-homebuyers who have initiated IBC against the developers for seeking exit from their investments on account of the current condition of the real estate market," said Abhilash Pillai, partner, Cyril Amarchand Mangaldas.

View Full Image

In their petitions, developers had contended that homebuyers were already given enough protection under Rera and consumer forums, and making them a part of the IBC proceedings was not required. The government responded saying that the amendment was only aimed at defaulting real estate giants.

The Centre also said that the amendment was looked to protect the rights of homebuyer, who have a huge stake in real estate projects, having invested in them. Recognizing them as financial creditors was essential, since they get duped by some real estate developers, it added.

India’s real estate sector is witnessing a prolonged slowdown, with several developers who have been dragged to courts over project delays facing bankruptcy or insolvency.

The builders argued that homebuyers can initiate proceedings on the basis of any “default", as the definition was very vague, and the delay in completion of the project could also be due to delays in payments by the homebuyer.

The court, in response, said there were adequate mechanisms to check this and only a genuine homebuyer will be able to invoke insolvency proceedings against a builder. SC also asked the Centre to file an affidavit taking corrective measures.

Realty company Supertech chairman R.K Arora said while genuine buyers will be rewarded, “there may be external reasons behind delays and other issues, which are beyond the control of developer, and these will be considered when a buyer has to prove his case".