• Law & Order

Putting Homebuyers under Secured Financial Creditors under IBC, 2016: A Misleading Outlook

Written by Shivansh Soni

Maharashtra National Law University, Nagpur



Source: Centrik


Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


Abstract


The recent developments and cases relating to the homebuyers to be considered under the category of secured financial creditor remains unaddressed. The judiciary on one hand has stated implicitly that the homebuyers should be considered under the head of financial creditors but also on the other hand has left the question open to interpretation as to whether they are “Secured” or “Unsecured” financial creditors. The authority of Insolvency and Bankruptcy Code (2016) and Real Estate (Regulation and Development) Act, 2016 which was initially enacted to regulate the largely unregulated sector of the Indian Economy, and fulfilling the needs and demands for housing and infrastructure in the country in matters relating to default cases under which the homebuyers have suffered have been discussed in this article. The article also contains sufficient statutory understanding and interpretations of the provisions of RERA and IBC. The security interest which has been the bone of contention throughout the debate of whether or not they are under the ambit of “secured” or “unsecured” financial creditors is also discussed and evaluated with the help of relevant case laws.


Key Words: Secured and Unsecured Financial Creditors, Security Interest.


Introduction


The Insolvency and Bankruptcy Code, 2016 since its enactment has been very clear in its purpose and objectives which include, maximizing the value of assets, promoting entrepreneurship and availability of credit and balancing the interests of its stakeholders. And in order to analyze whether the homebuyers or the allottees fall under the ambit of “Secured” Financial Creditors, it would be important to understand its definition under the statute and the amendment. Prior to the enactment of the amendment, there had been judgements providing the homebuyers the status of a ‘financial creditor’, however this has been established only by inserting a particular clause in the contract.[1] A transaction wherein the seller of the apartments had to pay assured returns to the homebuyers till possession of the property was given, was in the nature of loan and thus constituted financial debt.[2]


The Insolvency and Bankruptcy Board of India further provides a claim form for creditors who are neither ‘financial’ nor ‘operational’ which leads to a common understanding that homebuyers do not fall under any of these.[3] However, it would be wrong to exclude the judgement of the Supreme Court which gives the status of financial creditors to the homebuyers.[4]

But the issue remains the same, whether homebuyers are ‘secured’ financial creditors or not. That, the difference between a secured and an unsecured creditor has an implication on the priority of the payments liquidated.[5]

In a simpler manner, it can be said that the secured creditor is one, who has a security interest in its favour.[6] The Insolvency and Bankruptcy Code (Amendment) Act, 2018 though declares the homebuyers as financial creditors but there is no mention that they fall under the scope of “secured” financial creditors.[7]

Unaddressed Debate


Suppliers, customers, contractors etc. are generally operational creditors and mostly operational creditors are unsecured. It would not be wrong to interpret that homebuyers are unsecured creditors, while the lenders of the corporate debtor also, only after the title is transferred to the homebuyers of their apartments or plots by their real estate promoter, do they get right over their asset as mentioned in § 3(31) of the Code. § 53 provides the order of priority[8] to be followed while distributing the liquidation assets, which includes, creditors, secured and unsecured, employees and workmen, in pursuance of the same, the Code also places secured creditors higher specifically than the unsecured creditor.[9] Also, in a similar context, it is not reasonable to conclude that just because the dues of workmen and debts due to the secured creditors are treated as Pari Passu, the order of priority among secured and unsecured creditors would not be based on the similar concept’. And also, it would not be wrong to interpret that without having a reasonable justification to put the homebuyers in the definition of “secured” financial creditors.


The issue of “secured” financial creditor needs to be looked with special emphasis on § 3(31)[10] of the Insolvency and Bankruptcy Code, 2016. The homebuyers though have been given the status of financial creditors, no clear stance has been taken by the Insolvency and Bankruptcy Code, 2016 in that furtherance. It is therefore not prudent to put homebuyers under the definition of “Secured” Financial Creditor without assessing whether they hold any security interest in the assets or not.

Putting homebuyers under secured financial creditors goes against the very spirit of the IBC, making it liquidation centric and not resolution centric.

Alternative Solution (RERA)


The provisions of RERA, 2016 could be preferred to resolve the grievance by the homebuyers. The Real Estate (Regulation and Development) Act, 2016 was enacted in order to regulate the largely unregulated sector in the Indian economy, which plays a catalytic role for fulfilling the need and demand for housing and infrastructure in the country.[11] RERA provides a platform where the interests of the homebuyer are protected as a consumer while in a Corporate Insolvency Resolution Process[12] (CIRP), the emphasis is on resolution and is contradictory to RERA, on the maximization of the assets.


RERA is a special Act which has been passed with a special objective to address the issues faced by the homebuyers (allottees) against the real estate agents and vice-versa on occurrence of a default.[13] Technically speaking the homebuyers should rather prefer to initiate a proceeding under RERA and not IBC. RERA, being an act special in its nature, and therefore, the grievances of the former should only be heard by an “authority” under the RERA. RERA is a special act which deals with the real estate development projects and must, therefore, be given precedence over the Code, which is through a special act, has a completely different purpose.


Authority of RERA and IBC


The authority of RERA has been recognized in the case of Neelkamal Realtors Suburban Private Limited v. Union of India[14] which upholds the constitutional validity of the act after its enactment. It is important to note that under § 30(2)(e) of the Code, it has been provided that the proposed resolution plans must not contravene with other provisions of law. Thus, provisions of the RERA need to be complied with. § 31 of RERA clearly establishes the provision for filing of a complaint before the Authority[15] or the Adjudicating Officer in terms of contravention of the Act, against any promoter[16] allottee or the real estate agent.

The fact that RERA aims to provide solutions to all the problems faced by the homebuyers and simplifies the process by accepting the grievances under the head of one single authority[17], claiming the same under the Code does not fulfill such a purpose at all and hence, the allottees have a reasonable stand before the RERA Authority and not the authority under the Code. RERA in this sense has been specifically enacted to address the grievances of the allottees, not only includes those under registered agreements, but also those allottees or homebuyers who are in an unregistered agreement with their real estate agent.


Agreements Registered or Unregistered?


With the recent development, states have begun to recognize the claims filed by the homebuyers or the allottees before RERA, including those in the unregistered agreements.[18] Much inference can be drawn from the Haryana Real Estate Regulatory Authority, Gurugram’s decision in the case of Ms Simmi Sikka v. M/s Emaar MGF Land Limited[19].

In a similar instance, the Haryana Real estate Authority, Panchkula held that “duties cast upon the promoter will be applicable only to promoter of a registered project and not to the promoter of an unregistered project”[20]. The Maharashtra Real Estate Authority has also agreed to accept complaints with respect to unregistered projects[21], however, it does not provide any reasoning behind arriving at such a conclusion. It becomes amply clear that the concerned authority (recognized under the ambit of RERA) may also act upon complaints filed for an unregistered project, which would not be the case under IBC.

However, there may have been differences[22] between other states’ Real Estate Regulatory Authorities but it can be interpreted from the above judgements that complains under unregistered projects may also be accepted by the RERA.

In pursuance of the same, it won’t be wrong to state that those homebuyers who are trapped in an unregistered agreement, have to approach the authority in the first instance and in not doing so, they are barking up the wrong trees, restricting the homebuyers from claiming under the appropriate authority and entertaining the such a claim would lead to unnecessary “killing of a sector-specific regulation such as RERA”[23], without even waiting to see its actual performance.


Conclusion


The Insolvency and Bankruptcy Code was enacted in the year 2016 with certain objectives, the first order objective being “resolution”, the second order objective is “maximization of assets of the Corporate Debtor”[24] and the third order objective being “promoting entrepreneurship, availability of credit and balancing the interests”.[25] The order of objectives as mentioned above is sacrosanct, however, keeping the homebuyers under the category of secured financial creditors is not within the ambit of any of these objectives. The aim of such a process should be resolution, the fact that it holds primary importance in any insolvency resolution process should be taken into consideration.[26] The first and the foremost objective is to arrive at a resolution and not ‘liquidation’. Homebuyers in such instances are in a generic sense more towards avoiding their own personal losses rather, to gain benefit out of such proceedings by getting to the few places above in the order of priority.[27]


The homebuyers and other allottees want to be included in the definition of “secured” financial creditors only leads to one conclusion that their demands are against the very spirit of the Code which is ‘Liquidation-Centric’ and not ‘Resolution- Centric’.[28]


[1] Mahindroo & Anr. v. Earth Organics Infrastructure, NCLAT New Delhi, Company Appeal (AT) (Insolvency) No. 74/2017, decided on 2 September 2017. [2] Nikhil Mehta v. AMR Infrastructure, NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 07/2017, decided on 21 July 2017. [3] Section 9A (1) Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. [4] Chitra Sharma v. Union of India, Writ Petition (Civil) No. 744 of 2017. [5] Are homebuyers secured financial creditors or unsecured financial creditors under IBC? Economic Times, August 10, 2018, https://economictimes.indiatimes.com/wealth/real-estate/are-home-buyers-secured-financial-creditors-or-unsecured-creditors-under-ibc/articleshow/65332287.cms. (Last Visited 8th Feb, 2020). [6] Section 3(30), Insolvency and Bankruptcy Code, 2016. [7] Bikram Chatterjee v. Union of India, Writ Petition (Civil) No. 940 of 2017. [8] As provided under the Insolvency and Bankruptcy Code §53 (2016), “Distribution of Assets”. [9] ICICI Bank Limited v. SIDCO Leathers Limited, (2006) 10 SCC 452. [10] The Insolvency and Bankruptcy Code, 2016, § 3(31) which reads as follows-“‘security interest’ means right, title or interest or a claim to the property, in favor of, or provided for a secured creditor by transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person; Provided that security interest shall not include a performance guarantee.” [11] Lavasa Corporation Limited v. Jitendra Jagdish Tulsiani & Anr., Second Appeal (Stamp) No. 9717 of 2018, Lavasa Corporation Limited v. Manju Narendra Joshi & Anr., Second Appeal (Stamp) No. 18465 of 2018, Lavasa Corporation Limited v. Girish Vassan Panjwani & Ors., Second Appeal (Stamp) No. 18467 of 2018. [12] As provided under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) § 2(e), 2016, “Definition of Corporate Insolvency Resolution Process”. [13] Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited (2019) 3 SCC 620, Bank of India v. Ketan Parekh (2008) 8 SCC 148. [14] WP No. 2737 of 2017. [15] § 2(i) (2016), The Real Estate (Regulation and Development) Act, “Definition of Authority”. [16] § 2 (zk) (2016), The Real Estate (Regulation and Development) Act, “Definition of Promoter”. [17] Real Gem Buildtech Private Limited v. Union of India (WP No. 2711 of 2017), Nirmal Ujwal Credit Co-operative Society Limited, Nagpur (WP No. 2255 of 2017), M/s Mudassar Builders and Developers v. Union of India (WP No. 2708 of 2017), D.B. Realty Limited and v. Union of India (WP No. 2727 of 2017). [18] Sandeep Singhal v. Umang Realtech Pvt. Ltd. (CN. 711/2018, Order dated January 15, 2019); Mandeep Singh Brar v. Landmark Apartment Pvt. Ltd. (CN. 84/2018, Order dated November 20, 2018); Monika Jain v. Parsvnath Developers Ltd. (CN. 697/2018, Order dated November 20, 2018). [19] Complaint No. 7 of 2018, (Order dated August 21, 2018). [20] Rajesh Kumar v. M/s TDI Infrastructure Ltd. CN. 274 of 2018; Sanju Jain v. TDI Infrastructure Ltd. CN. 144 of 2018; Ritu Aggarwal v. TDI Infrastructure Pvt. Ltd. CN. RERA-PKL 730/2018; Madhu Sareen v. BPTP Ltd. RERA-PKL-CM.113/2018 & Ors; Devinder Singh v. BPTP Ltd. RERA-PKL 103/2018; Baldev Singh v. Ultratech Township Developers Pvt. Ltd. RERA-PKL 335/2018; Aditya Shrivastava v. BPTP Ltd. RERA-PKL 437/2018. [21] Mohammed Zain Khan v. Maharashtra Real Estate Regulatory Authority & Ors. (W.P. No. 908 of 2018). [22] Bikramjit Singh v. State of Punjab, CN. 3 of 2017. [23] Rahul Unnikrishnan, “Putting the Bankruptcy Code against RERA”, Business Line, Monday, June 18, 2018, https://www.thehindubusinessline.com/opinion/pitting-the-bankruptcy-code-against-rera/article24194162.ece. (Last Visited August 7, 2020). [24] UNCITRAL, “Legislative Guide on Insolvency Law”,10, 2005. [25] Ministry of Corporate Affairs, Government of India, “Report of the Insolvency Law Committee”, 5, March 2018. [26] Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, Civil Appeal Nos. 9402-9405 of 2018. [27] As provided under the Insolvency and Bankruptcy Code, § 53 (2016), “Distribution of Assets”. [28] Essar Steel Limited & Anr. v. Reserve Bank of India, 2017 SCC OnLine Guj 995: (2018) 208 Comp Cas 101.



BIBLIOGRAPHY


Case Laws Referred


1. Aditya Shrivastava v. BPTP Ltd. (RERA-PKL 437/2018).

2. Baldev Singh v. Ultratech Township Developers Pvt. Ltd. (RERA-PKL 335/2018).


3. Bank of India v. Ketan Parekh (2008) 8 SCC 148.


4. Bikram Chatterjee v. Union of India, (WP (Civil) No. 940 of 2017).


5. Bikramjit Singh v. State of Punjab, (CN. 3 of 2017).


6. Chitra Sharma v. Union of India, (WP (Civil) No. 744 of 2017).


7. D.B. Realty Limited and v. Union of India (WP No. 2727 of 2017).

8. Devinder Singh v. BPTP Ltd. (RERA-PKL 103/2018).

9. Essar Steel Limited & Anr. v. Reserve Bank of India, 2017 SCC OnLine Guj 995.

10. Lavasa Corporation Limited v. Girish Vassan Panjwani & Ors., (SA No. 18467 of 2018).

11. Lavasa Corporation Limited v. Jitendra Jagdish Tulsiani & Anr., (SA No. 9717 of 2018).

12. Lavasa Corporation Limited v. Manju Narendra Joshi & Anr., (SA No. 18465 of 2018).

13. M/s Mudassar Builders and Developers v. Union of India (WP No. 2708 of 2017).

14. Madhu Sareen v. BPTP Ltd. (RERA-PKL-CM.113/2018).

15. Mahindroo & Anr. v. Earth Organics Infrastructure, NCLAT, (Insolvency) CA No. 74/2017, decided on 2 September 2017.

16. Mandeep Singh Brar v. Landmark Apartment Pvt. Ltd. (CN. 84/2018, Order dated November 20, 2018).

17. Mohammed Zain Khan v. Maharashtra Real Estate Regulatory Authority & Ors. (W.P. No. 908 of 2018).

18. Monika Jain v. Parsvnath Developers Ltd. (CN. 697/2018, Order dated November 20, 2018).

19. Ms Simmi Sikka v. M/s Emaar MGF Land Limited (CA No. 7 of 2018).

20. Nikhil Mehta v. AMR Infrastructure, NCLAT, (Insolvency) CA No. 07/2017, decided on 21 July 2017.

21. Nirmal Ujwal v. Credit Co-operative Society Limited, Nagpur (WP No. 2255 of 2017).

22. Rajesh Kumar v. M/s TDI Infrastructure Ltd. (CN. 274 of 2018).

23. Real Gem Buildtech Private Limited v. Union of India (WP No. 2711 of 2017).

24. Ritu Aggarwal v. TDI Infrastructure Pvt. Ltd. (CN. RERA-PKL 730/2018).

25. Sandeep Singhal v. Umang Realtech Pvt. Ltd. (CN. 711/2018, Order dated January 15, 2019).

26. Sanju Jain v. TDI Infrastructure Ltd. (CN. 144 of 2018).

27. Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited (2019) 3 SCC 620

Articles Referred

1. Are homebuyers secured financial creditors or unsecured financial creditors under IBC? Economic Times, August 10, 2018, https://economictimes.indiatimes.com/wealth/real-estate/are-home-buyers-secured-financial-creditors-or-unsecured-creditors-underibc/articlesho%20w/65332287.cms.

2. Ministry of Corporate Affairs, Government of India, “Report of the Insolvency Law Committee”, 5, March 2018.

3. Rahul Unnikrishnan, “Putting the Bankruptcy Code against RERA”, Business Line, Monday, June 18, 2018, https://www.thehindubusinessline.com/opinion/pitting-the-bankruptcy-code-against-rera/article24194162.ece.

4. UNCITRAL, “Legislative Guide on Insolvency Law”, 10 (2005).




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