The Builder-Buyer Battle for Real Estate: Deciphering Post Covid-19 Psychology
[Authors are advocates, Krishnamohan K Menon, Managing Partner in Mimansa Law Offices, Advocate on Record Supreme Court of India, Chaitanyashil Priyadarshi, Partner and Somya Jaitley, Associate]
INTRODUCTION
1. Since the early 2000s, the Real Estate industry in India started seeing significant changes. Now with multiple players, mushrooming projects, billboards, and advertisements offering myriad schemes with near impossible return promises, real estate seemed to be the magical stairway to financial heaven. Some industrial players were seasoned while many were wide-eyed rookies with a taste only for short term profit. Thelatters’ funds were mostly cash routed and dubious and the fund application was even more so. While the offers were tempting to the buyer, the contents of the contract usually secured the builder and builder alone. The offers were grandiose, but promises were seldom kept and clearly siphoning was the norm. Consequently, the number of delayed & incomplete projects far outnumbered the timely delivered ones.
2. The good old saying goes- “if it seems to be too good to be true, it probably is”. That is exactly what happened to a majority of the investors who went ‘all in’ with their investments into such schemes; most came out with their fingers burnt. Some builders claimed that this collapse was triggered by the radical Governmental interference in the form of the Regulatory law RERA, tax revamp by way of GST and the so-called demon of Demonetization. Subtly though, some builders also accepted that this was the consequence of crony capitalism and the bubble burst was bound to happen one day or other. Whatever be the reason, the real estate economy went on a downward spiral and continues to do so.
3. The buyers now faced their biggest challenge- enforcement of their rights in the middle of a tailspin. The Consumer Forums, although liberal in terms of relief, could not offer any expeditious solutions. It is interesting to note that for a forum which is expected to dispose of cases within a year, the National Commission was granting adjournment dates in excess of twelve months. RERA grievance redressal mechanism, although seemingly promising, was not effectuated timely and was not functioning efficiently. Project restructuring seemed a farfetched dream with the banks rolling down the shutters.
4. The only glimmer of hope for the buyers seemed to be the Insolvency and Bankruptcy Code, 2016, which after protracted litigation and multiple amendments recognized the position of property buyers as ‘Financial Creditors’[1]. This conferred upon the buyers the power to trigger Insolvency proceedings under Section 7 of the Code against the Real Estate Company. For the first time, panic set in amongst the builders. Not only was this a summary and expeditious proceeding, an unsettled claim of debt would result in replacement of the management and
investigation into the affairs of the Company.
5. The consequences were Bipolar – on the one hand there was expeditious settlement of claims (either by way of refund or delivery of alternate property) and on the other, many a Real Estate Company shut shop and resigned to Insolvency. Although the revival of the Companies Post Insolvency was a rarity, the interference of the Hon’ble Supreme Court in a few cases saw a revival of some projects and restoration of some degree of sanity amidst the chaos.
THE BATTLE
6. The builders, not used to this treatment, protested. What followed thereafter, was a contest worthy of a movie script:
i. Round 1 to builders:The amendment to Section 7 of the IBC, which gave the buyers the Status of Financial Creditors, was challenged by a builder before the Hon’ble Supreme Court in Pioneer Urban’s case[2]. While issuing notice in the matter, the operation of the said amendment was stayed by the Hon’ble Supreme Court on 21st January 2019. This stay proved to be a gamechanger as every builder would now file a petition and seek a similar order. This
stalled every real estate matter before the National Company Law Tribunal’s (NCLT’s) across India for a period of 7 months.
ii. Round 2 to buyers:Thenext round belonged to the buyers as the Hon’ble Supreme Court would dismiss the builder’s challenge and uphold the law guarding the buyers vide its detailed judgmentdated 9th August, 2019[3]. The stay on proceedings was vacated. The Supreme Court also clarified that RERA proceedings were independent of IBC and one does not impede the other.
iii. Round 3 to builders:One of the clarifications in the above judgment was that the NCLT would keep in mind that the cases before it were genuinely meant for resolution of insolvency and not merely ones filed by trigger happy buyers or speculative investors seeking to arm-twist the builders. Harping on this, affidavits were filed in pending cases before the NCLT by the builders calling many cases to be motivated ones and not genuine claims. Delaying
proceedings seemed to be a latent intent.
iv. Round 4 to buyers: The NCLT would have none of it. It was made clear in Sunil Handa’s and other cases[4], that a buyer who approaches the NCLT after expiry of the date of delivery mentioned in the agreement, is no speculative investor. A builder may keep offering the property thereafter in the guise of extended RERA dates, but the buyer is not so bound. These orders were followed by a series of declaration of insolvencies furthering the economic
tailspin.
v. Round 5-drawn: Necessity is the mother of invention; be it products or litigative strategies. Rejuvenated, the builder’s now sought to defend future cases on the point of ‘Force Majeure’ i.e. that the non-delivery of property was due to uncontrollable circumstances such as delay by the authorities in issuing permits and licenses on time. Therefore, it was argued that there was no default. This found favour with NCLAT in Raheja’s case[5]. But this did not extend much to other cases, as in most cases the default was not owing to uncontrollable circumstances but
owing to the builder’s own fault.
vi. Round 6 to Builders: Frantically, the builder’s made representation after representation before the Government and sought an intervention citing an impending doom. Already troubled by the GDP projections, the Government introduced a purported salvaging measure in the December of 2019 vide an Ordinance[6]. The Ordinance, like never before, introduced a new rule only for Real Estate Allottees:- lone wolves allowed no more. The allottees could now file an IBC case in a pack [100 buyers or 10% of buyers in a project] or not at all. Why a group? 10% of what? How does one know the total allottees? Why is a builder secured and not a manufacturer? Why is a real estate buyer worse off than even a tea supplier to the builder? What if the group is made and one backs off? Questions were many and answers, few. To add insult to injury, the Ordinance also gave an ultimatum- make friends and meet the quorum in
30 days or even pending petitions would go.
vii. Round 6 to buyers: Shocked by the irrationality of the amendment, the buyers approached the Hon’ble Supreme Court vide various Writ Petitions[7] in Manish Kumar’s Case, Sanjib Kumar’s case etc. Fortunately, the Hon’ble Supreme Courtissued notice in the matter and granted ‘status quo’ saving the pending proceedings from dismissal[8]. Pending this challenge, the legislature gave its thumbs up to the ordinance[9]compelling the buyers to challenge this also.
viii. Round 7 stalemate: Just when the turbulence was thought to be over, the Hon’ble NCLAT passed an unprecedented order in Umang Realtech’s case[10]and held that when a Builder Company is declared insolvent, it is not the company that becomes insolvent but the project alone. This was conceptually unheard of.
ix. Round 8 to buyer: The equations were changed again when the NCLAT hinted at excluding the decree holder buyers i.e. those buyers who have doubly affirmed their position as Financial Creditors [through orders of RERA, Consumer Court, Civil Court etc.] from the stranglehold of the mandatory ‘pack filing’ amendments[11].
x. Round 9 the Story continues: Normally, one would believe that if I say I have a right- I am good and If the Court say’s I have the same right- I am doubly good. For unexplainable reasons, the Company Tribunals seem to have different views on this point. It is settled law that a real estate buyer who has documents to establish default on the part of the Builder can directly trigger insolvency proceedings without having this position affirmed by any court. If that is so, then a buyer who has gotten their right doubly affirmed through a RERA/Arbitration/Consumer Court order, should be doubly good to file an Insolvency case? Obviously. Surprisingly, the NCLAT seems to have different views on this point. In Ugro Capital’s case[12] the NCLAT said ‘yes’ and in HDFC Bank’s case[13] it shockingly said ‘No’. Fortunately, reason seems to prevail owing to the Supreme Court’s comforting superior view in Vashdeo’s case[14] wherein observations indicate that a Decree Holder is no lesser than a decree holder and entitled to
file an Insolvency Case.
xi. Round 10 to COVID: To add fuel to the to the raging inferno, the year 2020 gifted mankind with COVID 19. In a drastic bid to save the economy, the following amendments were made to the Earlier, an Insolvency case could be filed for a default of Rs. 1 lakh-now it is 1 Crore[15]. Sections 7-10 of IBC have been sought to be suspended for 6 months to avoid an economic collapse, thereby putting IBC itself in a limbo[16]. Interestingly, the ordinance has not been assented to by the Hon’ble President. It may be possible that all have realized that the economy is not linear but circular. If the fear of paying is taken away from the defaulter, then the fear of recovering sets in with the creditor. Either is not good for business.
WAY FORWARD
7. One thing is clear- that everything is unclear. The future of IBC from a real estate buyer’s perspective is no less than a complex calculus problem. The suspension may or may not happen. The challenge to the threshold provisions may or may not find the assent of the Hon’ble Supreme Court. Even if the same doesn’t find favour, it may be possible that the amendment is partly struck down to save pending proceedings. The Hon’ble Supreme Court may or may not hold that decree holders are outside the scope of the amendment. The various forums may reach a consensus on what happens to a group which achieves a threshold on the date of filing but loses the quorum when a few people are settled during the proceedings OR Not.
8. In this tumultuous scenario, only the sane and calm minds can prevail. To begin with it is important to not restrict one’s view to the IBC alone but keep an open mind to pursue the various legal remedies available in law-singularly or in multiples. This requires a logical analysis of the possible consequences, reasoned prediction of the future, evaluation of the remedy mechanisms available, classification of cases to choose the right mechanisms and pursuing only that route which is optimum. A detailed analysis of the same is done herein below.
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