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SC approves status of homebuyers as financial creditors

New Delhi, Aug 9 : In a big boost for homebuyers, the Supreme Court on Friday upheld the amendment in the Insolvency and Bankruptcy Code (IBC), which gives homebuyers status of financial creditors on par with creditors' banks.

More than 200 real estate developers had moved the apex court referring to this amendment as "illegal and unconstitutional."

The amendments to IBC deem allottees of real estate projects to be "financial creditors", and they may trigger the Code, under Section 7 against the real estate developer. In addition, being financial creditors, they are entitled to be represented in the Committee of Creditors by authorised representatives.

Upholding the amendment to IBC and terming it as not arbitrary in nature, a bench headed by Justice R.F. Nariman observed that the plea of trigger-happy homebuyers attempting to begin insolvency proceedings against the real estate companies should not be entertained by courts, instead pleas which are genuine in nature shall be allowed.

"The Real Estate Registration Act (RERA) is to be read harmoniously with the Code (IBC), as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code," said the court in its judgement.

This could be interpreted that IBC is an additional platform for homebuyers to register their grievances against the real estate developers. The court rejected real estate companies' arguments that the amendment has given uncontrolled powers to the homebuyers.

"It is clear that it is very difficult to accede to the petitioners' (real estate companies') contention that a wholly one-sided and futile hearing will take place before the NCLT by trigger-happy allottees who would be able to ignite the process of removal of the management of the real estate project and/or lead the corporate debtor to its death," observed the court.

The real estate companies' argued that different instructions may be given by different allottees making it difficult for the authorised representatives to vote on the Committee of Creditors leading to the collegiality of the secured creditors getting disturbed.

"To this the answer is that like other financial creditors, be they banks and financial institutions, or other individuals, all persons who have advanced monies to the corporate debtor should have the right to be on the Committee of Creditors", said the court while rubbishing the argument.

The court acceded to the point that the allottees are unsecured creditors, "but they have a vital interest in amounts that are advanced for completion of the project, maybe to the extent of 100 per cent of the project being funded by them alone," observed the court.

The top court noted the extreme shortage of staff at tribunal level to handle cases of this nature. "Unfortunately, both the NCLT and NCLAT do not have sufficient members to deal with the flood of applications and appeals that are before them. The time taken in the queue by applicants who knock at their doors cannot, for no fault of theirs, be put against them," observed the court.

The court reckoned that the Constitutional validity of the Amendment Act makes it absolutely necessary that the tribunal and appellate tribunal shall be manned with sufficient members to deal with litigation arising under the Code generally, and from the real estate sector in particular.

The court directed the Centre to file an affidavit on this issue within three months informing it on the steps taken in this direction. Also, the copy of this judgement shall be circulated within all state governments and top officials in the administration.

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SC approves status of homebuyers as financial creditors


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