Pitting the bankruptcy code against RERA – Business Line

By giving financial creditor status to home-buyers under IBC, the Centre has effectively killed RERA

Recently, the Union Cabinet approved, by an ordinance, amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) giving home-buyers the status of “financial creditors” in the insolvency process under the IBC. By doing so, the Union Cabinet has overlooked the recently enacted Real Estate (Regulation and Development) Act, 2016 (RERA), which is a special legislation to protect the interests of home-buyers.

Before explaining the ramifications of the recent move by the Union Cabinet, it is imperative to study the kind of protection offered by RERA to home-buyers. RERA was enacted to promote the real estate sector and to ensure sale of plot, apartment or building, or sale of real estate project in an efficient and transparent manner to protect the interest of home-buyers. RERA also provides for an adjudication mechanism for speedy dispute redressal, and establishes an appellate tribunal to hear appeals.

RERA protection

More specifically, the following are some of the protections offered by RERA to home-buyers:

(1) Section 4(2)(l)(D) mandates that the promoters should deposit 70 per cent of the money realised for the real estate project from the allottees in a scheduled bank to cover the cost of construction and the land cost, and shall be used only for that purpose;

(2) Every promoter should apply to the Real Estate Regulatory Authority (“Authority”) for registration of real estate projects. Such registration can be revoked by the Authority if the promoter makes default in doing anything required by RERA (including time-bound completion of the project);

(3) Upon revocation of the registration, the Authority has the power to freeze the above mentioned bank account to ensure that the promoters do not siphon off money belonging to the allottees;

(4) Subsequently, upon revocation of the registration, the Authority may consult the government to take such action as it may deem fit including carrying out of the remaining development works by competent authority or by the association of allottees; and

(5) If a promoter or a real estate agent fails to pay any interest or penalty or compensation imposed on him, it shall be recoverable from such persons as an arrears of land revenue. The enforcement of such an award, in Tamil Nadu, is in the same manner as if it were a decree or order made by a civil court. Similar regulations are present in many other States.

In short, RERA treats home-buyers as consumers, and provides a consumer-friendly dispute resolution mechanism through an exclusive Authority and appellate tribunal for the home-buyers. Now, should we really need to classify home-buyers as “financial creditors” under the IBC?

Let us look at the complications that arise with this approach.

A financial creditor holds an important role in the corporate insolvency process. The Committee of Creditors (CoC) includes all financial creditors of a corporate debtor. The CoC will appoint and supervise the Insolvency Professional, and has the power to either approve or reject the resolution plan to revive the debtor, or can proceed to liquidate the debtor. The entire process is time-bound and must be completed within a period of 180 days (a one-time extension of 90 days is possible after the completion of 180 days).

As noted by the Bankruptcy Law Reforms Committee, speed is of essence for the working of the Bankruptcy Code. This is because, delay causes value destruction of assets under liquidation. Thus, identifying and removing the sources of delay will result in a high recovery rate.

Financial creditors largely consist of banks and financial institutions, which have the requisite expertise to actively participate in, and to contribute to the resolution process, which involves the crucial task of coming up with a resolution plan to revive the company.

There are a number of reasons as to why liquidation is the last resort under the IBC.

Apart from the fact that there are many jobs and livelihoods at stake, the best return is always achieved by rescuing the company as a going concern. By keeping the company alive, the business can either continue to operate and generate revenue for the creditors, or it can be sold as a going concern, which will result in a higher realizable value than the liquidated assets of the company.

Resolution vs liquidation

It is therefore in the best interest of creditors of all classes, including home-buyers, to keep the real estate firm afloat through a resolution plan instead of pushing for liquidation. However, in my opinion, home-buyers will have little interest in the company’s revival or the corresponding macro-economic implications, as their end-goal will be to simply recover their hard-earned money.

Another issue is with regard to the representation of home-buyers: it will be a challenge to obtain consensus or a majority vote on various issues that need to be addressed at the CoC meetings. Further, the ground reality is that, in our country, barring a few exceptions, almost all the companies that enter into the insolvency resolution process end up in liquidation. Therefore, the inclusion of home-buyers in the category of “financial creditors” will only cause unnecessary delay in the corporate liquidation process, which will significantly reduce the value of the assets under liquidation, thereby reducing the recovery rate for home-buyers and other creditors.

Moreover, due to this additional round of distribution of the recovery proceeds post-liquidation, and dilution of the creditors’ rights in and control over the insolvency proceedings, the real estate lending rates are expected to go up, and real estate funding will be hit badly by this decision. Also, if a home-buyer chooses to use provisions under the IBC and the NCLT orders a moratorium under s. 14, all the pending petitions against the corporate debtor under RERA will be paused. In short, even if a section of home-buyers chooses RERA over IBC, they will have no remedy left or will be forced to proceed under the IBC.

It is not the first time that a mess has been made of the laws governing the banking and finance sector in India. Prior to the enactment of the IBC, we had several legislations such as the Sick Industrial Companies Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1933 and the SARFAESI Act, 2002. These legislations created a lot of confusion as to their application due to significant overlapping among them. The same is the case with the situation of home-buyers now. RERA was brought in to confer the status of a “consumer” on home-buyers, and to provide them with a number of remedies to enforce their rights against real estate developers. However, the IBC, which is also a special law like RERA, would take precedence over RERA as it was enacted later. The recent ordinance proves beyond doubt that the government lacks proper vision — any lackadaisical approach in drafting laws would affect citizens badly. There is no excuse in killing a sector-specific legislation like RERA without waiting to see its actual performance.

The writer is an Advocate practicing in the Madras High Court

via Pitting the bankruptcy code against RERA – Business Line

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