top of page

Homebuyers left remediless under IBC too?

When a real estate project commences, the Promoters of the project invite prospective homebuyers to purchase the plot/apartment in the project at a reduced price by entering into Agreement for Sale with a promise to effect the transfer of the property once the construction is completed. The amount collected from these ‘Homebuyers’ is used as the initial investment in continuing the construction of the project. Therefore, the Homebuyers are the class of creditors who have invested their money as a consideration in a real estate project in lieu of receiving a home in the project. They are classified as ‘allottees’ under The Real Estate (Regulation and Development) Act, 2016 (RERA) and as a Consumer under the Consumer Protection Act. Since an Agreement for Sale is also entered into by the promoters of the project in favour of these Homebuyers, they are also holders of a security interest/ charge over the property as per Section 55(6)(b) and can enforce such right under the Section 53A of Transfer of Property Act. But with the introduction of the Insolvency and Bankruptcy Code, the legal remedies available as a Homebuyer, allottee or Consumer in all these provisions were overhauled. Though the Homebuyers under IBC are classified as Financial Creditor, they are not given the same standing as the class of secured financial creditors, thereby making the position of the Homebuyers in the whole process as uncertain to the extent that the legal remedies available to an Individual homebuyer under all the other provisions of law get superseded and thereby prejudicing the interest of a homebuyer. It is on this topic that the Article focuses. The first part of this article dives into the rights and remedies provided to a homebuyer under the RERA, Consumer Protection Act and other Civil laws such as the Transfer of Property Act, Contract Act, Specific Relief Act etc. In the second part of this article, these rights and remedies are juxtaposed with the provisions of IBC to shine a spotlight on the position of the Homebuyers under the regime of IBC.


Once a real estate project gets approved, the promoters create brochures and advertisements of the end result of the project to induce prospective homebuyers to pre-purchase homes in the project at a reduced rate. Based on these advertisements and promises, an Agreement for Sale is entered into between the promoters and the homebuyers, whereby the promoters allot a specific apartment/home in the name of the ‘allottee’ to be transferred once the entire construction is completed, in lieu of consideration as the cost of the apartment. [1] As per Section 12 of the RERA, such an advertisement binds the Promoter with an obligation to comply with the veracity of the advertisement towards the allottee and creates a right for the allottee to receive the advantages as advertised in the brochure. Any advertisement of services not intended to be offered would be deemed as an ‘unfair practice’ and would result in the revocation of the RERA Registration[2]. Further, the Allottees are comprehensively protected vide the Chapter IV of RERA, which provides for the rights of the allottees, including the right of the allottees to receive the allotted property and the Undivided Share in the Common property, compensation if the time frame prescribed for handing over possession of the property is breached with interest and right to get the refund of the amount paid on cancellation. Thus the RERA specifically protects the rights of the Homebuyers by placing the entire liability upon the promoter to complete construction and transfer the title as entered into in the Agreement for Sale.


Based on these brochures and advertisements, a prospective homebuyer enters into an Agreement for Sale with the promoter of the project to be enforced on a subsequent date. The RERA provides that such an Agreement for sale would provide for the exact unit allotted to the allottee, the consideration paid and mode of payment of the remaining amount, the due date of completion of construction, and the penal interest on the principal amount paid if the construction is not completed, the current status of the project, consensus regarding the stages of payment of consideration and the date of transfer of title and possession[3]. As per Sec 11(h) of the RERA, such an agreement bars the promoter from further mortgaging the property and, if done so, would not affect the rights of the allottees.


An Agreement for Sale brings the Homebuyers under the purview of the Consumer Protection Act, 2019 (CPA) as a Consumer. A Homebuyer is a consumer as he is purchasing a property by paying consideration and under the promise of transferring ownership within a certain period.


The CPA defines "consumer means any person who— (i) buys any goods for a consideration which has been paid or promised or partly paid and partly promised, or under any system of deferred payment and includes any user of such goods other than the person who buys such goods for consideration paid or promised or partly paid or partly promised, or under any system of deferred payment, when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purpose”[4] Since the Homebuyer has either paid or part paid the consideration or entered into a system of deferred payment of the said consideration, the said allottee is classified as a Consumer. When the period of transfer of ownership and possession as agreed to in the Agreement for Sale is breached, there exists a deficiency in Service.[5] Therefore, when a Promoter breaches the terms of an Agreement for Sale, there accrues a right on the Homebuyer to approach the Consumer Court against the deficiency of service and get remedy in the form of getting the apartment/home allotted in his name or to cancel the Agreement for Sale and get back the earnest money paid, liquidated damages for breach of contract, to receive the interest accruing over the earnest amount paid till the date of transfer of ownership.


Once an Agreement for Sale is entered into and part payment has been made, and the promoter subsequently fails to complete the construction of the project and effect transfer of title, the Civil laws come into play. The Homebuyers have the remedy to receive earnest money paid and compensation for breach of Contract under Sec 73 and 74 of the Indian Contract Act, Sec 21 of the Specific Relief Act and Sec 55 of the Transfer of Property Act. Meanwhile, if the Homebuyer is in possession of the property after paying his dues, then he has the remedy to initiate part performance of the contract under Sec 53 A of the Transfer of Property Act, thereby forcing the Promoter to execute the title in his favour. The same right is protected as the Specific Performance of the contract under Section 10 of The Specific Relief Act.


The Insolvency and Bankruptcy Code (IBC) was enacted with the intention to keep the defaulting company as a going concern rather than safeguarding the interest of the lenders. Since IBC is applicable to Companies engaged in real estate projects, the affected lenders include innocent homebuyers, complicating the entire mechanism of IBC. The mechanism of IBC is such that the lenders are classified into broad 2 categories, the Financial Creditors[6] who give consideration for the time value of money and the Operational creditor[7] who supply essentials for the running of the Company. Once a Corporate Insolvency Resolution Process (CIRP) is commenced, the existing board of the Company is disbanded, and Company is run by a Resolution Professional nominated by the Committee of Creditors. It is only the financial creditors who form the Committee of Creditors (CoC), that decide how the CIRP is to continue and vote on all matters of any substance. The Supreme Court in Pioneer Urban Land and Infrastructure v. Union of India[8] had held that the borrowings from Homebuyers should be a borrowing in its commercial sense as it’s given against the consideration for the time value of money and therefore is to be considered as a Financial Creditor. Since then, courts have time and again stated that a Homebuyer under an Agreement for Sale paying consideration creates a security interest over the property and thereby creates a charge over the property. Even then, the Homebuyers are classified as only Financial Creditors and not secured financial creditors; therefore, as per the provisions of the IBC, the claim of the Homebuyer is placed below that of the Secured Financial creditor.


The issue arises when the promoter of a real estate project mortgages the project property with a bank and gets working capital to construct the project, fails to complete the project, and the Secured Financial Creditor initiates the Insolvency Proceeding u/s7 of IBC. Once a CIRP is admitted, the Moratorium under Section 14 of the IBC comes into play, all the above-discussed legal remedies come to a standstill, and the homebuyers are forced into the IBC. Since in a real estate project, no free land or assets are available other than the property agreed to be sold to homebuyers, the liquidation value of the real estate project is almost always nil, and therefore the number of prospective resolution plans is usually low.


Thus when a Resolution Plan does come in, the amount brought in is considerably low and after paying the CIRP costs and workman dues, the major share of the money left would be given to appease the Secured Financial Creditors in order to release the mortgage over the property, or else they will vote against the Resolution Plan. The Homebuyers have to accept any Resolution Plan that comes in as the alternative is liquidation which is against the interests of the homebuyers, as the project remains incomplete and no Completion certificate can be issued by the authorities without which the Homebuyer cannot get the property mutated.


The Homebuyers are forced to accept these Resolution Plans as either they have less voting share in the CoC than the Financial Creditors, in which case the Resolution plan always pays off a substantial sum of the project towards the Secured Creditors so as to pass the muster of CoC. If the homebuyers are the majority in the CoC and they deny the Resolution Plan, the CIRP goes into liquidation, and the priority in receiving the liquidated value goes to Secured Creditors, and the homebuyers lose out again.

The best scenario that the Homebuyers can hope for is to get the construction of the project completed from the amount brought in by the Successful Resolution Applicant; even then, the Homebuyers are losing out on the remedies of liquidated damages and interest over the earnest amount paid.


More often than not, the Resolution Applicant comes in with a plan which requires the homebuyers to pay additional contributions over and above the principal amount paid by these allottees. Such contribution, along with the amount brought in by the Successful Resolution applicant, is used to pay off the debts of the Corporate debtor and complete the construction of the project. Thus the homebuyers are effectively paying for the amount misappropriated by the promoters of the Corporate Debtor from their hard-earned money. All these have translated to real-life scenarios where homebuyers who have litigated in courts for years are left holding the orders and awards of Consumer Commissions/Arbitrators, unable to enforce execution due to the initiation of a Moratorium.


The IBC has essentially forced the Homebuyers to ignore their statutory rights enshrined in the RERA, the right to enforce the contract as per the Contract Act and Transfer of Property Act, Specific performance of a contract as per the Specific Relief Act, to receive compensation for breach of contract, to receive interest over the amount paid and any compensation ordered for by the Consumer Court for deficiency of Service or by the RERA. Thereby leaving the class of homebuyers in a worse scenario than prior to the introduction of IBC.


This issue also brings forth another question regarding the doctrine of election of remedies. The SC has already established in a catena of judgements that when multiple remedies are available, it is upon the Consumer to choose the best course of action. When the legislature has provided multiple avenues to enforce legal remedies, then it is the right of the person to choose the legal recourse that suits his best interests. But with the introduction of the IBC and the position of the Homebuyers in CIRP, the Homebuyers are losing the legal recourse favourable to them and instead are forced into a system which preys on their desperation.


Adv. Kiran Gopi LL.M

Associate | Artis Law House



[1] The Real Estate (Regulation and Development) Act, 2016, RERA s.2(d) “the person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freeholdor leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent
[2] id s.7(1)
[3] id s.13(2)
[4] The Consumer Protection Act, 2019, CPA, s.2(d)
[5] id s.2(11) "deficiency" means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service and includes— 
(i) any act of negligence or omission or commission by such person which causes loss or injury to the consumer; and 
(ii) deliberate withholding of relevant information by such person to the consumer;

[6] Insolvency and Bankruptcy Code, 2016 s.5(7)
[7] Id s.5(20)
[8] Pioneer Urban Land and Infrastructure v. Union of India, (2019) ibclaw.in 13 SC

Comments

Rated 0 out of 5 stars.
No ratings yet

Add a rating
bottom of page