Consumer VOICE

  Join Us Donate Now

Supreme Court nullified builders’ effort to oust homebuyers from consumer courts and insolvency proceedings

Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union Of India & Ors
In The Supreme Court of India Civil Original/Appellate Jurisdiction Writ Petition (Civil) No. 43 Of 2019
Bench: Justices R.F. Nariman, Sanjiv Khanna and Surya Kant
Decided On: August 9th, 2019

Many builders have filed a combined salvo against homebuyers in a separate matter titled as Ramprastha Promoters & Developers Pvt. Ltd. vs. Saurabh Kasturia & Anr. In Delhi High Court to oust the jurisdiction of Consumer Courts in early 2019 on the ground that they already had a remedy under RERA. This was yet another effort of barring homebuyers from approaching consumer courts to seek refund or compensation in delayed and incomplete projects.  Two builders had filed cases pleading that complaints relating to ongoing projects should only be referred to the RERA and not consumer courts. While admitting the cases, the Delhi High Court had put proceedings before the National Commission on hold.

This is a crucial case for consumers an adverse judgment of the Delhi High Court would oust them from Consumer Courts and confine them to RERA which has a poor track record in providing relief to homebuyers. There is no transparency under RERA and homebuyers are at loss. Also it is important to mention that this Act is in addition to, and not in derogation of any law as laid down in Section 88 of the RERA Act, 2016. Also Section 71 of the RERA says if a complaint is pending before any Consumer Court, then the consumer with the permission of the forum may withdrawn the pending complaint and may file the application before the RERA. Both laws are mutually exclusive.

It has been heartening to read the recent judgement of the Hon’ble Supreme Court of India in the present case (Pioneer Urban Land and Infrastructure Limited & Anr. vs. Union of India & Ors.) where Supreme Court has dismissed petitions filed by nearly 200 realtors and finally, given positive nod to the amendments made to the Insolvency and Bankruptcy Code (Second Amendment) Act, to treat homebuyers as financial creditors.  The bench of Justices R F Nariman, Sanjiv Khanna and Surya Kant held that the amendments do not violate Article 14 and 19(1)(g) of the Constitution and rejected the argument that they are 'arbitrary, unreasonable, excessive and disproportionate'. This judgment is seen as a major win for the homebuyers, who will now not only be allowed to invoke the Code but will also be a part of the committee of creditors with the same footing as banks and other financial institutions. Along with this, the homebuyers can also approach RERA and Consumer Courts.

Builders Challenged the explanation to Clause 5(8)(f) of the Insolvency and Bankruptcy Code:

The first challenge to the amendment was laid by the Pioneer Urban Land and Infrastructure filed in the Supreme Court in January 2019. It challenged the validity of section 5(8)(f) of the IBC 2016, where homebuyers were given the right to be considered as financial creditors. Subsequently, 180 similar writ petitions were filed by builders like Supertech, Parsvnath, BPTP, Ansal Hi-Tech Townships, Today Homes Noida, Ireo, SARE Shelters Projects, Wave MegaCity Centre, CHD Developers, Spaze Towers, Orris Infrastructure, AVP Buildtech, Three C Shelters, Emaar Hills Township, TDI Infrastructure, ATS Realty, among others challenged the Insolvency and Bankruptcy Code which inserted two explanations in Section 5(8)(f) of the Code that  "any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing", and resultantly he is a financial creditor under the Section 7 of the IBC. (Which allows financial creditors to file an application in NCLT for initiating the corporate insolvency resolution process against a defaulting company). The amendment had further allowed the homebuyers being financial creditors to have representation in the Committee of Creditors through an authorized representative and also have voting rights.

The builders argued that the amendment in IBC has only created more confusion and also resulted in additional encumbrance upon them. The real estate companies raised the following points:

  • Classification of homebuyers as financial creditors amounts to treating unequals as equals. This is unreasonable classification and is discriminatory;
  • This is contrary to the object of IBC, as a few disgruntled allottees can bring the entire project to standstill.
  • Homebuyers have a separate remedy under the RERA Act for their grievance redressal.
  • Giving advance payment for flat allotment cannot be regarded as 'financial lending'.

However, one of the major arguments of real estate companies was that the homebuyers already have a separate remedy under the RERA Act, 2016 and Consumer laws for the redressal of their grievance and their grievances need not be addressed under the Code as the same leads to duplication of proceedings.

Analysis of Supreme Court

Supreme Court primarily noted that the constitutional validity of the amendment will be decided on the background of the fact that the legislature must be given free play in the joints when it comes to economic legislation. For clear understanding, the bench went ahead to examine the recommendations made by the Insolvency Committee Report wherein it was stated that the delay in completion of under-construction apartments has become a common phenomenonCommittee further agreed that amounts raised under home buyer contracts is a significant amount, which contributes to the financing of the construction of an asset in the future. This being the case, it was important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the Code under Section 7 and have their rightful place on the Committee of Creditors when it comes to making important decisions as to the future of the building construction company, which is the execution of the real estate project in which such home buyers are ultimately to be housed.

The Court while clarifying the position of homebuyers as financial creditors and not as operational creditors said, “what is unique to real estate developers vis-à-vis operational debts, is the fact that, in operational debts generally when a person supplies goods and services, such person is the creditor and the person who has to pay for such goods and services is the debtor. In the case of real estate developers, the developer who is the supplier of the flat/apartment is the debtor inasmuch as the home buyer/allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found. 

Another vital difference between operational debts and allottees of real estate projects is that an operational creditor has no interest in or stake in the corporate debtor, unlike the case of an allottee of a real estate project, who is vitally concerned with the financial health of the corporate debtor, for otherwise, the real estate project may not be brought to fruition. Also, in such event, no compensation, nor refund together with interest, which is the other option, will be recoverable from the corporate debtor.

The Court added, "It is these fundamental differences between the real estate developer and the supplier of goods and services that the legislature has focused upon and included real estate developers as financial debtors. This being the case, it is clear that there cannot be said to be any infraction of equal protection of the laws."

RERA only a parallel remedy

Referring to Section 88 of the RERA Act, the Court said that it was an additional remedy, which will not bar other remedies available to a homebuyer. The Code and RERA operate in completely different spheres.

The conclusions of the judgment are:

  • The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.
  • The RERA is to be read harmoniously with the Code, 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.

Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.

This landmark judgment of Supreme Court against builders will definitely prove to be a huge deterrent against the fraudulent builders as this will give huge sigh of relief to the aggrieved homebuyers who can now approach the Consumer Protection Act, 1986, RERA as well as the IBC. The inevitable consequence of this judgment is the likely dismissal of the petition filed by Ramprastha Promoter and Developer in Delhi High Court in due course providing relief to homebuyers.

Top ten List of Judgement

  1. Pioneer Urban Land And Infrastructure Limited & Anr. Vs. Union Of India & Amp; Ors.: Supreme Court nullified builders effort to oust homebuyers from consumer courts and insolvency proceedings. Read More
    August 9th, 2019
  1. Alok Kumar V. M/S. Golden Peacock Residency Private Limited & Anr.: Unfair to make homebuyers wait indefinitely for possession, directs developer to refund money: National Commission. Read More
    6th September, 2019
  1. Anjum Hussain vs Intellicity Business Park Pvt Ltd: In class action suits, oneness of the interest is akin to a common grievance against same person: Supreme Court.
    10th May, 2019 Read More
  1. Pioneer Urban Land & Infrastructure Ltd. vs. Govindan Raghavan: Homebuyers can’t be forced to accept possession in case of unreasonably delayed flat: Supreme Court.
    April 2nd, 2019 Read More
  1. Sunil Kohli vs. M/s. Purearth Infrastructure Ltd.: If the purchaser of good uses the good for earning livelihood, he is ‘consumer’: Supreme Court. Read More
    October 1st, 2019
  1. Vibha Bakshi Gokhale Vs. Gruhashilp Constructions: Dismissal of consumer complaints on mere technical grounds, defeats the purpose of ensuring justice: Supreme Court. Read More
    May 10th, 2019
  1. Punjab Urban Planning and Development Authority (Now GLADA) Vs. Vidya Chetal: Determination of disputes concerning validity of imposition of statutory dues arising out of a “deficiency of service” can be undertaken by the Consumer Fora under the provisions of the C.P. Act. Read More
    16th September, 2019
  1. Maharaja Agrasen Hospital & Ors. vs. Master Rishabh Sharma & Ors: Hospital vicariously liable for medical negligence committed by its Doctors. Compensation enhanced. Read More
    16th December, 2019
  1. Administrator Smt. Tara Bai Desai Charitable Opthalmic Trust Hospital, Jodhpur Vs. Managing Director Supreme Elevators India Pvt. Ltd & Ors.: Can A Trust file Consumer Complaint: matter needs to be revisited: Supreme Court Read More
    October 4th, 2019
  1. Shoda Devi Vs. Deen Dayal Upadhyay Hospital: Supreme Court enhanced award of compensation and said it cannot go restrictive just because the victim is from poor and rural background. Read More
    7th March, 2019
Divya Patwal

VOICE

Translate »