Legal Position Of Home- Buyers Under Rera And Ibc, 2016

Initially, Homebuyers were not expressly covered by the concept of “financial creditor” or “operational creditor” under the Insolvency and Bankruptcy Code, 2016. Nevertheless, The National Company Law Appellate Tribunal (“NCLAT”) held in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure that the amounts collected by developers from homebuyers under assured return schemes had the “commercial effect of a borrowing”. Therefore, they were held to be “financial creditors” under the Code and qualified as applicants for the initiation of the corporate insolvency resolution process (“CIRP”) against the real estate developer.

According to the definition in Section 2(d) of the Real Estate (Regulation and Development) Act of 2016 (RERA), individuals who had been given real estate properties (commonly referred to as home buyers) were now considered financial creditors under the Insolvency and Bankruptcy Code,2016.

The IBC defines a “financial creditor” as any person who is owed a “financial debt.” This definition includes anyone to whom such a debt has been legally transferred or assigned. Homebuyers and other beneficiaries (defined as buyers and extended leaseholders within real estate projects) can invoke Section 7 of the IBC which enables financial creditors to file a petition with the National Corporation Law Tribunal (NCLT). Additionally, a legitimate representative will represent these home buyers and real-estate allottees on the creditors’ committee. The amendments made by the Ordinance inter alia bring IBC in sync with Section 18 of RERA which gives the allottees the right to demand

1. refund of the entire amount paid by the allottees (together with interest at prescribed rates), and
2. interest to be claimed for any delayed possession. 

Along the present legal framework, The National Company Law Appellate Tribunal’s ruling that once a homebuyer is found to be entitled to a refund, he will be considered to be a financial creditor and their claim cannot be admitted as that of homebuyers was challenged in an appeal filed on August 14, 2023. The bench consisting of Justice S Ravindra Bhat and Justice Prashant Kumar Mishra made an observation in the present case.

ANALYSIS OF THE CASE:

In the case of Vishal Chelani v Debashis Nanda, the appellant lodged a complaint before the Uttar Pradesh Real Estate Regulatory Authority (UP RERA), in accordance with section 31 of the UP RERA Act of 2016. This complaint, filed in 2019, led to the issuance of a recovery certificate aimed at refunding the appellant for their flat purchase. The builder company was in the process of resolution. Consequently, the Interim Resolution Professional, recognizing the appellant as a homebuyer, rejected their claim and advised them to resubmit it as a financial creditor.

The NCLAT, in this matter, referenced the Supreme Court’s judgment in Kotak Mahindra Bank Limited v. A. Balakrishnan & Anr. The Supreme Court’s decision highlighted that once a Recovery Certificate has been issued, the party possessing it is regarded as a Financial Creditor. Owing to the dissatisfaction with the outcome of the judgement, the appellant appealed to the Supreme Court.

1. Critical Analysis of the judgement delivered in Kotak Mahindra Bank Limited v. A. Balakrishnan & Anr.:

The court’s examination in the Kotak Mahindra Bank Limited case dealt with the aspect to whether a person, who holds a Recovery Certificate would be a financial creditor within the meaning of Section 5(7) of the IBC. The court noted that in clause (8) of Section 5 of the IBC, the definition of the term “financial debt” stated that it “means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes”.

The judges relied on the case of Pioneer Urban Land and Infrastructure Limited and anr. vs. Union of India and others, where it examined the Explanation proviso to Section 5(8) (f) of IBC. It stated that any funds collected from individuals who were allocated property in a real estate project would be treated as if they were borrowed funds, carrying the financial implications of a borrowing. The court, also, concluded that the phrase “and includes” in the context of the legal provision referred to aspects that might not necessarily be explicitly mentioned in the main part of the definition.

Applying this understanding to Section 5(8) of the IBC,2016, it was analysed that the wording “means a debt along with interest, if any, which is disbursed against the consideration for the time value of money” was followed by “and includes.” It was evident that by using the term “and includes,” the legislative body intended to provide examples that could be encompassed within the definition of “financial debt.” The court observed that the legislative intent was not to exclude a liability related to a “claim” arising from a Recovery Certificate from being considered as “financial debt” but to encompass such a liability arising from a simple “claim” within the definition of “financial debt.” Thus, the apex court determined that a liability for a claim resulting from a Recovery Certificate would be a “financial debt” within the meaning of Section 5(8) of the IBC and a “financial creditor” within the meaning of Section 5(7) of the IBC.