There is a need to strengthen dispute resolution platforms other than the IBC, if the government wishes to protect the interests of distressed real estate buyers in India
BY VISHAL DUGGAL
For quite some time, the real estate sector in India, a preferred avenue of investment for NRIs, has been hit hard by bankruptcy of even big and well-known builders. It started with the bankruptcy of the Lavasa Corporation and the Amrapali Group. Over the years, the National Company Law Tribunal (NCLT) has initiated bankruptcy proceedings against several developers such as Unitech, Sahara, Jaypee Infratech, Logix City Developers, Three C Homes, MGF Developments and Spaze Tower. More recently, the news of Supertech Ltd’s bankruptcy at the end of March was followed by the bankruptcy of ATS Group company Anand Divine Developers on April 6.
While this is just news for others, it is a big blow to thousands of Indians living in the country and abroad who had booked housing units from real estate companies that have been declared insolvent. The hard-earned money of thousands of consumers is invariably stuck with no hope
of early resolution.
WHY ARE REALTY COMPANIES GOING INSOLVENT ONE AFTER THE OTHER?
There is no single reason for real estate companies to go bankrupt, least of all the Covid crisis which is only used as an escape route by builders to circumvent the law.
Most of the companies reached the verge of bankruptcy because they did not have the money to pay off the loans they took one after the other from banks or financial institutions. When they were not able to service their debt, banks and financial institutions finally took the legal route of the IBC or the Insolvency and Bankruptcy Code, 2016. But the biggest losers due to the bankruptcy of real estate companies are those who have spent their lifetime savings to buy a roof over their heads.
UNETHICAL PRACTICES
The lack of fair business practices is also a reason for the growing incidence of bankruptcy of real estate entities. In the pre-RERA regime, they would use the money collected from customers to buy new land and launch new projects, without paying their statutory dues and sticking to
existing project completion.
WAGES OF TRANSGRESSION
There have been many reports of nexus between builders and development authorities. The Comptroller and Auditor General (CAG) laid bare malpractices in the approval of the land allotment and development plan in its Performance Audit Report on “Land Acquisition and Allotment of Properties in NOIDA” in Uttar Pradesh, tabled on December 17, 2021.
The CAG revealed massive irregularities in land acquisition, allotment and approvals in New Okhla Industrial Development Authority (NOIDA) due to connivance between builders and officials, resulting in trauma for homebuyers and massive losses for the Authority. The exchequer lost out on ₹ 52,000 crore as officials adopted dubious practices, said the CAG in its first-ever performance audit of the township during 2005-06 to 2017-18.
The national auditor found several instances of lack of due diligence, contravention of rules and orders, misrepresentation and wilful concealment of facts in planning, acquisition of land, pricing and allotment of properties. The rights of farmers were violated through misuse of statutory provisions. All this resulted in severe hardship to homebuyers on account of incomplete projects and a huge amount of outstanding to NOIDA, pushing many realty players into the abyss of bankruptcy.
LONG-DRAWN PROCEEDINGS UNDER IBC
Apart from financial institutions and banks, homebuyers, whose status has now been elevated to the status of the financial creditors, too can proceed against real estate developers in the NCLT. But the IBC (Amendment) Act, 2020 has introduced a minimum threshold: 100 or 10% of the
homebuyers, whichever is lower, have to come together to file a petition to initiate proceedings against a developer. In stark contrast, earlier, even a single homebuyer could approach the NCLT against the defaulting real estate company.
Besides, the proceedings at NCLT are painfully long, complex, and tedious. A case in point is Jaypee Infratech’s projects where construction is yet to start even a year after homebuyers and lenders voted in favour of Suraksha Group taking over the real estate developer.
An analysis conducted by the Investment Information and Credit Rating Agency (ICRA) of all the cases since the implementation of the IBC five years ago till December 2021 reflects very slow resolution. As much as 47 percent or 1,514 cases of the total 3,247 cases were resolved through liquidation, and only 14 percent or 457 applications were closed as per proper resolution plans approved by lenders. In the real estate category, 244 were admitted and 116 closed.
Further, a study by advisory firm Grant Thornton Bharat has revealed that only nine cases out of 223 debt-ridden real estate companies admitted for resolution under the IBC until September 2021 have been resolved.
RECOURSE TO LEGAL REMEDIES
The most disadvantageous aspect of the NCLT process for a real estate buyer is that once a company is admitted to the insolvency process, there is a moratorium on all pending civil, consumer and RERA cases, including executions, till a resolution is achieved. All that buyers can do is to file their claims with the Interim Resolution Profession (IRP) within the statutory prescribed timeline under the IBC.
The said moratorium bars institution or continuation of suits against the Corporate Debtor. The proceedings initiated by homebuyers seeking execution of their decree of refund or refund certificate (RC) stand to be adjourned sine die until the Corporate Insolvency Resolution Process
(CIRP) is concluded. Thus, start of IBC proceedings debars property buyers from availing of recourses available under the Real Estate (Regulation and Development) Act, 2016 or the Consumer Protection Act (CPA), 2019.
The IBC process requires homebuyers to file claims within the first 14 days from the day the insolvency petition is admitted. They can get a maximum of 90 days to file the claims. If they fail to do so, they stand to lose their investment for good.
NEED FOR ALTERNATIVE SOLUTIONS
In view of the coverage of real estate cases under the CPA, and the coming into force of RERA, there is an urgent need for institutionalising dispute resolution platforms other than NCLT for real estate cases. Mediation can also be considered as one of the ways for resolution of real estate disputes. The functioning of conciliation forums of RERA has been quite encouraging in this context. The NCR conciliation forum
of the Uttar Pradesh Real Estate Regulatory Authority (UP RERA) had resolved more than 1,150 property disputes worth ₹ 345 crore through amicable settlements till March 2022.
Well, that was just an instance. The unsavoury trend of real estate companies landing up at the NCLT needs to be halted forthwith. The government needs to strengthen the statutory platforms such as RERA and Consumer Forums to protect the interests of real estate allottees, and make it mandatory in the legal framework to ascertain the consent of real estate consumers before a realty company can be admitted for resolution under the IBC.
