Home buyers are “unsecured creditors”

The two laws enacted in 2016 may have the best of intentions, but the Insolvency and Bankruptcy Code (IBC) and the Real Estate (Regulation and Development) Act (RERA) appear to be pitted against each other when it comes resolving interest of bankers and home-buyers, according to an ASSOCHAM- Thought Arbitrage paper.

“The conflict between IBC and RERA came to the fore in quite a few bankruptcy proceeding in the recent times…. In a way, IBC and RERA have areas where there are possibilities of conflict in operation.

“While IBC allows companies to file for bankruptcy to provide relief to debtors or creditors, RERA looks at providing relief to home buyers and seeks to hold developers or builders responsible if the project is delayed,” the paper said.

As per provisions of the IBC, home buyers are “unsecured creditors” and as a result their priority to be compensated comes after those institutional or other creditors who have provided loans to the developer. Scope for confusion prevails as for both RERA and IBC, the law states that it will prevail over other laws.

In the latest case related to an Amrapali project, the Supreme Court held that financial creditors cannot take over homes belonging to the home buyers. In other words, Supreme Court upheld the rights of home buyers ahead of the creditors.

This amply demonstrates the fundamental contradiction between IBC and RERA – while one tries to give primacy to the creditors the other tries to put consumers before creditors.

Since IBC was legislated in May 2016, after RERA was passed in March 2016, legal experts opine that the Insolvency Act will override RERA, in case of a conflict. In some cases, that might undermine the actual objective of consumer security, with which RERA was enacted.

“The fundamental contradiction between these two may drag cases to judicial and legal forums,” the paper noted with concern.

In the light of the recent legislation of Bankruptcy Act, RERA may not create separate provisions to deal with bankruptcy. “Synchronising Bankruptcy Act with RERA may be a better way to tackle this problem,” ASSOCHAM Secretary General D S Rawat said.

Regulation of the real estate sector remains an important driver for its growth. A well organised and regulated real estate sector is more likely to grow rapidly in the long run than an unorganised one

Effective implementation of RERA has the potential to drastically change the composition, operation and financing of the sector, particularly the residential real estate sector, the paper said. fii-news.com