Insolvency Proceedings Against Builders in NCLT

The National Company Law Tribunal came as a big relief to the home buyers who were not treating RERA as a serious forum. RERA lacked the teeth which could put builders in a spot and could prosecute them with dire consequences.

The National Company Law Tribunal came as a big relief to the home buyers who were not treating RERA as a serious forum. RERA lacked the teeth which could put builders in a spot and could prosecute them with dire consequences. The fact that various Courts recognized NCLT as the forum which could be approached by the homebuyers caused quite an uproar amongst the Builders and Developers. The fact that NCLT could declare them insolvent and appoint a Liquidator was proving to be a difficult hurdle to overcome.

However this did not last long as the amendments stated that there should be at least 100 homebuyers or 10% of the strength to move NCLT. Developers from Delhi-NCR proposed that all buyer objections initially be heard by controller RERA before insolvency procedures are initiated. Consumer activists see the move as an impractical one and a setback for aggrieved homebuyers even as developers and some other stakeholders have welcomed it. Nothing will change for homebuyers whose applications have already been accepted by the NCLT, but new applicants may have to comply with the new rule after it becomes law. However, many feels that the amendment provides no relief to real estate companies for existing ongoing projects where NCLT has admitted applications for initiating insolvency proceedings filed by homebuyers. These will be subjected to the full insolvency resolution process under IBC. However, there is no guarantee that any new application filed before the proposal is enacted into law will be accepted either. NCLT has the right to reject the application of a financial creditor and not start proceedings against the defaulting developer. As per the real estate agents' summit body, CREDAI, around 450 real estate companies and projects around the nation are confronting insolvency procedures under the Insolvency and Bankruptcy Code (IBC) due to default in project delivery to homebuyers as well as bank loan repayments. Also the threshold has been increased from 1 lakh to 1 crore for defaults, which again is detrimental to the interest of the Operational Creditor. Activists said that homebuyers were included as financial creditors after a lot of struggle, and the current move was a step down from what they had achieved. In June 2018, IBC was amended to give homebuyers the right to initiate a case against an errant developer. They were allowed the right to be on the committee of creditors and were given voting rights to influence the resolution process.

According to Anurag Singh Thakur, the minister of state for finance and corporate affairs, a total of 1,821 cases filed by homebuyers against builders since June 2018 were pending in NCLT as on 30 September 2019.

Furthermore, ever since the homebuyers got the financial creditors’ status, developers have been alleging that the law was being misused, leading to more project delays. The change, they said, would reduce cases of misuse and protect the developers. It was observed that when two or three people go to NCLT, the objective may not be to get their houses, but to recover their money and given the present scenario, where if you had invested, say, ₹1 crore, you may only get, say, ₹80 lakh when you sell the property. There are cases where buyers have approached the NCLT even though the projects were delayed by only a few months.

The major ground being taken was that Section 79 of RERA reads as “No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which the Authority or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act”. This however, was turned down by the Supreme Court, stating they are concurrent remedies.

Now after the pandemic of Covid, the projects have again gotten stalled. Some of the builders may take the plea that there are no laborers available and also that the construction material is not available on sites. This can be argued as delay in performance and insolvency cannot be invoked because the circumstances are not favourable. Since there are no construction activities, cash flow is hindered, non-performance can be justified. Insolvency proceedings may not be the right option as of now. The finance ministry and the RBI have already come up with moratorium periods for the sector. 

An office memorandum of the MCA provides that a party may invoke the FM clause. The memorandum makes it clear that invocation of a FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. A notice of force majeure must be given as soon as it occurs, and it cannot be claimed later. Further, if the performance, in whole or in part or any obligation under the contract, is prevented or delayed by force majeure for over 90 days, either party may terminate the contract without any financial repercussion on either side. However it is to be seen if this provides relief to the real estate sector.