NATIONAL LAW UNIVERSITY ODISHA, CUTTACK

INSOLVENCY AND BANKRUPTCY CODE

PROJECT ON

“IMPACT ON REAL ESTATE COMPANIES “CONFLICT BETWEEN IBC &

RERA”

SUBMITTED TO:

Ms. Kaushiki Brahma

(Assistant Professor of Law)

SUBMITTED BY:

AKHIL NAUTIYAL

(16/B.A.LL.B./012)
Table of Contents
RESEARCH METHODOLOGY .................................................................................................................... 2
OBJECTIVE ............................................................................................................................................... 2
RESEARCH QUESTIONS............................................................................................................................ 2
SCOPE AND LIMITATION ......................................................................................................................... 2
INTRODUCTION ....................................................................................................................................... 3
KEY OBSERVATIONS AND ANALYSIS OF THE DIFFERENCES BETWEEN IBC AND RERA............................ 5
RERA: ................................................................................................................................................... 6
IBC: ...................................................................................................................................................... 6
Key observations & analysis:............................................................................................................... 7
CASE ANALYSIS: PIONEER URBAN LAND AND INFRASTRUCTURE LTD. VS. UNION OF INDIA ................. 8
Background of the case:...................................................................................................................... 8
Constitutional challenge: .................................................................................................................... 8
Decision of the Supreme Court: .......................................................................................................... 9
Key implications for real estate developers: .................................................................................... 10
CAN PRECEDENCE TO IBC WEAKEN RERA? ........................................................................................... 11
RAJESH GOYAL V. BABITA GUPTA & ORS .......................................................................................... 12
NEW ISSUES ARISING IN REAL ESTATE SECTOR .................................................................................... 13
CONCLUSION......................................................................................................................................... 14
LIST OF ABBREVIATIONS ....................................................................................................................... 15

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 RESEARCH METHODOLOGY

The project undertakes a doctrinal form of research methodology, which is a method of

inquiry appropriated in many different academic disciplines. Qualitative research aims to
gather an in-depth understanding of the conflict between IBC and RERA. The sources consist
both of primary and secondary sources.

OBJECTIVE

1. To examine the conflict between IBC and RERA and its impact on Real Estate
Companies in the light of leading judgments and other publications.
2. To examine the unique position of IBC vis a vis RERA, while at the same time
underscoring the importance & effectiveness of RERA for homebuyers.

RESEARCH QUESTIONS

1. How has IBC amendment improved the condition of Real Estate Home Buyers?
2. What are new issues arising in Real Estate market after Pioneer Urban Land and
Infrastructure Ltd. Vs. Union of India judgment?
3. Is IBC Diluting the Impact of RERA?

SCOPE AND LIMITATION

This research project is to analysis the conflict between IBC and RERA. The project covers
the statutory provisions of Insolvency and Bankruptcy Code, 2016 and Real Estate
(Regulation and Development) Act, 2016, and analysis their scope in the real state sector. It
extends to the role of judiciary in the real estate sector. The project is limited to the laws
relating to real estate in India. This project is an attempt to understand the fear of developers,
the standpoint of allottees and the final verdict of the Court to the extent of the conflict
between IBC and RERA.

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 INTRODUCTION

The Real Estate (Regulation and Development) Act, 2016 has been introduced with several
goals and one of its main objectives was to safeguard the consumer interest in the real estate
industry. RERA has been introduced throughout the country and has been developed and is
fully functional, except for a few Member States. The status of applicants, disposals, relief
provided, instructions, etc., would have been shown by a sample verification of various state
RERA websites. The legislation slowly and gradually became a key law that was
advantageous for developers and home buyers.

In order to promote entrepreneurship, the availability of credit, and to balance the interests of
all stakeholders in a timely manner, the Insolvency and Bankruptcy Code 2015 integrated
legislation on the reorganisation and insolvency resolution of corporate persons, partnership
firms and individuals for the maximisation of value of such people's assets.

Imagine if a home buyer takes large loans to buy a flat and encounters a criminal developer
who does not have an interest in finishing or returning the project. A consumer complaint
must be brought by the customer before the Consumer Dispute Redress court which, sadly,
was not open to representatives and pending, and it could take several years. The buyer might
have lodged a probably successful complaint with the RERA. The home buyer decided to
approach NCLT under IBC due to the success of IBC with daily press and social media news
about NCLT. The NCLT's dilemma is whether the home buyer is an "operational creditor" or
a "creditor."

In several NCLT judgements, home buyers were listed as neither fitting within the definition
of ‘financial’ nor ‘operational’ creditors1.The NCLAT2 demanded that home buyers be
treated as "financial creditors" because of a fixed return agreement in the contract in which it
has been decided that the apartments seller would pay 'assured returns' to home buyers before
property is in possession. They concluded that a transaction was a 'financial debt’ within the
context of a Code.

On the one hand IBC seeks to tackle insolvency problems and eventual liquidation of
enterprises, where RERA is a sectoral legislation implemented to infuse transparency and

1
Col. Vinod Awasthy v. AMR Infrastructure Ltd., NCLT, Principal Bench, Delhi, CP No. (IB)-10(PB)/2017 and
Nikhil Mehta v. AMR infrastructures Ltd, NCLT, Principal Bench, Delhi, CP No.(IB) – 03(PB)/2017.
2
Nikhil Mehta v. AMR Infrastructure, NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 07/2017.

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accountability on property that is until now uncontrolled. Although both Acts have been
enacted with the best of intentions, there seem to be some places that could allow for a
confrontation to take place in the years to come. While the latter requires companies to file
for bankruptcy so as to give debtors and creditors a reassurance, the former is aimed at giving
the consumers a sigh of relief by making the promoters and developers responsible for the
delays of a project. Simply said, although one gives creditors priority, the other focuses
mainly on the vulnerable customers. The project, as stated herein, clearly illustrated these
contradictions between the two.

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 KEY OBSERVATIONS AND ANALYSIS OF THE DIFFERENCES
BETWEEN IBC AND RERA

The homebuyers were unsecured creditors under the IBC but, with the 2019 amendment3 in
the law, they have now acquired the status of financial creditors. So they will now have a say
in the weakened entities' resolution process. Though the said amendment is like a breath of
fresh air for the investors, it still stops short to state whether they are secured or unsecured.

On the other hand, Article 7(1) of the RERA Act 2016 states specifically, in the event of a
complaint being lodged, suo motu or on recommendation by a competent authority the
appropriate authorities shall have full rights to revoke the developer registration as last resort.
Registrations may be withdrawn if the former has reason enough to assume that either the
promoter has failed or violated any clause of the Act or is engaging in unfair practices.

Under Section 7 of the Insolvency and Bankruptcy Code, 2016, the applicants could make a
claim against the developer in the case of a default of a minimum of 1 lakh prior to the
amendment. Now, Section 3 of the Law on Insolvency and Bankruptcy (Amendment) of
2020 seeks to modify the trigger of a financial creditors' code.

In the amendment to Section 3 of Insolvency and Bankruptcy (2020), the threshold is set. It
provides a means for financial creditors, under the real estate project, to initiate the corporate
insolvency resolution. The threshold to invoke the code:

Applicants for the same real estate project, of which fewer as stated below, must apply the
application together:

1. Minimum 100 allottees; or

2. Minimum 10% of total allottees.

Section 3 of the Amendment amendments amends Section7 of the Code for Insolvency and
Bankruptcy, providing that home buyers may only make applications under Section7 of the
Code if they have submitted the application jointly under the same property project by not
less than one hundred of such assigned owners or by not less than ten per cent. Whatever is
less, of the total number of such allottees under the same real estate project, agreeing that the

3
'The Insolvency And Bankruptcy Code (Amendment) Bill, 2019' (PRSIndia, 2019)
<https://www.prsindia.org/billtrack/insolvency-and-bankruptcy-code-amendment-bill-2019> accessed 15
October 2020.

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homeowners are protected under a financial creditor concept. The amendment was also
intended for the lawsuit to be taken as a compulsory "class action" suit, meaning that in this
situation it is mandatory for a group of owners of the same property project to file the lawsuit,
in compliance with the thresholds.

RERA:

Who can file: A Seller, Home Buyer or prospective seller / Home Buyer offered flat can file
a complaint irrespective of whether that person is a corporate entity or an individual.

Case Timeline: For redressing complaints, depending on the State, RERA takes a few
months to years.

Accessibility: Each State, which is the Authority under the Act, has 1 to 2 RERA offices.

Reliefs: The power to enforce a fine is usually exercised by RERA, the project is
deregistered, the promoter is included in the defaulters list, direct project completion in the
way given in consultation with the government and incidentally passes appropriate orders.

IBC:

Who can file: As a financial creditor, since a recently amended application has been
implemented in August 2018, a project allottee may file a claim of insolvency pursuant to
section 7 of the IBC for any individual and corporate entity.

Case Timeline: The Insolvency application by the Adjudicating Authority takes about 6
months to one year.

Accessibility: NCLT is traditionally created by each state and is chairman of one state or of
one NCLT, is generally approved and competent in two states.

Reliefs: After the Insolvency Application has been accepted by NCLT, IRP comes into effect
in the management of the company’s affairs and liquidation will be initiated should the
Corporate Insolvency Resolution Phase (CIRP) fail; it can fail if developer is a corporate
entity. NCLT controls the entire process from time-to - time; NCLT includes the submission
of different reports.

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Key observations & analysis:

➢ If the buyer only seeks a return of his / her money, in particular when the financial
condition of the developers has deteriorated, the insolvency claim before NCLT will
be a more suitable solution when the property that does not have many apartments in
the sales portion is being redeveloped.
➢ The closer the project to completion, the more successful RERA will be, particularly
if Flat buyer wishes to get a flat and vice-versa, in accordance with the view that
RERA can also provide compensatory relief.
➢ Insolvency would still be used as a solution if a purchaser felt that the developer's
financial condition deteriorated and that the developer could not finish the project and
refund the money with interest to avoid further declines. It helps to get the most
capital invested with interest recovery. Project completion can take several years
because of the various practical problems that can occur when the project is
completed. Even if developer has no financial ability to pay the order for paying the
money, there will be no good results.
➢ As far as execution is concerned, insolvency, as the method of liquidation of the
company or person's properties, will be a more profitable option if the developer is
unable to be able to return the money invested.
➢ A flat purchaser / home buyer can still initiate criminal cases of fraud and other
criminal actions committed by a developer.

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CASE ANALYSIS: PIONEER URBAN LAND AND INFRASTRUCTURE
LTD. VS. UNION OF INDIA4

Background of the case:

More than 150 builders, developers, real estate companies have challenged Section 5 of the
Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 incorporating two
clarifications into section 5 of Clause (8)(f) of IBC. According to the first clarification, any
amount raised from the "allottee" for a "real estate project" will be regarded as a financial
creditor under section 7 of the IBC and will have a commercial impact of borrowing. This
amendment enabled the home buyer to initiate insolvency proceedings against defaulting
Promoters under section 7 of the IBC. The amendment also allowed home-buyers to have
representation by an appointed representative on the Creditors Committee, and to have voting
rights.

Constitutional challenge:

The real estate companies argued that the classification of homebuyers as finance creditors
would be an unreasonable classification and unfair inasmuch as it treats unevenly and
unequally, with no clear disparities. The amendment is thus contrary to Article 14 of the
Constitution. It was also pointed out that such an amendment runs counter to the goals set by
IBC and some exasperated homebuyers could stop the whole housing project.

The Writ Petitioners brought the amendment before the Supreme Court on the ground that the
fundamental right was affected under Article 19(1)(g) and the fiction in the explanation was
inconsistent with the intent of the IBC. Furthermore, it was argued, that the enactment of "a
sledgehammer to destroy a gnat" will make the amendment under question unreasonable,
disproportionate and in breaches of Article 14 and 19(1)(g) because there was a relevant
legislation, that is RERA (sector-specific legislation), that addressed such problems. It was
also contended that there was no ‘debt’ or ‘borrowing’.

On the judgement of the Supreme Court5 the additional solicitor General relied and argued
that the amendment law would cover the ratio therein defined. It has also been suggested that

4
Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. WP (C) No. 43/2019.
5
Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors.─ (2019) SCC OnLine SC 73.d

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deals to acquire real estate would also come under the scope of 'financial debt' even without
an explanation. The counsel of various allottees argued that remedies under other laws did not
matter and that the lapse in the State Rules meant that one-sided deals that benefited the
developer continued.

Decision of the Supreme Court:

The Supreme Court upheld that the amendments proposed to IBC in relation to home buyers
were constitutionally valid and held that:

i. The Insolvency Law Committee found that the delays in the completion of apartments
are common problems and the amounts earned from household buyers contribute
significantly to the construction of such properties. It also had to be clarified that
home buyers are deemed "financial creditors" in order to access the Code and to hold
a position on the creditors' committee.
ii. It is hard to consider the argument that RERA is a special bill dealing with a real
estate development project and thus needs to take precedence over the Code, which is
just a general piece of legislation. Parliament was aware of the RERA and had added
some definition of provisions to the Code at the time of the implementation of the
explanation in IBC Section 5(8)(f).
iii. This code is intended as a mechanism in rem, which is totally beyond the reach of the
allottee after being triggered. Thus, anyone who prefers and requests under Section 7
of the Code is at risk that in the event of any infringement by the developer, their
apartment will not be completed in the short term.
iv. When the petition is accepted under the Code6, due to the strict insolvency
procedures, the allottee can never be refunded for the full principle or interest. In
comparison, if these allottees approach under the RERA, the repayment and
compensation interest is more than likely to be completed early and/or to be entirely
reimbursed.
v. In case of breach of agreements with the developer, the claimant shall be entitled to a
position in a creditor's committee, provided that the allottee may demand
reimbursement.

6
The Insolvency and Bankruptcy Code 2016.

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The amendments are a great support to the developers, but homebuyers / allottees have been
discriminated against unjustly. The amendment was meant to bypass the Supreme Court,
which saw homebuyers as financial creditors. Hardship has been established for the
beneficiaries to invoke the code –even though homebuyers have been added under the law by
an amendment (2018) to allow them to enter the proceedings with the same status as financial
creditors.

Key implications for real estate developers:

The Judgment opens the door for home buyers to investigate the RERA, the IBC and the
Consumer Protection Act (1986) modes of redress to misrepresented real estate developers.
These solutions offered to home buyers are mutually independent and are available to home
purchasers according to their own preference.

Whether Home buyers would approach the NCLT as their first recourse under the IBC
remains obvious because the IBC is not targeted at recovering individual debts, but only at
resolving the corporate debtor's insolvency overall. Consequently, the start of the IBC process
does not guarantee that any reimbursement for the sums owed to the homebuyer is received.
Homebuyers can only approach NCLT under the IBC if there is no chance of their units being
kept or their money being returned.

In the event that the insolvency resolution procedure is started, a real estate developer could
still escape the whole process by providing a remedy to homebuyers who would then be able
to withdraw before the IBC in compliance with section 12A of the NCLT. Further, the
Judgment also notes that in case of a triggering of the IBC, the erstwhile management of the
real estate developer may, (subject to the qualifications set out in section 29A), submit a
resolution plan which can then be voted upon by the committee of creditors. Moreover, the
Judgment states that, if an IBC is triggered, the previous management of the developer of the
property (subject to the qualifications provided for in section 29A) may create an agreement
plan that may then be accepted by the creditors' committee.

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 CAN PRECEDENCE TO IBC WEAKEN RERA?

The lack of enforcing processes is a very common pitfall under RERA. Thus, while
homebuyers are being remedied by RERA, the fundamental reality in many RERAs at the
state level is that remedies do not exist beyond paper.

IBC did not consider homebuyers as either financial or operational creditors during the initial
stages. By promulgating, however, the Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2018 a reform in the meaning of "financial debt" under Section 5(8)(f)7 of the
IBC has granted the homes buyers priority status to include:

“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.”

Just a year ago, by introducing ceiling thresholds and requiring a joint application by
allottees of real estate projects, the Insolvency and Bankruptcy Code (Second Amendment)
Bill, 2019 reversed the progress to empowering home buyers;

“Provided further that for financial creditors who are allottees under a real estate project,
an application for initiating corporate insolvency resolution process shall be filed jointly by
not less than one hundred of such allottees under the same real estate project or not less than
ten percent. of the total number of such allottees under the same real estate project,
whichever is less:8”

Therefore, in compliance with Section 7 of the Code, this amendment would not allow
individual home buyers to initiate insolvency proceedings.

Homebuyers must recognise the harmonious nature of RERA by means of Section 88 of the
RERA Act currently;

“The provisions of this Act shall be in addition to, and not in derogation of, the provisions of
any other law for the time being in force.9”

7
Section 5(8)(f) of the Insolvency And Bankruptcy Code 2016.
8
Section 7 of the Insolvency And Bankruptcy Code 2016.

9 Section 88 of Real Estate (Regulation and Development) Act, 2016

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The above provisions show that a homebuyer is not inherently limited to RERA when a
process is initiated against the builder in RERA. Remedies under RERA are remedies in
persona i.e. they impose a liability upon the Builders on behest of an individual homebuyer
for breach of contract. If the builder violates the agreement, the homebuyer may then ask the
buyer to repay the amount paid along with the interest due under the RERA and the
homebuyer will be named a decree holder, if the same is granted.

RAJESH GOYAL V. BABITA GUPTA & ORS10:

Facts: Initially under Section 7 of IBC, the allottees who were Financial Creditors moved an
application against the Promoter to trigger the CIRP. The appeal was accepted in the
challenged order of 19 September 2019 by the Adjudicating Authority (NCLT), Principal
Bench, New Delhi. Mr Rajesh Goyal (Promoter) subsequently lodged an appeal to NCLAT
on the ground that, according to the ratio of the Supreme Court in "Pioneer Infrastructure,"
the respondents (alottees) are themselves in default. The appellant pointed out that the project
is on the brink of completion and the appellant had paid more than the sum obtained from the
"Financial Creditors" in respect of that project; in reality, the costs were incurred in
compliance with the requirements of RERA.

Judgment: Taking into account the amount invested by a promoter and project status,
NCLAT has allowed the corporate debtor's promoter to reinstate, under CIRP, into the
exercise of his ‘inherent powers' in respect of the business debtor's projects as a "Financial
Creditor," pursuant to Rule 11 of the NCLAT rules of 2016. Furthermore, the CIRP process
would close and the unsold flats or apartments would be handed over to the promoter if the
projects are complete and creditors would be compensated and the certificate for completion
from the Interim Resolution Professional and other requirements fulfilled.

CONSEQUENCES:

In these circumstances, NCLAT 's approach to the exercise and broad interpretation of the
“Inherent Powers” conferred under Rule 11 of the NCLAT Rules 6 in Rajesh Goyal surpasses
RERA and will entitle the Tribunal judges to distinguish or disagree with RERA it in future
cases. Therefore, it could be concluded that the effect of RERA is diluted slowly and steadily
due to the proactive approach of the tribunals formed under the IBC and disputes are
flavoured by the IBC among home buyers and developers.

10
Rajesh Goyal.v. Babita Gupta & Ors 193(IBC)157/2020.

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 NEW ISSUES ARISING IN REAL ESTATE SECTOR

The home buyer is in a tough position. There could be a number of allottees who would like
the apartment where the IBC would come into effect, and all other creditors would enter the
scene, and from a claim’s viewpoint, there could be a large and greater amount of debt
relative to that of the allottee. The developer also has difficulty because a business otherwise
healthy but in difficulties due to market situations can be affected by the IBC window.

The decision of the three Supreme Court Bench upholding the constitutional validity of the
2018 amendment11 states that since the beginning of the IBC, the awarded homeowner has
become "financial creditor."

The Supreme Court acknowledged the idea that RERA is well known to the Parliament, but
chose to clarify that any amount the owner earns in respect of a real estate project would be
regarded as a commercial-debt amount. In this situation, the Parliament is equally informed
of the 2017 Central Goods and Services Tax Act, which intends to treat complex construction
as a service12. Now that the allottee is to be considered as a financial creditor, can it be said
that a real estate developer is engaged in providing construction services to a consumer?

The Supreme Court held the operating debt creditor to be the one who offers products and
services and the developer is the debtor in case of real estate developers as he pays advance
payments to his own home.13 Can we now assume that the transaction is equivalent to
borrowing and that there is no service from the developer to levy the GST by classifying the
allottee as the creditor and a financial creditor?

The Supreme Court ruled that the allottee 'deburse' the money as advance payments for the
construction of an immovable project and thus it is debt14. Had the Court held that the allottee
is a operational creditor, it would have survived the existence of the construction as a service
but the declaration as financial creditor will offer new perspectives for discussion as to
whether a real estate development supplier or recipient or service equation has been given.

11
Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. WP (C) No. 43/2019.
12
Schedule-II 5(b) of the CGST Act, 2017.

13
Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. WP (C) No. 43/2019 para 40.
14
Pioneer Urban Land and Infrastructure Limited & Anr. Vs. Union of India & Ors. WP (C) No. 43/2019 para 61.

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 CONCLUSION

Although the 2nd Amendment 2019 of IBC has severely restricted homebuyers' rights to
trigger the IBC insolvency mechanism u/s 7, homebuyers are obligated to remind themselves
of their legal rights in all various types of Indian Law, such that the remedies they pursue are
better suited. Homebuyers, for example, should be careful that they approach IBC if the
builder is not financially stable because triggering the insolvency procedure would create the
collective distribution assets and competition between the builder and all other creditors.
Should all home purchasers seek to enforce the terms of the contract, RERA offers a more
centralised approach to home buyers thus enforcing penalties on builders in default.

Although the incorporation of homebuyers as financial creditors has provided time-bound

and expedient solutions and justice for homebuyers, the customer must pursue all practicable
remedies under RERA before using the IBC option. There is no need to reaffirm that RERA
provisions are far more consumer-friendly and, if carefully followed, they will deliver a
better and more acceptable outcome for homebuyers. In order to make it more effective &
time bound, the government must also implement some improvements in RERA provisions.

It is important to grant RERA more functional autonomy and additional adjudicative powers
to make it more effective and successful. Finally, the homebuyers should be cautious when
using the different provisions; otherwise they would leave their case expeditious and may
ultimately prolong it far beyond their power. Either the government or courts must settle and
ensure that each law harmoniously coexists by specifically demarcating, restricting and
applying the provisions of RERA & IBC to homebuyers.

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 LIST OF ABBREVIATIONS

RERA: Real Estate (Regulation and Development) Act, 2016

IBC: Insolvency and Bankruptcy Code, 2016
NCLT: National Company Law Tribunal
IRP: Insolvency resolution process
CIRP: Corporate Insolvency Resolution Process
NCLAT: National Company Law Appellate Tribunal.

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