CORPORATE LAW II

TOPIC
Impact on Real Estate Companies:
Conflict between IBC and RERA
 Impact on Real Estate Companies: Conflict between IBC and RERA

CONTENTS

ACKNOWLEDGEMENT.........................................................................................................II
ABSTRACT...............................................................................................................................3
INTRODUCTION......................................................................................................................4
Research Objectives...............................................................................................................4
Statement of Problem.............................................................................................................5
Research Questions................................................................................................................5
Research Methodology...........................................................................................................5
CONFLICT BETWEEN IBC AND RERA...............................................................................6
CONFLICT BETWEEN RERA AND IBC – REALLY?..........................................................7
AMENDMENT IN IBC AND ITS EFFECT.............................................................................9
IBC Amendment....................................................................................................................9
Torrent of Cases.....................................................................................................................9
DECISION OF SUPREME COURT.......................................................................................11
BENEFITS OF RERA FOR THE BUYERS...........................................................................14
CONCLUSION........................................................................................................................17

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 Impact on Real Estate Companies: Conflict between IBC and RERA

ABSTRACT

This project talks mostly about two acts RERA, i.e., Real Estate (Regulation and
Development) Act 2016 and Insolvency and Bankruptcy Code 2016. One is a law related to
real estate and the other is based on bankruptcy law.

Both of these impact the real estate companies. In this project we see how this law will
impact the main stakeholders in the real estate. These include developers, allottees as well as
the creditors. We will try and see their fear, standpoint, opinions of the stakeholders.

We will also see if these laws are against each other or are supplementing each other towards
a single goal.

And then we will move towards the judgement given by the Supreme Court and see how the
Supreme Court judgment has resolved the issue.

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 Impact on Real Estate Companies: Conflict between IBC and RERA

INTRODUCTION

To understand the impact on real estate companies, we need to first know what are IBC and
RERA. So let us look at them one by one.

IBC, Insolvency and Bankruptcy Code, 2016 was enacted in 2016 to merge all existing laws
on insolvency and bankruptcy and create a single law on it. This act acts as a solo solution to
resolve issues related to insolvency. It will now smoothen the process and will be time
efficient as well as economic. This code also seeks to safeguard the interests of small
investors which in turn will glow the business environment in India. This entails a total of
255 sections and 11 schedules.

RERA, The Real Estate Regulation and Development Act, 2016 seeks to protect home buyers
and adding to it also contributes to boost investments in real estate. The basic aim of this act
is to establish Real Estate Regulatory Authority (RERA) in each state to regulate the sector
and also plays a role of an adjudicating body to ensure speedy resolution of disputes. It
consists of 92 sections.

Research Objectives

This topic is mainly to see the impact on real estate caused due to the conflict between IBC
and RERA. Now in this project we will be talking about

1. The main stakeholders in the real estate. These include developers, allottees as well as
the creditors. We will try and see their fear, standpoint.
2. Also, this study will include the judgement given by the Supreme Court.
3. We will also try and see if these laws are against each other or are supplementing each
other towards a single goal.

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 Impact on Real Estate Companies: Conflict between IBC and RERA

Statement of Problem

Why this problem is researchable?

This is a very good question and also begs for an answer as to why one should invest time
studying it. Land from time immemorial has not only been a source of wealth but also one of
the basic necessities of a human. From time immemorial certain laws and statutes have been
made to regulate land to ensure harmony in the society.

When we talk about modern India, which strives to make itself into a welfare state, ensures
smooth functioning of the society. Therefore, it becomes more pertinent for us to ensure
smooth management of lands. The two laws, IBC and RERA are nothing but a tool to ensure
this end. Since these laws are sometimes conflicting, leading to chaos, it has become
important to understand these both laws and get a clear picture of it.

Research Questions

This project is primarily based on but not limited to finding answers to the following
questions:

1. What are the fears, standpoints, opinions of the stakeholders of real estate?
2. In which way the Supreme Court judgment has resolved the issue?
3. Are these laws really conflicting or just supplementary to each other?

Research Methodology

The research methodology adopted by the authors of the project is doctrinal. The authors
have cited various cases, reports, articles and statues. The authors have also referred to
various lectures of eminent jurists. Moreover, the research work has been completed in
adherence to the analytical method of research and relied on secondary sources.

The methodology adopting in drafting is descriptive in nature. This project endeavours to

follow the existing scenario and establish a relationship with the subject of the topic. The
citation method adopted is OSCOLA.

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 Impact on Real Estate Companies: Conflict between IBC and RERA

CONFLICT BETWEEN IBC AND RERA

According to IBC, the people who buy homes are known as unsecured creditors, due to
which they are second to when it comes to get compensated after institutional or any other
creditors.

Now let us look what actually is the conflict between IBC and RERA. The contention has
arisen recently in some bankruptcy suits. IBC allows the companies to declare themselves
bankrupt so that it helps them to pay back the debtors as well as the creditors. On the other
hand RERA prioritise homebuyers by making developers or builders responsible for the
delay.

In Amrapali project case, the Supreme Court held that the financial creditors cannot take
houses to avail their due money. This clearly showed that homebuyers were prioritised than
the
financial creditor. This decision was on the side of RERA. The main contention is on the
priority. One law gives priority to one while the other law gives priority to other. In one law.
consumers over creditors, in the other creditors over consumers.

One principle says that since IBC was legislated in May, 2016 and RERA in March, 2016.
Therefore, IPC should prevail over RERA. But does time should be the whole determinant or
we should look at it with different lenses.

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 Impact on Real Estate Companies: Conflict between IBC and RERA

CONFLICT BETWEEN RERA AND IBC – REALLY?

RERA is a law made specifically to deal with issues relating to real estate. Its purpose is to
make real estate sector a transparent and accountable sector and regulate it for the greater
good.

IBC is an umbrella compilation of laws made to resolve insolvency and bankruptcy issues.

When we talk about a conflict, it means there are two competing parties, that means there is
no clarity as to which one would be considered over whom. So let us look inside the laws to
see what they have to say in matters of conflict.

In IBC, Section 238 clearly states whenever there is a conflict between ant law and IBC, it
will be IBC which would prevail.

In RERA, Section 89 states that it would be the one considered in case of conflict.

They would only clash if IBC is invoked in case of real estate. As far as IBC does not gets
into the real estate sector there is no issue. But it is not that IBC prohibits or stops the
application of other laws when invoked, different laws can prevail simultaneously. infact
Section 30(2)(e) provides for it.

Now what happens when the company becomes insolvent. According to Section 6 of IBC,
any of the stakeholders, i.e., financial creditors, operational creditors or the company itself
can declare and invoke the insolvency proceedings. Now after the proceedings start a
committed gets constituted know an Committee of Creditors (CoC) and a professional is
appointed known as the Insolvency Resolution Professional. Adding to it Section 21 of IBC
provides for the members of the CoC which consist of financial creditors, who will then vote
on the Resolution Plan.

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 Impact on Real Estate Companies: Conflict between IBC and RERA

But IBC also provides that operational creditor can be a part of the CoC meetings but cannot
cast their vote.1

This act is an amazing act to rescue the secured creditors but is not able to lend its hand to the
non-secured creditors. Here comes the RERA act which provides shoulder to their head.

RERA makes sure that at least 70 percent of the amount collected from the buyers be
deposited. This amount includes the previous amount excluding the amount spent on making
the project.2 It can also freeze the account of the defaulter, i.e. the company which can only
be redeemed when the resolution plan gets endorsed.3

But what needs our attention is that. IBC’s main priority is to make sure the creditors get their
money back but not on the completion of the project. This very thing led to the insertion of
the amendment in IBC which made sure that the allottee be an active member of the CoC.

Now the buyers will be an active member and will be a member for making the plan. Now
whether the Resolution Plan makes another party or a third party liable, it would have to take
a written consent from at least 2/3rd of the buyers as well as the RERA Authority.4

In general IBC and RERA works in tandem to secure buyer and makes sure that the project is
completed. Problem only arises when either the consensus on resolution plan is missing or
not been accepted by the authority adjudicating it or if the company needs to be liquidated.

The conflict ignites because as per IBC there is a hierarchy of creditors, with secured
creditors at the apex.5

Now let us understand this in simpler way.

1
Insolvency and Bankruptcy Code 2016, s 24
2
Real Estate (Regulation and Development) Act 2016, s 4 (2) (1) (d)
3
Real Estate (Regulation and Development) Act 2016, s 7 (4) (c)
4
Real Estate (Regulation and Development) Act 2016, s 15
5
Insolvency and Bankruptcy Code 2016, s 53

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 Impact on Real Estate Companies: Conflict between IBC and RERA

AMENDMENT IN IBC AND ITS EFFECT

To understand it better let us read and understand the following scenario.

These things started when a buyer who took massive loans to purchase an apartment gave
money to the builder. If the builder delays and shows no interest in completing the project,
then what options does the homebuyer has. One thing which he can do is to go to consumer
forum which would be both time and cost taking. Another thing which he could do is to go
through RERA. But that person went to NCLT through IBC, where the main contention was
whether to tag the homebuyer as operational creditor or a financial creditor.

In few cases the NCLT put the homebuyer in neither of the domains. But on appeal it was
decided that the homebuyer was a financial creditor since in the contract made the seller of
the apartment pays the buyer to pay assured returns until the builder does not give the
possession of the house to the buyer. This transaction was similar to loan, which led the
NCLAT give the homebuyer the status of a financial creditor.

Now the thing was that the homebuyer who were getting assured returns were financial
creditors while the one who was not getting assured returns were not. But if the insolvency
starts they too have the option to go to the resolution professional.

IBC Amendment

The amendment came when a homebuyer approached the Supreme Court as he was not
getting any relief in the then existing IBC. To deal with the issue there was an amendment.
The amendment is as follows: 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.

Torrent of Cases

This amendment proved like a torrent. Due to this there were plethora of cases all over the
country by the homebuyers. The plaint was regarding the default as per IBC. According to
Section 3(12) of the IBC defined ‘default’ to mean non-payment of debt when whole or any

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 Impact on Real Estate Companies: Conflict between IBC and RERA

part or instalment of the amount of debt has become due and payable and is not paid by the
debtor or the corporate debtor as the case may be. 

Since the home buyer paid money in return for getting an apartment. And now when either
the apartment is being delayed or has not been delivered, will this also amount to default is a
thing we have to ponder on.

When we look at some judgements by the NCLT we find that in many cases the non delivery
of an apartment or the delay does not resemble a default. 6 But in Emmar MGF Land Case,
NCLT ruled that the non completion or delay over a stipulated time will amount to default.7

Due to this many builders approached the Supreme Court. This led to a number of petitions.
All these petitions were clubbed under one case known as Pioneer Urban Land and
Infrastructure Ltd. & Another Vs. Union of India & Ors.

6
Alka Agarwal Vs. Parsvanath landmark Developers Pvt. Ltd IB 1229(PB) 2018
7
Neeraj Gupta Vs. Emmar MGF Land Ltd IB 1403(PB) 2018

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 Impact on Real Estate Companies: Conflict between IBC and RERA

DECISION OF SUPREME COURT

Since in Emmar MGF Land Case, NCLT ruled that the non-completion or delay over a
stipulated time will amount to default.8

Due to this many builders approached the Supreme Court. This led to a number of petitions.
All these petitions were clubbed under one case known as Pioneer Urban Land and
Infrastructure Ltd. & Another Vs. Union of India & Ors.

Now let us look at the case.

The arguments of the petitioners were as follows:

1. The petitioners argued that the amendment was unconstitutional as it affected their
fundamental right as per article 19(1)(g).
2. They also argued that the explanation which provides for deeming fiction is also not
in consonance with the code.
3. They also argued that since RERA was a legislation which specifically pertains to the
issue of real estate, and so the need to solve the issue through IBC was of no use.
4. They argued that the amendment in IBC was nothing but an excessive force which
was disproportionate and violated Article 19(1)(g) and Article 14.
5. They also argued that there was no debt or default on their part.

Let us also have a look on what arguments did the defendant that is govt of India gave. The
arguments are as follows:

1. The main reliance of the additional solicitor general was on a previous Supreme Court
case9. The ratio laid down in that case included the scope of amendment.
2. They also argued that in spite of not being in the explanation the real estate
development agreements did come under the term ‘financial debt’.
3. The state counsel argued that pre amendment there was some loopholes in the act
which provided an unfair advantage to the builders.

8
Neeraj Gupta Vs. Emmar MGF Land Ltd IB 1403(PB) 2018
9
Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors 2019 SCC OnLine SC 73

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Now as we know the arguments of both sides, now let us see what Supreme Court has to say
about it.

The Supreme Court upheld the constitutional validity of the amendments introduced to IBC
with reference to home buyers and held that -  

1. The supreme court noted that the delay in handing over the apartment has become a
common phenomenon and adding to it a huge amount of money from the homebuyers
is involved in building the apartments.

Therefore, this begs that there has to be a clarity as to if homebuyers are financial
creditors or not so that if need arises, they can be a part of the committee of creditors.

2. On the argument that the RERA is a specific legislation and is enough, the SC held
that the idea that one being a specific legislation and the other being a general
legislation so the specific should prevail does not makes any sense.

The supreme court further observed that since the IBC was enacted later than RERA,
which means that the legislators were aware.

3. The Supreme Court further held RERA is to be seen as an addition which means that
it is also one of the fruits in the basket of remedies available to the allottees, and not
that it was the only fruit.
4. Supreme court even observed that both codes should be seen as in harmony with one
another and in case of clash, IBC would get priority over RERA.
5. Supreme Court also made it clear that if an allottee invokes the code, it cannot be
closed at his will. The suit will be considered as in rem.
6. Supreme Court further makes it clear if the allottee invokes IBC he may loose all
money lost given if he invokes Section 7 of the code. The SC further advises if the
motive is to get the money get or make the apartment get ready on time, should
approach RERA which would make sure the amount is safe as well as the apartment
gets completed on time. One should invoke the code only when the allottee
completely looses all faith in the builder.

After this the Supreme Court tries to make the case clear as to whether an alllotee is a
financial creditor or not.

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7. The Supreme Court held that someone who supplies goods/services is a creditor
whereas someone who pays for it is a debtor. Now let us apply this on real estate. The
developer who is the supplier of the apartment is a debtor in as much as the
homebuyer is. And the money took from allottee is nothing but consideration for the
time value of money.
8. Since there is a difference between the real estate developer and the supplier, the court
deemed the developer as a financial creditor. As of the allottee they were termed as
creditors like debenture or a fixed deposit but they were also included in the
committee of creditors as and when there was any breach of contract.

BENEFITS OF RERA FOR THE BUYERS

The main motive of Supreme Court is to motivate the buyers to opt for RERA over IBC when
it comes to any dispute as it will ensure stability in the sector and will be more buyer friendly
approach.

Let us discuss some of the benefits of RERA.

1. Standardized Carpet Area:

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Before understanding this, let us see what actually is a carpet area. Carpet area is the
area of land which will be ultimately used for the apartment. This area does not
include the area used by the walls. It is very important that the carpet area of a land is
calculated in a fair manner as the value of a land is now determined by its carpet area.

Earlier builders used different modes to calculate the carpet area, which was arbitrary.
With RERA, there is a set procedure through which carpet area of a land will be
determined. Also, they have to publish the carpet area beforehand.

2. Right to Information About the Property:

RERA ensures that every important information about the property is disclosed in a
fairly which affects the decision making of a buyer.
These details include plan layout, stages of construction, plan of execution, status of
completion, etc.

3. Timely completion of projects

RERA ensures that the project is completed within time. RERA does this by ensuring
that the builder sets a due date on which the property will be handed over to the buyer.

If the builder fails to do so, then the remedy available to the buyer are as follows:
a. The buyer can withdraw from the project, which means that the buyer will not
only get the refund but also the interest on it will be payable.
b. If this buyer chooses to stay in the project then the buyer will not only get the
interest on the amount invested but also compensation on it.

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4. Builders Will Be Held Responsible for Any Defect or Fault in The Construction:

If there is any glitch whether quality or infrastructure within 5 years from when the
buyer gets the possession of the property, the onus of rectifying it will be taken care
by the builder. Also, there is a time limit of 30 days, within which the builder has to
solve the glitch. Adding to it, the whole cost will be taken care by the builder.

If in any circumstances, the builder fails in this endeavour, then the buyer will be
qualified to get compensation.

5. Faster grievance redressal

The buyer also qualifies to sue the builder in the Appellate Tribunal if he/she is not
satisfied with the quality or construction of the property.
There is a time frame of 60 days within which the cases will be redressed. The
tribunal is also be held liable to give proper justification if there is any delay.

6. Capping of Advance Payments:

The advance payments by the builder has been capped at 10% of the amount of
property.

7. Protection against false promises

If there is any discrepancy between the commitment and the delivery of the project,
then the buyer will qualify for withdrawing from the project and qualify for the full
refund, interest on the amount paid, as well as a compensation.

8. RERA makes sure that at least 70 percent of the amount collected from the buyers be
deposited. This amount includes the previous amount excluding the amount spent on

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making the project.10 It can also freeze the account of the defaulter, i.e. the company
which can only be redeemed when the resolution plan gets endorsed.11

Apart form these major advantages following are some other advantages of RERA.

1. RERA makes sure that the developers register their projects, both going as well as the
coming ones.
2. All relevant information related to the projects consisting of project plan, layout,
government approvals and others requisite documents have to be produced.
3. Also the updates of the projects have to be submitted on a quarterly basis.
4. The major relief in this act is that the developers have to keep atleast 70% of the
amount received by the buyers in an escrow account which will be only used in the
project.
5. A standard approach will be fostered to calculate the carpet area, resulting in the
lessening of manipulation of the prices.

CONCLUSION

In this project we observed the two laws, i.e. RERA and IBC and how it impacted the real
estate sector.

IBC, Insolvency and Bankruptcy Code, 2016 was enacted in 2016 to merge all existing laws
on insolvency and bankruptcy and create a single law on it. This act acts as a solo solution to

10
Real Estate (Regulation and Development) Act 2016, s 4 (2) (1) (d)
11
Real Estate (Regulation and Development) Act 2016, s 7 (4) (c)

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resolve issues related to insolvency. It will now smoothen the process and will be time
efficient as well as economic. This code also seeks to safeguard the interests of small
investors which in turn will glow the business environment in India. This entails a total of
255 sections and 11 schedules.

RERA, The Real Estate Regulation and Development Act, 2016 seeks to protect home buyers
and adding to it also contributes to boost investments in real estate. The basic aim of this act
is to establish Real Estate Regulatory Authority (RERA) in each state to regulate the sector
and also plays a role of an adjudicating body to ensure speedy resolution of disputes. It
consists of 92 sections.

Both these laws are meant to protect the interest of the stakeholders in the real estate sector.
We have seen how an amendment in the IBC act gave rise to a number of cases, and then
there was RERA. Both laws held themselves supreme when conflicting with one another.

At last Supreme Court intervenes and gives IBC priority over RERA while also making sure
the buyers rely mostly on RERA.

At last, I would like to conclude by saying that both laws were incepted for different reasons.
And the beauty of both lies in working hand in hand with one another.

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