Why Must Builders Register Every Project at 20% Payment? Supreme Court’s Game-Changing Housing Rule Revealed”

Introduction

 In a landmark decision, the Supreme Court of India heard four civil appeals and gave a unified decision. The main theme of these appeals was to determine the difference between speculative investors and genuine homebuyers in the settings of the insolvency proceeding as per the Insolvency and Bankruptcy Code, 2016. The intention behind this ruling was to reiterate major principles of the IBC, get rid of inconsistencies, and introduce stability in the residential real estate market.

Background 

The Indian real estate market has suffered due to a fundamental lack of balance of power that usually left homebuyers at a disadvantage. In Mansi Brar Frenandes v. Shubha Sharma and Anr. case, the decision of supreme courts. The case was based on four civil appeals and therefore the case was called Shubha Singh and Anr. The initial three appeals were based on a National Company Law Appellate Tribunal (NCLAT) order of 17.11.2020, and the fourth appeal was to another order of the NCLAT of 12.08.2021.

 The acute issue is raised in this case. Justice J.B. Pardiwala and R. Mahadevan stated in their bench that the right of housing is not a contractual right only but a violation against Article 21 of Indian Constitution. It declared Mansi Brar Fernandes to be speculative investor rather than a real homebuyer and it did the same to Sunita Agarwal who was a speculative buyer who intended to make a profit out of a profitable deal.

Key points: 

The verdict of the Supreme Court included a number of paramount clarifications and declarations:

• Difference between Speculative Investors and Real Homebuyers: The Court noted the cardinal difference between genuine homebuyers who are interested in acquiring possession of a home versus speculative investors who are interested in reaping huge profits or making untimely exits. It pointed out that the IBC is not a salvage system among the speculative investors.
• Constitutional Right to Shelter: The Court restated that the Constitution provides in Article 21 of the Constitution that the Right to Shelter was a part of the right to life. It emphasized that house is a human right, and not a speculative tool such as stocks or debentures. The State has a similar constitutional responsibility of providing good housing and sheltering home buyers against fraud and abuse.
• Applicability of the IBC (Amendment) Ordinance, 2019: The Court clarified that in the amended Ordinance, the introduction of a threshold on the applications of allottees in Section 7 related to Section 106, 135(ii). It explained that procedural obligations were not to discriminate against a party on the basis of an act of the Court. So, where orders were reserved prior to promulgation of Ordinance, and where the same had been followed since then, in the course of the appellate proceedings, the blemish was considered to be remedied.

Recent Developments 

The Supreme Court in its decision came up with certain findings on the appeals and provided a number of broad guidelines: 

• Concurrence on the Speculative Investor Status: The Court confirmed that the NCLAT had not been wrong in its conclusion that Mansi Brar Fernandes and Sunita Agarwal were speculative investors. In the case of Mansi Brar, it was held that the MoU was a buy back contract, which was guaranteed to yield returns as opposed to possession, due to the dishonoured cheques and the high premium rate. In the case of Sunita Agarwal, the focus of MoU on the aspect of investment and the option of risk-free exit with assured returns proved her intention to be a speculator.
• The Court struck down the NCLAT ruling on the irrelevance of the Ordinance/Amendment Act to the case presented by Mansi Brar, and ruled it to be directly applicable to section 106, 135(ii). It however, held that the fact that the appellant had been complying with the threshold requirement at the time of its appellate proceedings corrected the factual flaw by applying the principle that a litigant must not suffer because of any delay or oversight on the part of the court.
• Guidelines on the Protection of Homebuyers and the Real Estate Industry: The Court provided far-reaching guidelines to the various authorities in order to close the systemic problems and provide real protection to the actual homebuyers. These include:

1. A committee led by a retired High Court Judge and in consultation with the domain experts to be formed to recommend commercially viable systemic reforms to the real estate sector within a period of six months.
2. The state RERA organizations should be sufficiently manned in terms of infrastructure and professionals (legal professionals/consumer advocates). They have to provide due diligence prior to the approval of the project.
3. IBC guidelines to Real Estate the IBBI, in consultation with RERA to formulate certain guidelines of real estate insolvency proceedings, including schedule of project wise CIRP, and protection of allottees.
4. The insolvency resolution of real estate must be conducted largely on a project-by-project basis as opposed to the whole corporate debtor to safeguard viable projects and true homebuyers.
5.  Homebuyer Representation: Regulations to provide adequate representation of allottees in CoC by a representative authorised by the regulations.
6.  NCLT Scrutiny: NCLTs need to make a prima facie finding regarding all type of petitions under Section 7 of the Act in the section of admissions so that an allottee is a bona fide homebuyer, or speculative investor.
7.  Registration and Safeguarding of transactions: All the residential property transactions of new housing projects should be registered with the local revenue authorities with payment of at least 20 percent of property price. The contracts which are not based on the Model RERA Agreement or which have returns/buyback conditions to allottees more than 50 years of age must be backed by the affidavit certifying the risk knowledge.

Conclusion 

The Supreme Court made it clear again that investors are very essential, but speculative participants whose aim is only to make money cannot be allowed to abuse the IBC which is intended to save sick companies and shield the real homebuyers. Liberalization of speculative claims will destabilize the residential real estate field and put the social value of housing as a basic right to pieces. The Court directions are to reinstate confidence in the regulatory and insolvency system and discourage speculative abuse, and to see that the dream home of the people of India is not turned into a nightmare that would stay with them forever. The case highlights the constitutional duty of the State to safeguard homebuyers and economy, with the greater interest of the industry and true allottees having to be upheld.

 

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WRITTEN BY  Manisha Kunwar