Supreme Court - Home buyers who had availed remedies under RERA, can not be treated as unsecured creditors in IBC.

 IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 3806 OF 2023

VISHAL CHELANI & ORS. .....Appellant(s)

Vs.

DEBASHIS NANDA .....Respondent(s)

Date of Decision :-October 06, 2023

FACTS OF THE CASE:-

1.  The appellants are home buyers, who had opted for allotment in a real estate project of  Buland Buildtech Pvt. Ltd.
2. Aggrieved by the delay in the completion of the project, the appellants approached the UPRERA which by its orders upheld this entitlement to refund amounts deposited by the, together with interest.
3. In the meantime, by the Order dated 28.02.2023 by NCLAT, in C.A.(AT) No. 991/2022 proceedings under the Insolvency and Bankruptcy Code, 2016 were initiated.
4. A resolution plan was presented to the adjudicating authority. In that plan, a distinction was made between home buyers, who had opted or elected for other remedies such as i.e. applying before the RERA and having secured orders in their favor, and those who did not do so.
5. Home buyers who did not approach authorities under RERA Act were given the benefit of 50% better terms than that given to those who approached RERA or who were decree holders.
6. The appellants felt aggrieved as their applications were rejected by the NCLT and their appeals in NCLAT too was unsuccessful. Consequently, they approached the Supreme Court.  

Contentions of appellants

1. with regard to the definition of financial debt [Section 5(8)(f)] which was amended in 2018 after which home buyer allottees in real estate projects also fell within the broad description of financial creditors, so A distinction cannot be made between one set of such home buyer allottees and another.

Contentions of defendants

1. the appellants cannot be permitted to secure two benefits. Having approached the UPRERA, they fell into a different sub-class of home buyers, who were entitled to specified amounts and, therefore, were unsecured creditors, as compared with allottees who had not invoked RERA remedies. It is submitted that such home buyers relinquished their rights under Section 18 of the RERA Act.

QUESTION OF LAW

1. The main issue before the Court was whether such a classification, differentiating between home buyers who sought relief under RERA and those who did not, could be upheld. In essence, the question was whether RERA-allotted financial claims should be treated differently from those not claiming relief under RERA in insolvency proceedings.

COURT'S FINDINGS

1. The Court is unpersuaded by the submission of the Resolution Professional’s view that once an allottee seeks remedies under RERA, and opts for return of money in terms of the order made in her favour, it is not open for her to be treated in the class of home buyer.
2. To treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable.
3. Section 238 of the IBC contains a non obstante clause which gives overriding effect to its provisions. Consequently its provisions acquire primacy, and cannot be read as subordinate to the RERA Act.
4. In view of the foregoing reasons,  appeal was allowed in the above terms and the impugned order is hereby set aside; the appellants are declared as financial creditors within the meaning of Section 5(8)(f) (Explanation) and entitled to be treated as such along with other home buyers/financial creditors for the purposes of the resolution plan.

 

Supreme Court Upholds RERA Jurisdiction Over Banks in Union Bank Case

New Delhi: The Supreme Court has upheld the Rajasthan High Court’s ruling that banks and other secured creditors can come within the jurisdiction of the Real Estate Regulatory Authority (RERA) when they take enforcement action against real estate projects under the SARFAESI Act.

The case arose from a dispute involving Union Bank of India and the Rajasthan Real Estate Regulatory Authority, following proceedings concerning the stalled Sunrise real estate project. The Rajasthan High Court had clubbed the bank’s petition with 69 other connected writ petitions involving similar legal questions.

The High Court delivered its judgment in D.B. Civil Writ Petition No. 13688/2021 & 69 other connected Writ Petitions on December 14, 2021, and Union Bank subsequently approached the Supreme Court through SLP (Civil) Nos. 1861–1871.

Dispute over bank recovery and homebuyer rights

The dispute involved a conflict between two important regulatory frameworks — the Real Estate (Regulation and Development) Act, 2016 (RERA) and the SARFAESI Act, 2002, which enables secured creditors to enforce security interests and recover outstanding dues.

According to the case record, the developer had obtained financing by creating security over the real estate project. The project subsequently remained incomplete and the developer defaulted on its loan obligations. The bank then initiated recovery proceedings under SARFAESI, including action against properties in the project.

Homebuyers approached the RERA authority to protect their interests, leading to a dispute over whether RERA could exercise jurisdiction against the bank as a secured creditor.

Rajasthan High Court's key conclusions

The Rajasthan High Court held that RERA would prevail over SARFAESI in the event of a conflict between the two statutes, relying, among other things, on the Supreme Court's earlier ruling in Bikram Chatterji v. Union of India.

The High Court also held that RERA would generally not apply to a borrower-bank transaction where the security interest had been created by mortgage before RERA came into force, unless the creation of the mortgage or the transaction was found to be fraudulent or collusive.

At the same time, the court held that the RERA authority could entertain a complaint against a bank acting as a secured creditor when the bank invoked Section 13(4) of SARFAESI, subject to the circumstances identified by the court.

Supreme Court dismisses Union Bank's challenge

On February 14, 2022, a Supreme Court bench comprising Justice M.R. Shah and Justice B.V. Nagarathna heard Union Bank's SLPs.

The Supreme Court recorded that it was “in complete agreement” with the view taken by the Rajasthan High Court and dismissed the petitions. However, it added a specific clarification to the High Court's conclusion concerning RERA jurisdiction over secured creditors.

The Supreme Court clarified that the High Court's finding concerning Section 13(4) of SARFAESI would apply where proceedings before RERA are initiated by homebuyers to protect their rights.

Significance for stalled real estate projects

The ruling establishes an important legal intersection between homebuyer protection, RERA and bank recovery proceedings.

In practical terms, a bank exercising its statutory recovery powers over a real estate project cannot simply be treated as outside the reach of RERA when homebuyers approach the authority to protect their rights, subject to the limitations identified by the courts.

The judgment also preserves an important distinction for pre-RERA mortgages. The High Court's conclusion, affirmed by the Supreme Court, states that RERA does not ordinarily apply to the borrower-bank transaction where the security interest was created before the introduction of RERA, unless the mortgage or transaction is found to be fraudulent or collusive.

Relevance to stalled-project resolution

The judgment is particularly relevant to stalled real estate projects where three interests can collide: homebuyers seeking completion or protection of their units, developers facing financial defaults, and banks seeking recovery of secured loans.

The decision does not mean that every dispute between a borrower and a bank automatically falls within RERA. Rather, the Supreme Court's order confirms the High Court's framework concerning secured creditors and specifically ties the relevant RERA jurisdiction to proceedings initiated by homebuyers for protection of their rights.

The ruling has subsequently been cited in later real-estate and insolvency proceedings concerning the relationship between RERA protections for homebuyers and the enforcement rights of secured creditors.