Breaking the Deadlock: Strengthening Homebuyer Protection under RERA-IBC

Introduction

The Real Estate Industry has been a great contributor, with more than 7% of the Indian GDP. However, things were not the same before the advent of the proper legislation in this sector as the homeowners faced problems like stalled developments and insolvencies, and the developers had various types of economic pressures to handle. Consequently, the Real Estate (Regulation and Development) Act (RERA), 2016 and the Insolvency and Bankruptcy Code (IBC), 2016, were enacted for the purpose of transparency and efficiency and creating a formal mechanism to deal with insolvencies, respectively. However, both of these acts are made for the greater good of the homeowners, and developers confuse them because of their overlapping features. Different databases make it difficult to track many relevant procedures. Additionally, the rights of the buyers and the role and responsibility of the developers have to be given primacy when both legislations are imperious.

Chaos to Compliance: The Evolution of Real Estate Regulations in India

Before the arrival of RERA and IBC, the Indian realty market was inadequately regulated, leading to frequent cases of delayed deliveries, cheating, and misappropriation of funds collected from homebuyers. The buyers were left short of funds when the developers siphoned funds from one project to another. The 2008 financial crisis again revealed vulnerabilities in the industry, with increased calls for regulation. The 2016 implementation of RERA was a giant leap in making developers accountable, while IBC tried to address the financial insolvency of developers by using orderly resolution processes.

Now, real estate disputes can be solved through different legal authorities like RERA, the Consumer Redressal Commission, and NCLT. Accordingly, individuals encountering disputes can seek relief under the Consumer Protection Act, 2019 as a 'consumer'; the Real Estate (Regulation and Development) Act, 2016 (RERA) as an 'allottee'; and the Insolvency and Bankruptcy Code, 2016, as a 'Financial Creditor'. Most cases go through RERA because it has created an open platform for resolving issues like delayed possession, quality of construction and property valuation.

The Tug-of-War: Navigating Conflicts Between RERA and IBC

To begin with, homebuyers were at a disadvantage when a real estate developer became insolvent. Before the 2018 amendment to IBC, homebuyers were unsecured creditors and were usually deprioritised in recovery proceedings. In the leading case Pioneer Urban Land & Infrastructure Ltd. v. Union of India, however, the Supreme Court upheld the constitutional validity of the amendment, giving homebuyers the status of financial creditors under IBC. In Chitra Sharma v. Union of India, the Supreme Court reaffirmed that the rights of homebuyers under RERA are to ensure that they were not entirely subsumed under the corporate insolvency paradigm of IBC.

This empowered them to initiate insolvency proceedings against defaulting developers and assured their representation in the Committee of Creditors (CoC) - a group of financial creditors, which provided them a voice in resolution plans. Although homebuyers have been given financial creditor status, their status in insolvency proceedings is still complex. One of the primary concerns in relation to the enlightenment of homebuyers vis-à-vis technical and financial expertise is that homebuyers do not have the ability to evaluate resolution plans effectively, even though they are members of the CoC. Additionally, their scattered nature does not allow a collective decision or a consensus, leading to developers exploiting these legal loopholes, which further results in prolonged proceedings.

Despite such provisions, there were clashes between IBC and RERA, primarily on the basis of the non-obstante clause in Section 238 of IBC, providing overriding effect in case of conflict with other laws. Conversely, Sections 88 and 89 of RERA infer that its sections are in addition to other laws and shall override inconsistencies. This further leads to a direct conflict between two legislations where both laws assert precedence; thus, there is a need for a harmonised approach to safeguard the rights of homebuyers. Another primary concern is the priority of claims. In terms of IBC, secured lenders like banks become the stronger players as opposed to unsecured creditors like homebuyers. The result of this is lower homebuyer recovery levels in case of liquidation initiation.

Beyond Bankruptcy: RERA’s Role in Securing Investments

RERA provides many protective measures to protect homebuyers in a situation where a developer faces financial troubles and is on the verge of bankruptcy. One such important measure is under Section 4(2)(l)(D), which states the escrow account (a third-party account), where developers have to hold 70% of project funds in an escrow account. This prevents the misappropriation of homebuyers' funds and ensures that funds are utilised for construction. Section 18 of RERA also entitles homebuyers to a refund along with interest or compensation for delay in the project.

Besides this, RERA provides regulatory bodies the power to step in actively in the case of stuck projects due to insolvency. Authorities are equipped with the appointment of a new government agency or developer to undertake and complete the incomplete project so that the financial failure of a developer does not impact homebuyers. Another crucial safeguard is Section 7, which gives the authorities the power to de-register a developer's project registration in case of financial mismanagement.

Consumer vs Creditor: The Legal Puzzle of Homebuyer Claims

While RERA and IBC have been enacted to address the issues of the real estate sector, the concurrent provisions have given rise to conflict. One is concurrent jurisdiction, as homebuyers can approach a claim under RERA and IBC. It causes uncertainty regarding what is the best legal remedy. The doctrine of Election, as upheld in Imperia Structures Ltd. v. Anil Patni, gives homebuyers an option between both mechanisms.

Moreover, RERA adopts a project-oriented approach, while IBC adopts a developer-oriented insolvency resolution mechanism. Thus, claims of homebuyers become subject to the overall financial distress of the developer. To top it all, liquidation under IBC is secured creditors-friendly, leaving the homebuyers with hardly anything to retrieve. However, RERA offers financial protection through refund orders and payment of interest, which improves consumer protection.

Courts have attempted to neutralise these conflicts by bringing harmony in the interpretations of the two legislations. In Chitra Sharma v. Union of India, the Supreme Court held that homebuyers' rights in RERA could not be watered down by IBC proceedings, for the better coordination of the two legal mechanisms.

Bridging the Gaps: Reforms for a Stronger RERA-IBC Mechanism

Specific reforms must be undertaken to give a more robust framework for handling insolvency in the real estate industry. Firstly, it needs to be decided through apparent legislative position on whether RERA directions prevail over IBC resolution plans. This will help avoid confusion and ensure that homebuyers are not in a state of legal uncertainty.

Secondly, a more robust representation of homebuyers in the CoC is the need of the hour. Their decision-making role remains restricted even when the homebuyers are considered financial creditors. Making it possible will ensure their interests are adequately reflected in insolvency resolution plans.

Another reform required is placing fast-track resolution processes under RERA to avoid delayed project completion. Quicker resolution of disputes is always a cure for homebuyers to protect their investment better. Lastly, RERA and IBC databases can be merged into a centralised digital tracking system, enhancing transparency and accountability and allowing stakeholders to monitor developer defaults and pending insolvency proceedings better.

From Paperwork to Pixels: The Role of Technology in RERA and IBC

The application of technology in IBC and RERA laws can actually go a long way to improve enforcement, efficiency, and transparency. Another step that can be adopted in this regard is creating a combined e-governance portal which would bring together RERA, IBC, and the National E-Governance Services Ltd. This platform would ease insolvency resolution, potentially monitoring defaulting developers in real-time, tracking cases under progress, and monitoring compliance measures.

Blockchain technology ensures that the increased security and traceability of transactions go hand in hand and inhibits fraud by developers. It allows homebuyers to spend money in the right way and maintain a permanent, efficient record of financial transactions. Further, legal tech solutions founded on artificial intelligence (AI) can automate case management, speed up the resolution of disputes, and reduce backlog in tribunals.

Another technological tool that can be utilised to enable better access and bring in more accountability to recourse to affected stakeholders is the 'automated homebuyer case' tracking system, which can help homebuyers to have real-time information about the status of their cases with respect to RERA and IBC.

Conclusion

The RERA-IBC interface needs to be studied in a more detailed way as it is still evolving, and it would additionally help the courts and policymakers to develop novel legal interpretations to align the rights of the homeowners whenever the developers become insolvent. There is still a need to strengthen the enforcement mechanisms to make them more practical rather than just on paper and secure homebuyer's rightful place of priority they deserve in insolvency resolution. Therefore, India can build a strong market as it has the potential to grow to US $5.8 Trillion by marking a correct balance between developer viability and consumer protection by constructing a more convergent framework as a home is more than just four walls - it is security, stability, and aspiration.