BOMBAY HIGH COURT UPHOLDS THE CONSTITUTIONAL VALIDITY OF RERA

 

The Supreme Court of India had transferred a series of writ petitions filed by developers and builders challenging the constitutional validity of certain provisions of the Real Estate Regulation and Development Act, 2016 (RERA or Act) to the Bombay High Court. On 6 December 2017, a division bench of the Bombay High Court passed a judgement upholding the constitutional validity of the provisions that were sought to be challenged.

Following is a brief overview of some of the important provisions of RERA challenged by the various Petitioners and the decision of the Court.

1. Retrospective Application of RERA:
   
   
   Section 3 of RERA, mandates that all ongoing projects for which an occupational certificate has not been issued must also be registered under the Act. The Petitioners contended that this amounts to a retrospective application of the Act and disregards the contractual agreement executed between the promoters and the allottees prior to the commencement of RERA.
   The Court held that the aforesaid provision merely envisages that projects which are incomplete at the time of commencement of RERA must be registered. While getting the project registered, promoters are entitled to prescribe a fresh time period for completion of the remaining work, to ensure that they are not visited with the penal consequences laid down under the Act. Moreover, given the amount of defaults that have taken place by promoters in allotting premises to buyers, it is imperative for the ongoing projects also be registered under the Act to regulate the development of such projects. In view of the aforesaid, the contentions raised by the Petitioners in this behalf were held meritless.
   
   
2. Funds to be parked in an escrow account: 
   
   
   Section 4(1)(D) of RERA mandates that 70% of the funds realized from the allottees for real estate projects must be deposited in a separate bank account to cover the costs of land and construction and can only be used for the aforesaid purpose. The Petitioners inter alia submitted that in certain cases, allottees may fail to deposit the requisite money or various other situations may arise whereby the promoter is unable to deposit the money. They also raised the contention that the promoters are divested of their funds and would be exposed to adverse statutory consequences.
   
   
   The Court held that the amounts were to be deposited in a separate account merely to ensure that it is utilized for the purposes of the project and not misused. Moreover only 70% of the funds are required to be kept in the escrow account and 30% of the funds are available to the promoter, thereby ensuring that the rights of the two parties are balanced. The Court also held that RERA could not possibly provide for every situation where the promoters would be unable to deposit 70% of the funds in a separate account and the same should be dealt with by Real Estate Regulatory Authority (Authority) established under RERA. The Court also clarified that the amounts realized by the promoter would remain his money and in no case expropriated or taken over by the Authority established under RERA. Therefore, the aforesaid provision was held to be within the constitutional framework.
   
   
3. Extension of Registration:
   
   
   Section 5 of RERA states that the registration of a real estate project shall be valid for the period declared by the promoter in his application. Section 6 allows the Authority to extend the registration for a further period not exceeding one year, on account of a force majeure event such as war, flood, drought, fire, cyclone, earthquake or other calamity. The Petitioners challenged the same, in view of the fact that it doesn’t take into account, circumstances outside the control of the promoter which may delay a project such as shortages of raw material, labour etc.
   The Court held that the Authority established under RERA will examine on a case to case basis whether there exists exceptional circumstances stalling the completion of a project and in such exceptional cases, the Authority can allow the same promoter to continue with the project instead of revoking the registration.
   
   
4. Powers of the Authority on lapse of registration: 
   
   
   Section 8 confers wide powers on the Authority established under RERA, upon lapse or revocation of registration. It also confers on the association of allottees the right of first refusal to complete the remaining development work. The Petitioners contended that the Authority is left with no choice but to hand over the remaining development work to the association of allottees in the event they apply for the same. Section 8 does not contemplate handing back of possession to the promoter and is thus an expropriatory legislation.
   
   
   The Court, adopting a harmonious construction between the different provisions of RERA, held that if the Authority feels that there are compelling circumstances that disable a promoter from completing the project, even beyond the extension granted under Section 6 of RERA, the Authority would be entitled to continue registration of the project by exercising its powers under Sections 7(3), 8 or 37 of RERA. Such powers would be exercised on a case to case basis. Moreover, an obligation to construct premises, is not a proprietary right and therefore the same does not amount to an expropriatory legislation. 
   
   
5. Payment of interest to allottees: 
   
   
   Section 18 of the RERA provides for payment of interest by promoters to allottees in the event of delayed possession. The Petitioners challenged the same, inter alia on the grounds that the Authority can engage another agency to complete the project, however penal interest would still have to be paid by the promoter and that in certain cases the promoter may genuinely lack funds to pay the interest and compensation and on a failure thereto, he would be met with penal consequences. This provision was unnecessarily harsh and unreasonable.
   
   
   The Court has held that the requirement to pay compensation is not a penalty but compensatory in nature in light of the delay suffered by the allottee who has paid for his apartment but not received possession of it. In case the promoter fails to pay such compensation it would amount to an unjust enrichment by the promoter in respect of the hard earned monies of the allottees. Such a liability is not created for the first time under RERA but was also envisaged under the Maharashtra Ownership of Flats Act, 1963 (MOFA) and therefore the said provision is valid and constitutional.

MHCO COMMENT:

The intent of RERA is to bring transparency and safety in the real estate sector by putting in place a regulatory mechanism for the sector. It seeks to prevent ‘distortion’ and `structural abuse of powers` in this sector. The Court while upholding the constitutionality of RERA, has safeguarded this intent and interest of home buyers across the state. At the same time, the Court by alleviating certain apprehensions held by builders and developers, has tried to strike a balance between the interests of both parties.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 

 AMENDMENTS TO INSOLVENCY AND BANKRUPTCY CODE

The Insolvency and Bankruptcy Code, 2016 (IBC) is a law for the revival and restructuring of companies, firms and individuals in financial difficulty and providing for an insolvency resolution process in a time bound manner for maximisation of the value of assets of such persons.

In order to protect the interests of the stakeholders involved, and further strengthen the insolvency resolution process, the President of India promulgated an Ordinance to amend the IBC on 23 November 2017 (Ordinance) which inter alia disqualifies certain persons from being resolution applicants. At present, the insolvency resolution process involves submission of a resolution plan by a resolution applicant, to a resolution professional for its approval followed by placing the resolution plan before the committee of creditors for their approval, pursuant to which the same is submitted to the adjudicating authority for its approval.

The changes brought about by the Ordinance are as follows:

• Invitation by Resolution Professional: The resolution professional shall now be required to invite prospective resolution applicants to submit a resolution plan, who fulfil criteria laid down by it, with regard to the complexity and scale of operations of the corporate debtor after approval of the committee of creditors. Earlier, there was no such requirement of an invitation by a resolution professional;

• Resolution Applicant: The definition of resolution applicant has been amended to comprise a person who submits a resolution plan pursuant to the invitation made to it by the resolution professional. Earlier, the definition of resolution professional provided that such person was anyone who submitted a resolution plan;

• Eligibility of a person to be a Resolution Applicant: The Ordinance now lays down the disqualification criteria for a resolution applicant. A person, or any person who is acting jointly with such person, or a person who is a promoter or is in the management or control of such person, shall not be eligible to submit a resolution plan if: (i) he is an undischarged insolvent; (ii) he is identified as a wilful defaulter by the Reserve Bank of India; (iii) his account has been identified as a non-performing asset for more than one year; (iv) he has been convicted of an offence punishable with two or more years of imprisonment; (v) he has been disqualified as a director under the Companies Act, 2013; (vi) he has been prohibited from trading in securities by Securities and Exchange Board of India; (vii) he has indulged in undervalued or fraudulent transactions in respect of which an order has been made by an adjudicating authority under IBC; (viii) he has executed an enforceable guarantee in favour of a creditor, in respect of a debtor under insolvency resolution process or liquidation; (ix) is subject to any of the above disabilities under any law in a jurisdiction outside India; (x) he is a promoter or in the management or control of the resolution applicant or corporate debtor during the implementation of the resolution plan, or associate, holding or subsidiary company of such person mentioned above;

• Feasibility: The committee of creditors shall approve a resolution plan after considering its feasibility and viability as per the new Ordinance.

• Liquidation: Under the Ordinance, the liquidator shall not be permitted to sell movable or immovable property of the corporate debtor to any person who is not eligible to be a resolution applicant.

• Penalty: The Ordinance prescribes a penalty of Rs One Lac which may extend to Rs 2 Crore for contravention of the provisions of the IBC.

MHCO COMMENT:

The Ordinance, though passed with the intent to toughen the entire process of insolvency resolution, by attempting to eliminate any persons who, on account of their antecedents, may default and disrupt the entire resolution process, has in fact narrowed the list of persons eligible to be resolution applicants. This could prevent the resolution professional from getting the most value-driven offers as part of the resolution plan since the persons who stand to lose the most from the insolvency resolution process, viz. the promoters of the corporate debtor, could be disqualified. That said, such promoters should not benefit from their own misdeeds. The impact of this Ordinance, therefore, is key to determining whether it has struck a balance between disqualifying unscrupulous promoters and unfairly penalising those who have been affected by business realities.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

LIMITATION UNDER THE INSOLVENCY CODE TO COMMENCE FROM 1 DECEMBER 2016

The National Company Law Appellate Tribunal (NCLAT), has in the case of Black Pearl Hotels vs. Planet M Retail Limited, held that the period of limitation under the Insolvency and Bankruptcy Code, 2016 (IBC) will commence from 1 December 2016 thereby bringing cases that would otherwise be barred by limitation within the ambit of the IBC and giving creditors an option to recover a time barred debt.

Facts of the Case:

1.    The Applicant, Black Pearl Hotels entered into a business conducting agreement with the Respondent, Planet M Retail Private Limited (Corporate Debtor) in February 2008 to conduct and manage the business of running a music concept store by name Planet M’ on behalf of Applicant, in consideration of which Corporate Debtor was liable to pay a fee of Rs 11 lakhs per month to the Applicant.

2.    However, in June 2009, on account of the representation of the Corporate Debtor that its business was not doing well, the monthly fee was reduced from Rs 11 lakhs to Rs 7 lakhs for a period of 26 months from 1 February 2009 to 31st March 2011 retrospectively.

3.  The Corporate Debtor continued to pay Rs 7 lakhs per month from April 2011 to September 2011 as fees instead of paying Rs 11 lakhs per month in terms of Business Conducting Agreement and the Addendum to the said agreement. Thereafter, since October 2011 the Corporate Debtor failed to pay the conducting fee and, therefore, the Applicant terminated the business conduct agreement.

4.    In May 2016 the Applicant filed an Application under the IBC against the Corporate Debtor, for the amounts due under the Business Conducting Agreement before the National Company Law Tribunal (NCLT), Mumbai.

5.    The NCLT Mumbai dismissed the application on the grounds that "it is to be noted that after the last payment in September 2011, neither there was an acknowledgement of liability nor any payment by the corporate debtor. In this situation, the whole debt as claimed by the operational creditor is time barred."

6.    Hence, the Applicant Black Pearl Hotels appealed the impugned judgement before the NCLAT. The NCLAT referred to its earlier judgement in the case of Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd, where it had observed that there is nothing on record to show that the law of limitation is applicable to proceedings under the IBC. In that case, it had kept the question regarding the applicability of the Limitation Act to the IBC open.

7.    In the present case the NCLAT determined that, even if it were to be accepted that the Limitation Act is applicable to the IBC, it would be governed by Article 137 which states that the Limitation begins to run three years from when the right to sue accrues. Since the IBC came into force only on 1 December 2016, the right to sue accrues only from that date.

8.    Accordingly the Impugned Order of the NCLT Mumbai was set aside.

MHCO COMMENT:

The present judgement will enable creditors to file an application under the IBC, in respect of claims which are otherwise time barred and provide an opportunity to recover the same, provided the outstanding amount due is more than Rs 1 lakh. However, Supreme Court is still to give its view on same which should crystallise the position on the applicability of the law of limitation to matters under the IBC.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

LIMITATION ON LAYERS OF SUBSIDIARIES OF A COMPANY IN INDIA

The Ministry of Corporate Affairs (MCA) has recently notified the Companies (Restriction on Number of Layers) Rules 2017 (Companies Layer Rules) under the Companies Act 2013 (Companies Act) whereby a company is not permitted to have more than two layers of subsidiaries.

Important Points under the Companies Layer Rules: 

• Restriction on number of subsidiaries: After the commencement of the Companies Layer Rules, no company, other than the class of companies mentioned below, shall have more than two layers of subsidiaries.

• Computation: For the computation of number of layers under the Companies Layer Rules, one layer which consists of one or more wholly owned subsidiaries shall not be taken into account. Further, an Indian company may acquire a foreign company with subsidiaries beyond two layers, as per the laws of such country.

• Companies not covered under Companies Layer Rules: The following companies are exempted from the application of these rules: (a) A banking company as defined in the Banking Regulation Act, 1949; (b) A non-banking financial company registered with the Reserve Bank of India under the Reserve Bank of India Act, 1934; (c) An insurance company carrying on insurance business as per the Insurance Act, 1938; (d) A government company as defined in the Companies Act.

• Existing Companies with more than two layers of subsidiaries: Companies which have excess layers of subsidiaries on the date of commencement of these rules shall: (a) File a return with the MCA disclosing the layer wise details of subsidiary companies within 150 days from the date of commencement of the these rules; (b) Not have additional layers of subsidiaries over and above the number of layers existing on the date of commencement of these rules; (c) In case such company has reduced one or more layers subsequent to these rules, it shall not have more layers beyond the layers it has after such reduction, or it shall not exceed the number of layers as specified in these rules, whichever is more.

• Default:Contravention of these rules by a company and every officer in default of the company shall be punishable with a fine of Rs 10,000 (Rupees Ten Thousand Only), and Rs 1000 (Rupees Thousand Only) per day, for every day during which the default continues.

MHCO COMMENTS:

Earlier, the Companies Act only provided for restriction in making investments through not more than two layers of investment companies and there was no restriction in the number of subsidiaries a company could have. However, the Companies Layer Rules has brought about a change in the functioning of Indian companies by bringing strict filing requirements and has put a necessary ban on a company from having excessive number of subsidiaries in order to combat siphoning of funds by individuals behind such companies.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91-22-40565252 or legalupdates @mhcolaw.com for any assistance.

RESERVE BANK OF INDIA REGULATES PEER TO PEER LENDING

The Reserve Bank of India (RBI) recently issued a Master Direction on Peer to Peer Lending Platform for the registration and operation of peer to peer lending, pursuant to the Notification issued by RBI dated 24 August 2017 in which it specified that only a Non Banking Financial Company (NBFC) can carry on the business of providing a peer to peer lending platform.

Peer to Peer Lending Platform means an intermediary providing the services of loan facilitation via online medium or otherwise by linking lenders with borrowers in order to provide unsecured loans at a rate of interest which may be fixed by the platform or mutually agreed between the lender and borrower.

In this update we have broadly captured the directions which are provided in the Master Direction and the Notification:

Registration:

Every prospective Peer to Peer NBFC must make an application for Certificate of Registration to the RBI for carrying on the business of a peer to peer lending platform, based on certain criteria laid down by RBI which must be fulfilled such as adequate capital structure, company incorporated in India, public interest etc. Existing Peer to Peer NBFCs’ must apply for registration within 3 months from the date of the Master Direction. Any company seeking registration as a Peer to Peer Lending Platform must have net owned funds of at least Rs 2 crores.

Activities:

The Peer to Peer NBFC shall: 

• act as an intermediary providing an online platform for the participants involved in the peer to peer lending process;

• undertake documentation of loan agreements and other related documents;

• store and process all data relating to its activities and participants on hardware located within India;

• undertake credit assessment and risk profiling of the borrowers and disclose the same to their prospective lenders. 

The Peer to Peer NBFC shall inter alia not perform the following activities:

• raise deposits as defined under Companies Act, 2013;

• provide any credit guarantee;

• permit international flow of funds;

• permit any secured lending linked to its platform;

• lend on its own.

Limit & Maturity:

The aggregate loans taken by a borrower at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only) and the aggregate exposure of a lender to all borrowers at any point, across all peer to peer platforms shall not exceed Rs 10,00,000/- (Rupees Ten Lakhs Only). The exposure of a single lender to the same borrower shall not exceed Rs 50,000/- (Rupees Fifty Thousand Only). The maturity of the loan shall not exceed 3 years. The leverage ratio shall not exceed 2:1.

Mechanism:

Fund transfer between the borrower and lender shall be through escrow account mechanisms to be operated by a trustee. 2 escrow accounts are required, one for depositing funds received from lenders and one for repayment by borrowers. Cash transactions are strictly prohibited.

Credit Information:

The Peer to Peer NBFC shall submit data to credit information companies and update it on a monthly basis after taking consent of the participants for providing the required credit information.

Transparency & Disclosure:

The Peer to Peer NBFC shall enter into appropriate agreements with the borrower and lender specifying all the terms and conditions of the NBFC providing the services. Further, it has to disclose to the borrowers and lenders the details of each other including amount of loan, interest rate sought etc. It also has to disclose its business model, overview of credit assessment, grievance redressal mechanism, fair practice code etc on its website.

Information Technology & Business Continuity Plan: The business of the Peer to Peer NBFC must be technology driven and should have adequate safeguards for data protection. Further, the NBFC should have a Board approved business continuity plan in place for safekeeping of information and documents and servicing of loans for full tenure in case of closure of platform.

Reporting Requirements: The Peer to Peer NBFC shall submit a quarterly statement to the RBI stating the number and amounts of loans disbursed, funds held in escrow account, number of complaints outstanding and leverage ratio.

MHCO COMMENT

The RBI had issued a consultation paper on peer to peer lending in April 2016 and has thereafter issued this Master Direction to formalize and regulate the entire structure of peer to peer lending. This was needed in the present scenario so as to enable a fixed regime and compliance of the laid down norms by the platforms who wish to undertake peer to peer lending. The Master Direction should prevent abuse by the participants in the peer to peer lending process.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 

RERA UPDATE | PENALTY FOR DELAYED REGISTRATION

The Real Estate (Regulation & Development) Act 2016 (RERA) read with the Maharashtra Real Estate (Regulation and Development) (Registration of Real Estate Projects, Registration of Real Estate Agents, Rates of Interest and Disclosures on Website) Rules, 2017 (Rules) provides for mandatory registration of ongoing projects for which a Completion Certificate has not been issued. Application for registration of such ongoing projects was supposed to be made within a period of three months commencing from 1 May 2017.

The Maharashtra Real Estate Regulatory Authority (MahaRERA) while taking into consideration various difficulties faced by the Promoters for making online application for registration, by its Order No. 2 dated 2 August 2017, decided that (a) penalty of Rs. 50,000/- (Rupees Fifty Thousand only) shall be levied as penalty on the Application received on 1 August 2017 and 2 August 2017, (b) failure to pay the penalty within a period of seven days, shall cause their application to be rejected as per the provisions of Section 5 (1) (b) of RERA. MahaRERA further decided to keep the process of registration open.  

MahaRERA, by its Order No. 3 dated 10 August 2017 clarified the status of Application received after 2 August 2017, and held that (a) penalty of Rs. 1,00,000/- (Rupees One Lakh only) or amount equivalent to registration fee of the ongoing project, whichever is higher shall be levied on the Promoter in addition to the registration fee of project, (b) such penalty shall be applicable for the Applications received after 2 August 2017 until 17:00 hrs of 16 August 2017 and (c) if the penalty is not received by 19 August 2017, their application shall be rejected as per the provisions of Section 5 (1) (b) of RERA.  

Recently, MahaRERA, by its Order No. 4 dated 8 August 2017 observed that the delay in registering projects jeopardizes the interest of allotees. MahaRERA adopted a similar procedure for application filed from 17 August 2017 until 31 August 2017 and held that penalty of Rs. 1,00,000/- (Rupees One Lakh only) or amount equivalent to registration fee of the ongoing project, whichever is higher shall be levied on the Promoter in addition to the registration fee of project.  

For Applications filed after 1 September 2017 until 30 September 2017, MahaRERA ordered that the quantum of penalty should be commensurate to the size of project and thereby increased the penalty on such applications to Rs. 2,00,000/- (Rupees Two Lacs only) or amount equivalent to twice the registration fee, whichever is higher, subject to a maximum cap of Rs. 10,00,000/- (Rupees Ten lacs only) in addition to the registration fees.

MahaRERA further clarified that in the event, Promoter does not agree to pay the said penalty or in the eventthe application for registration is received after 30 September 2017 then the same shall be rejected as per the provisions of Section 5 (1) (b) of RERA. However, no application shall be rejected unless the applicant has been given an opportunity of being heard.  

MHCO COMMENT:

With the intent to ensure registration of maximum projects across Maharashtra, the recent order passed by MahaRERA gives yet another opportunity to the Promoters to register their ongoing projects albeit with a penalty on or before 30 September 2017 which is way beyond the original deadline intended by RERA. 

 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.