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.