Home-buyers Get Priority over Banks in Case of Builder Defaults, Rules SC
MAS Team | 18 February 2022
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In a significant order giving relief to lakhs of home-buyers, the Supreme Court (SC) has ruled that the interest of home buyers is more important than the interest of banks in cases where the developer or builder fails to repay the bank loan. 
 
A division bench of justice MR Shah and justice BV Nagrathna says, "In case of conflict between the Real Estate (Regulation and Development) Act (RERA) and recovery proceedings under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), the former will prevail."
 
"If the real estate company is not able to repay the bank loan and is not even giving possession to the homebuyers, then in these cases, homebuyers should get attention," the bench observed. 
 
The Court was hearing an appeal filed by Union Bank of India against a decision of the Rajasthan High Court. In this case, while cancelling the property auction, the Rajasthan Real Estate Regulatory Authority (RERA)  authority had asked the Bank to hand over possession of the incomplete project. 
 
However, Union Bank challenged the order in Rajasthan High Court. The Bank contended that since it does not fall under the purview of RERA, the Authority cannot stop the auction or recovery process. 
 
In its order, the High Court ruled that even if the Bank had taken possession after a default by the promoter, the homebuyers could still file a complaint in RERA. Union Bank had challenged the HC order in the apex court.
 
After holding home-buyers as financial creditors as per the Insolvency and Bankruptcy Code (IBC), in January 2021, the SC accepted an amendment in the IBC as constitutionally valid, which requires no less than 100 or 10% of homebuyers to initiate insolvency proceedings against the builder or developer. Under the IBC amendment passed by the Parliament in March 2020, a single home-buyer is barred from approaching the National Company Law Tribunal (NCLT) under Section 7 of the IBC.
 
Before the SC ruling in August 2019, home-buyers were treated as other creditors and they were not regarded as 'financial creditors' or as 'operational creditors', which restricted their ability to initiate insolvency proceedings under the IBC against a defaulting builder or developer.
 
In its August 2019 order, the apex court had upheld the government decision to grant home-buyers the status of financial creditors. The Court had also upheld the IBC Amendment with certain safeguards.
 
Last year in September, while hearing a case connected with builder-home- buyers' dispute arising out of the abandoning of a housing project, the apex court allowed the home-buyers to move against the promoters of corporate debtor, Today Homes and Infrastructure Pvt Ltd, even though a moratorium has been declared under Section 14 of the IBC. The bench of justice DY Chandrachud, justice Vikram Nath, and justice Hima Kohli also clarified that the moratorium was only in relation to the corporate debtor and not in respect of the directors/management of the corporate debtor, against whom proceedings could continue.