STATUS OF THE CLAIM MADE BY AN ALLOTTEE OF A PROPERTY AGAINST THE DEVELOPER OF SUCH PROPERTY

By Preksha Dugar, under the aegis of Vinod Kothari & Company

Introduction:

Delays in delivering possession by housing developers after receiving the consideration for the same to the respective allottees, has become a prominent issue in the recent times. The issue of the delays has been highlighted owing to the fact that despite incurring the complete expenditure for the apartments or flats, the allottees are rendered helpless financially when the huge sums of money spent by them are with the developers who are either insolvent or incapable of delivering the possession of such apartments or flats even after passage of years beyond the agreed date of delivery. The insolvency of the developer leaves the individual or the entity, which is the allottee in a disadvantageous position with the developer unjustifiably gaining while the interests of the allottee are prejudiced.

The Insolvency and Bankruptcy Code, 2017 (hereinafter referred to as the “Code”) provides for claims from creditors to be raised against debtors through an insolvency resolution mechanism adjudged by the National Company Law Tribunal and its appellate body.

Applicability of the Code in relation to the claims of an allottee against the developer:

The term “Claim” is defined under the Code as follows:[1]

“(6) “claim” means—

• (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
• (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;”

As per the abovementioned definition, a claim refers to the right of an individual or an entity to seek payment or seek remedy for a contractual breach where such breach gives the right of payment. Therefore, the right of the allottee to seek repayment of the amount of money invested by him towards the apartment or flat sought to be developed by the developer amounts to a claim against the developer. The repayment of such amount of money is the liability of the developer towards the allottee and amounts to debt as defined under the Code.[2]

The term debt includes financial debt as well as operational debt, which have been defined under the Code.

The question whether the allottee raising a claim against the developer would be categorized as a financial creditor or an operational creditor has been clarified by way of recent judicial pronouncements.

In the matter of Mukesh Kumar & Anr. v. AMR Infrastructures Limited C.P. No. (IB)-30(PB)/2017, the petitioners were allottees of an apartment in a commercial project and had paid the required advance amount and executed a memorandum of understanding with the developer/ respondent. Owing to the delay and incapability of the respondent in delivering the possession of the said apartment to the petitioners filed an application before the NCLT claiming the refund of the advance amount alongwith assured returns, in the capacity of operational creditors. The NCLT dismissed the application on the ground that the petitioners did not fall within the ambit of the definition of operational creditors since the claim of the petitioners could not be classified as an operational debt, which includes claim in respect of goods and services, employment dues and government dues. It also stated that an operational debt is inclusive of the above mentioned three claims and shall not be construed to mean all claims other than a financial debt.

The term “financial debt” was interpreted in the case of Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Limited C.P. No. (ISB)-03(PB)/2017 by the NCLT which stated that the substantive ingredient to be satisfied for fulfilling the requirements of the expression “Financial Debt” is the consideration for the ‘time value of money’. If the debt in question oes not include the time value i.e. “the price associated with the length of time that an investor must wait until an investment matures or the relate income is earned”, then the same cannot be efine as a financial debt.

The clarity on whether the allottee raising a claim against the developer would be categorized as a financial creditor or an operational creditor was provided by the judgment of Sajive Kanwar v. AMR Infrastructure C.P. No. 06/2017. In the said case, the petitioner booked shops in the shopping mall being developed by the respondent after payment of a specific sum. A delay of 6.5 years in the completion of the project alongwith failure of the respondent to pay the due committee returns despite several requests and reminders caused the petitioners to approach the Delhi High Court which transferred the matter to NCLT. The petitioners as operational creditors put forth the application against the respondent before the NCLT. The NCLT relying on the judgment of Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Limited C.P. No. (ISB)-03(PB)/2017 stated that the petitioners did not fall within the definition of “financial creditors” for the debt not being a financial debt. The petitioner’s claim being categorized as “operational debt” was also denied by the NCLT since the same was neither a claim on goods and services, employment dues or government dues.

The decision passed by NCLT in the case of Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Limited C.P. No. (ISB)-03(PB)/2017 was reversed by the National Company Law Appellate Tribunal (‘NCLAT’) stating that “assured returns”, being the amount payable by the developer till the delivery of the possession of the flat/ apartment in question, is a consideration for the time value of money thereby falling within the ambit of a financial debt. Pursuant to the same, an allottee would be a financial creditor thereby making the procedure under the Code applicable to such allottees.

In light of the judicial decisions passed by the NCLAT, it is evident that allottees making claims under the Code can raise such claims in the capacity of either financial creditors but the same has not been specified under the provisions of the Code.

Status of claims raised by allottees against the developer:

In light of the pronouncements by court of law, which negates the categorization of an allottee as a financial creditor or as an operational creditor, the need for analyzing the status of claims raised against the developer by an allottee is pertinent.

Certain provisions of the Code and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as the “IRP Regulations”) indicate the intent of the legislature to regulate debts other than financial debts and operational debts.

The definition of the term “debt” provided for by the Code is “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”. This clearly states that the obligation of the debtor to discharge the claim which includes a financial debt and operational debt, thereby entailing those debts other than the two specified category of debts also exists.

The IRP Regulations refer to provisions relating to substantiation of claims[3], submission of proof of claims,[4] verification of claims[5] and determination of claim amounts[6] refer to the term claims as an umbrella connotation without specifying the nature of claims that have been referred to by the legislature. The IRP Regulations have specified the nature of claims referred therein under certain provisions, for instance Regulations 7 and 8 but under the provisions referred to herein above a general reference has been made by the usage of the terms claims without specifying the category of claims being referred to, thereby indicating that a scope to include debts other than financial and operational claims could be a possibility considering the fact that the definition of the term debt is open ended.

Therefore, a clarity from the legislature is required to the effect that specification regarding the nature of the claims referred to in the IRP Regulations mentioned above in order to understand the legislative intent and also analyse the remedies that could be available under the Code r/w the IRP Regulations, to allottees of apartments or flats in case of defaults committed by the developer. For instance, under Regulation 16 of the IRP Regulations it is clearly provided that in case of non-existence of financial developers in a specific case, the operational creditors would constitute the committee of creditors.

The certainty referred to hereinabove has been achieved to a small extent vide the amendment under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2017 dated 16^th August, 2017[7] (hereinafter referred to as “IRP Amendment Regulations”) through insertion of Regulation 9A and Form F to the schedule appended to the IRP Regulations. The said Regulation 9A r/w Form F provides for the procedure of raising claims by creditors other than operational and financial creditors thereby providing a legitimate status to the claims of creditors other than the ones provided for under the Code, bringing within its ambit creditors such as house buyers and allottees. This reflects that such creditors will not be rendered remediless for lack of a specific procedure.

Further, the Real Estate (Regulation and Development) Act, 2016 (hereinafter referred to as “RERA”) provides for the regulation of the real estate sector in India requiring mechanisms to provide immense protection of consumers against the extensive delays, fraudulent conduct and such other grievance invoking actions of the builders, contractors and promoters. RERA includes provisions for remedial measures that can be sought by the consumers against whom the developers or promoters have committed default by failing to deliver the possession of the respective flats or apartments, after receiving consideration for the same by the allottee.

Conclusion:

The delays caused by housing project or commercial project developers is a problem face by mostly all buyers or allottees today despite the latter acting in complete conformity an compliance with law. In the absence of any provisions providing the allottees the right to seek repayments of the said advance money with interest from the developers coupled with the absence of specific procedure to be followed by such allottee to either obtain the repayment or the apartment or flat without incurring further losses, shall only result in the unjust enrichment of the developers by prejudicing the interests of the developer.

The Regulation 9A r/w Form F of the IRP Amendment Regulations has provided for a legal remedy available to the category of creditors other than financial and operational creditors thereby preventing their exploitation at the hands of the corporate debtors. Despite the relief granted to allottees and homebuyers by way of such amendment, the Code and its corresponding rules and regulations fail to provide for measures by which insolvency proceedings can be filed against the corporate debtors by creditors other than those falling within the ambit of financial creditors or operational creditors. Therefore, the Code is still lacking in providing equitable remedial measures to all creditors in terms of initiating insolvency proceedings as the category of “other creditors” can raise claims against the corporate debtors but the same shall be subsequent to insolvency proceedings being initiated by financial or operational creditors thereby rendering the other creditors dependent.

The said IRP Amendment Regulations is an affirmative measure brought in favour of the “other creditors” but the claims by such creditors could not be raised before the issuance of the IRP Amendment Regulations for lack of provisions substantiating the same. Such creditors have been placed at a disadvantageous position for absence of the retrospective applicability of the said IRP Amendment Regulations.

In light of the above, it is evident that progressive measures through the Code, its relevant rules and regulations and applicable amendments are being initiated but the same has to be done with a wholesome perspective.

[1] Section 3(6) of the Insolvency and Bankruptcy Code, 2017

[2] Section 3(11) of the Insolvency and Bankruptcy Code, 2017 defines debt as follows,“a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”.

[3] Regulation 10 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[4] Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[5] Regulation 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[6] Regulation 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

[7] No. IBBI/2017-18/GN/REG013.