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Recovery Weapons for Home Buyers

Insolvency Recovery Weapons for Home Buyers

Recovery Weapons for Home Buyers

Buying a home in today’s time is no less than playing a gamble. The cumbersome processes, elaborate legal formalities and improper enforcement mechanisms to enforce the interest of home buyers clubbed with the risk of delay in obtaining possession of the property have unduly complicated the dream of owning a home today.

Are you also an aggrieved home buyer? If yes, then connect with MUDS to seek relief and relive the dream of owning a home.

The home buyers were always in a safe zone and were given rights to raise their voice to Civil courts or concerned Consumer Courts to get their grievances redressed. Under the Consumer Protection Act(CPA), 1986 there exist consumer dispute redressal agencies at various levels like the District Forum, State Commission and National Consumer Dispute Redressal Commission (NCDRC). Under the CPA, a complaint regarding goods or services may be filed by any consumer or registered association or a group of consumers having the same interest. The complaint filed by home buyers shall be accompanied by the prescribed fee as mentioned in the Consumer Protection Rules, 1987.

The civil courts and consumer forums began becoming overloaded with cases and there was a sincere need to devise alternative means through which remedy could be bestowed to home buyers. In the light of this appeared the Insolvency and Bankruptcy Code 2016 which became the ray of hope for the home buyers. Until now, home buyers had to knock on the doors of the courts to receive their money while creditors and other stakeholders got benefitted from the implementation of the Insolvency and Bankruptcy Code 2016. The Code, when passed was a center point of criticism as such distressed house owners, who accumulate their savings into such housing and real estate projects were ranked at the lowest priority in the list of creditors positioned after financial institution and other industry leaders.

Another welcoming move came for home buyers in the form of new legislation named “Real Estate (Regulation and Development) Act, 2016”( RERA). The RERA seeks to curb the shortcomings of respective ownership acts prevailing in each state. The main intent of RERA was to provide uniform laws throughout the states, thereby protecting the interest of home buyers along with increasing transparency in the operations of construction companies monitoring the chances of defaults and misappropriation of funds by builders.

The home buyers were reaping satisfaction and were getting their payments realized when another feather was added in the cap of home buyers as our Indian President granted his assent to the ordinance amending the Insolvency and Bankruptcy Code, 2016 which had the effect of recognizing and repositioning the home buyers as Financial Creditors. The amendment is a huge relief to home buyers as now after the amendment the home buyers who were ranked as other creditors shall rank at par with the financial creditors. The amendment was made under the Code on the premises and keeping into account the fact that money is raised from such home buyers to finance construction and so these home buyers should be treated as financial creditors. The amendment shall greatly benefit the borrowers who are facing hardships due to incomplete real estate projects. Now after the amendment, the home buyers shall get the right to invoke Section 7 of the IBC against defaulting developer.

Let’s quickly have a glance at the legislation having remedies in place for the home buyers through which they can seek relief against the developers when they are aggrieved by such developers.

Remedy Legislations

1. The Consumer Protection Act, 1986

The Act was enacted to provide speedy redressal mechanism to the consumers. through the establishment of Forums at the District, State, and National Level. The provisions of the Consumer Protection Act are applicable when the consumers highlight unfair trade practice or any deficiency with respect to goods or services. The home buyers came within the ambit of the Consumer Protection Act by the interpretation of the term “Services “as the term services included construction also.

There is three-tier machinery for redressal of consumer grievances under the act. The District Consumer Forum is the initial forum and possesses the jurisdiction to entertain complaints where the value of the house and the compensation if any, claimed does not exceed Rs 20,00,000 (Twenty lakhs).

Where the value of the house and the compensation if any, claimed exceeds Rs. 20,00,000 but does not exceed Rs. 1,00,00,000(One Crore), then such complaints shall be handled by the State Consumer Commission which is established in each state.

Where the value of the house and the compensation if any, claimed exceeds Rs. One Crore then the National Consumer Disputes Redressal Commission will have the jurisdiction to entertain such complaints.

The territorial jurisdiction for filing the complaint shall either be the place where the registered/branch office of the builder is located or the place where the flat purchased from the builder is located.

There is no specific format or form in which complaint is to be filed before the forums under the Act. Therefore a plain paper application would be sufficient in this regard. This has made the filings of complaint easy and convenient for the consumers thereby making the forums easily approachable than civil courts.

In terms of relief granted to the aggrieved home buyer, the relevant forum may pass an order directing the builder or developer to return the money paid to them by the home buyers along with compensation for any loss or damage caused to the concerned home buyers due to the negligence of the builders or the developers. These forums also have the power of granting any punitive damage if they feel necessary. Penalties can also be imposed on such defaulting developers along with imprisonment for a maximum period of three years.

2. The Real Estate (Regulation and Development ) Act,2016

The Act came into force on 1st May 2016. The Act had the intention of providing protection to the home buyers along with boosting investment in real estate sector. The Act seeks to protect the home buyers by having in place provisions that prohibit unaccounted money from being pumped into the real estate sector and now 70 % of the money has to be compulsorily deposited in the bank account via cheque.

The Act has made it mandatory for all commercial and residential real estate projects where land is over 500 square meters or eight apartments to register with Real Estate Regulatory Authority (RERA) for launching a project.

The Act has established Real Estate Regulatory Authority in each state for the monitoring of real estate sector and also for acting as the adjudicating authority for speedy dispute redressal. The Regulatory Authority shall regulate transaction related to both residential and commercial projects thereby ensuring their timely completion and handover. These authorities shall not only promote the interest of home buyers but also deal and resolve their grievances.

The Act grants the option to appeal against the order of the concerned Real Estate Regulatory Authority and thereafter to the high court or the Supreme Court all in a time-bound manner.

The Act entitles the aggrieved homebuyer to claim the refund of the amount he had paid as consideration for the home along with interest as may be prescribed where the builder /developer defaults in the delivery of the possession in accordance with the terms of the agreement.

3. Insolvency and Bankruptcy Code, 2016

The Act came into force from December 2016. The Act is a successful piece of legislation promulgated to provide uniform code for insolvency resolution of all persons whether individual, partnership firm and corporate persons. The Act contains various chapters for dealing with the insolvency of different types of persons.

As per the initially coined Insolvency Code, home buyers were considered under a definite class of creditors and were clubbed with unsecured creditors. The home buyers approached the National Company Law Tribunal (NCLT) for being allowed to participate as creditors in the insolvency process. The legislature took the plea into account and has now provided recognition to home buyers as financial creditors by amending the code vide Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.

Now the home buyers are recognized as home buyers under the Insolvency and Bankruptcy Code, 2016 and are therefore entitled to receipt of a share in the sale of assets under the liquidation process. Being financial creditors home buyers are now permitted to initiate the Corporate Insolvency Resolution Process under Section 7. The home buyers shall now have the opportunity to be a part of the Committee of Creditors.

The protection provided under the IBC is limited in nature and is only relevant when a company becomes insolvent or bankrupt. Therefore it is not a suitable forum to claim relief in most cases and can only be used by the home buyers as and when the concerned real estate company is in a bad financial condition and is unable to continue and/or finish the concerned real estate project. Till the adjudicating mechanism under RERA is being established by each state government, home buyers and the potential home buyers are being best served by being granted relief from agencies under CPA.

The IBC amendment was brought to grant recognition to the home buyers with the motive to protect and acknowledge the rights of home buyers when the insolvency petition is filed against the developer company. RERA is a more specific act which should be adopted when the construction of the project is at the verge of completion or when it is possible to seek refund or possession from developers. Both the RERA and IBC provide subjective approach based on the facts of the case and the situation of the developer.

Comparing remedy under CPA v/s RERA v/s IBC on various parameters from Home Buyers perspective:

Basis Consumer Protection Act Real Estate Regulatory Authority Insolvency and Bankruptcy Code
Time It takes about 5-6 years for redressal of grievance or adjudication of the dispute by Consumer Forum RERA is in developing phase and so it takes on an average couple of years for redressal of grievances It takes about 6 months for adjudication of insolvency application and to admit the same by adjudicating authority.
Who can file A consumer i.e. a person who satisfies the conditions under Section 2(d) of the CPA can file a complaint. Thereby only a person mainly individual who enters into an agreement for the purchase of a home can file a complaint when he purchases the same for his individual or residential. A purchaser/ Homebuyer or prospective purchaser/home buyer offered home can file complaint irrespective of the fact that such person is corporate entity or individual. Since by recent amendment in August 2018, the Allottee of a project is considered as a facial creditor and so any person whether an individual or corporate entity can file an insolvency application under Section 7.
Application/complaint to be filed before whom Complaint is to be filed before Consumer Forum having territorial and pecuniary jurisdiction to hear a complaint Complaint is to be filed before the Real Estate Regulatory Authority established in each state by the respective state government where the project is situated Insolvency Application is to be filed before the Adjudicating Authority i.e.

a)National Company Law Tribunal, having territorial jurisdiction over the place where the registered office of a corporate entity is situated in case of Corporate Entities

b)Debt Recovery Tribunal, having territorial jurisdiction over the place where the individual resides, carries on business or personally works for gain

Appellate structure under the Act a)District Forum

b)State Forum

c)National Forum

d)Supreme court

a)Real Estate Regulatory Authority

b)Real Estate Appellate Tribunal

c)High Court

d)Supreme Court

a)National Company Law Tribunal

b)National Company Law Appellate Tribunal

c)Debt Recovery Tribunal

d)Debt Recovery Appellate Tribunal

e)Supreme Court

Execution/Relief provided The Consumer Forum has the power to execute their own orders. Real state Regulatory Authority exercise its powers by way of order to impose fine, deregister the project, including the promoters in the list of defaulters  or direct the completion of the project Once insolvency application is admitted, IRP comes into the light to manage the affairs of the company. In case of failure of insolvency, process liquidation would be commenced.

Legal Insolvency and Bankruptcy Code remedies available to Home Buyers

If the builder/developer has committed a delay in giving possession then in such a situation the home buyers can seek recourse to any of the following below listed remedies to claim a refund of money or possession of the home.

1. Approach Consumer Forum

This is the most common forum for bringing an action against the builder/developer regarding deficiency in service as was agreed between the home buyer and builder. The home buyer is covered under the definition of “Consumer “as is defined under the Consumer Protection Act, 1986 only if the house is purchased for his own use and not for commercial purpose. Approaching the Consumer Forum is easy because of the fact that the court fee charged is very nominal.

2. File a case before Regulatory Forum 

Home buyers can file a complaint with Real Estate Regulatory Authority under Section 31 of the Real Estate (Regulation and Development) Act, 2016. The Regulatory Forum is specifically constructed to provide speedy and effective adjudication of disputes between buyers and builders. Under RERA if the builders fail to grant possession at the promised time frame then home buyers have the autonomy to withdraw the amount invested in the project so far along with interest. However, if the home buyers still want to continue the project then in such a situation he is entitled to receive interest for every month of delay over and above the promised time.

3. File Civil Suit

Where the builder fails to deliver the possession of the property on the promised date then in such a situation the home buyers can file a civil suit on the grounds of the breach in the obligation which was promised at the time of the agreement. The home buyers can approach the civil courts and file suit for injunction/ damages or claim refund of the amount paid to the buyer till date along with interest. On approaching the civil court, the home buyers can get an immediate order for the injunction under Order 39 Rule 1 and Rule 2 of CPC. It is important to mention that there are no fixed stringent timelines for adjudication of the suit and so it may take longer time as compared to other alternatives. A civil suit can be filed by the persons who are not covered under the ambit of the consumer.

4. Initiate out of court Settlement

To avoid court formalities home buyers can opt and go for arbitration if there is enshrined an arbitration clause in the agreement between the buyer and builder .for resolving the matter via arbitration it takes around 3 to 6 months. Therefore for initiating out of court settlement, there is a mandate for the arbitration clause to be in place.

5. File Criminal Complaint

If the home buyer is cheated or defrauded by the builder/developer then in such a scenario the home buyer can file a criminal complaint based on the provisions of the Indian Penal Code on the grounds of being cheated, defrauded, etc. As soon as a criminal complaint is filed against the builder/developer, a bailable warrant may be issued against such builder/developer

6. Recourse under IBC

The Insolvency and Bankruptcy Code has completed 2 years as of now. In these two years, IBC has done great wonders. The home buyers were initially ranked at par with other creditors but after the amendment in August 2018, the home buyers have been upscaled by lining them in the position of financial creditors. Being Financial Creditors these home buyers can invoke Section 7 to seek remedy.

It is significant to highlight that the home buyers while claiming compensation through above-mentioned manner can claim interest along with the compensation on the amount paid by them to the developer/builder till date. Also if the home buyer was staying in rented accommodation till obtaining possession of home then he can claim money paid as rent.

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