Deeming Fiction Under IBC Leads To Equation Of NCLT With The Authority Under RERA

Deeming Fiction under IBC

“Deeming fiction”[i] literally means supposing the existence of state or position of a thing, for the purpose of the law, which factually is not in existence. However, it’s not necessarily confined to the said parameter. Rather it can also be explanatory in nature, intended to remove all possible doubts w.r.t the fact concerned being inclusive or exclusive, as the case may be, in the interpretation of the concerned provision.[ii]

Testing the same in light of ‘explanation to Section 5(8)(f) of the IBC’[iii] which explicitly includes ‘such minimum no. of homebuyers’[iv]in real estate as “financial Creditor”, is merely clarificatory in nature and not a concept which would have otherwise fallen out of the purview of the main provision.

The claim that the nature of investment by homebuyers being that of the “financial debt” (FD) has always been inferable from the residuary clause (f) of the definition, which states “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”. In this respect, it is to be understood that when the homebuyers pay any advance amount to the builder, as consideration for the flat, apartment, etc. being their future asset, the said payment amounts to “disbursal” of money. Now to give it a character of “borrowing” it must be reflected that such disbursed amount, used by the builder to finance his real estate project, would yield something back to the homebuyer in return.  Needless to mention that Builder is under a legal obligation to hand over the possession of the home on time as agreed upon or later along with the compensation for the delay. Moreover, in such a case of delay, the homebuyer is also entitled to withdraw the purchase, & to claim an entire refund of the amount invested. To be noted that, in each scenario homebuyer is legally entitled to get something equivalent in return, as a consideration for the huge amount invested in the project of the builder, which remains profitable for the builder, as the builder always keeps enough profit margin, while planning out the purchase agreement, giving thereby a “commercial” feature to the transaction.

Hence, undoubtedly investment by the homebuyers to finance the business project of the builder has the commercial effect of lending, who therefore fall in the category of the financial creditor.

Legislative Wisdom

Real estate transaction was capable to be interpreted under both “financial debt” as well as “Operational Debt”[v] (OD), however, our lawmakers carefully using the wisdom based on the social scheme of consumer welfare, has chosen to deem it FD as opposed to OD, being well aware of the different legal requirements under both the scenarios, as It would be more difficult for the builder to defend the case in case of FD than it would have been, had it simply been the case of OD. So, apparently, the legislature wanted builder not to simply get over by raising the “dispute”[vi], rather prove the same. Legislature thereby primarily intended to achieve social justice in the respective sector, which constitutes a substantial portion of today’s GDP & expected to increase further in the future.

Deemed Insolvency

The term “Deemed Insolvency” is further relevant to understand the ‘shift’ from the authority under RERA to NCLT. The concept has a role when the builder company is not factually insolvent, still under the code will be deemed insolvent, if “Default”^[vii] is ascertained.

When the builder commits default in repayment of such minimum amount, as prescribed under IBC, due to the allottees under any statue including RERA, allottee is entitled to file an application for initiation of the resolution process under IBC. If the builder fails to defend its case w.r.t such default as claimed, there does not remain any substantial defense left with the builder to raise & NCLT is empowered to admit the application.

It is to be noted that the entire case of financial creditor depends upon the existence of “Default”. Following the insolvency law of the USA in this respect^[viii], there is no requirement under the code to strictly prove the fact of “Insolvency” i.e. the financial inability of the builder to repay its debt(s), itself. The legislature, therefore, appears to have deemed the state of “insolvency”, in every case where “default” is duly ascertained.

Therefore, even where the builder was not financially sick in fact & had committed “default”, let say by deliberate conduct due to mismanagement, which certainly is no defense for it to raise under the Code, Insolvency is liable to be deemed.

Parallel Jurisdiction of NCLT & Authority under RERA

• Both the legislations ensure repayment of debt or invested amount to the allottee.[ix]
• Under IBC, the builder company remains in operation even during the moratorium period, with the motive to optimize the functioning & maximize the value of assets.[x]

Similarly, under RERA where registration of the builder is revoked, the authority may require the appropriate government to carry out the remaining development work so as to protect the stake of allottees.[xi]

• During the Resolution process, Allottees being part of the committee of creditors will have a substantial ‘say’ in planning out the repayment by debtor-builder.

Similarly, in the case of revocation of registration of the builder under RERA, the association of allottees, has been given the first right to refuse the development of remaining work^[xii]

Comparison & Conclusion

RERA’s objective is to ensure the ‘financial solvency of the builder company’[xiii], fair trade play, transparency in work, equal bargaining power, protection of socio-economic interest of the allottee, as well as the timely development of the project. So, it is intended not only to adjudicate the disputes arising between the builder & allottee but also to supervise the functioning of the builder & development of the project, as a preventive measure to avoid unnecessary litigation in the future, thereby having a wider & comprehensive scope than any other law for the protection of interest of allottees.

While IBC can be helpful for the group of allottees so far as the speedy repayment of debt is concerned through an effective negotiation process between the parties for planning out the resolution within a fixed time frame.

Author: Lubhanshi Rai- Student of 4th Year – Amity Law School, an intern at IP and Legal Filings and can be reached at support@ipandlegalfilings.com.