Supreme Court issues slew of directions to protect homebuyers and strengthen NCLT, NCLAT and RERAs

The Supreme Court on Friday issued a slew of directions to improve the functioning of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as well as the real estate regulatory authorities [Mansi Brar Fernandes v Shubha Sharma and Anr].

A Bench of Justices JB Pardiwala and R Mahadevan said it was passing the directions to restore faith in the regulatory and insolvency framework, deter speculative misuse and ensure that the “dream home” of India’s citizens does not turn into a lifelong nightmare.

"The Government is constitutionally obliged to protect the interests of homebuyers and the economy at large. It is not merely about houses or apartments; the banking sector, allied industries, and employment for a large populace are also at stake," the Court said.

Highlighting the problems faced by homebuyers, the Court said,

"The plight of tax-paying middle-class citizens paints a disheartening picture. Having invested their lifelong savings in pursuit of a home, many are compelled to shoulder a double burden – servicing EMIs on one hand, and paying rent on the other – only to find their “dream home” reduced to an unfinished building."

The Court was dealing with a case pertaining to two real estate companies against whom insolvency proceedings had been initiated.

In the judgment delivered on September 12, the Court said that while investors are integral to any industry and their interests warrant protection, speculative participants driven purely by profit motives cannot be permitted to misuse the Insolvency and Bankruptcy Code (IBC).

The Court said IBC is a remedial framework conceived for revival and the protection of sick companies and, in the case of real estate, genuine homebuyers but individual investors or home buyers have alternative remedies under consumer law or Real Estate (Regulation and Development) Act and even recourse to Civil Courts in appropriate cases. 

"Despite robust demand, the sector has been plagued by delays, defaults, and lack of accountability, leaving countless families without possession of homes despite having invested their life savings. In this backdrop, this Court has consistently reiterated that the IBC is not a recovery mechanism or a bargaining chip for individual disputes. Rather, it is a collective mechanism intended to revive viable projects and safeguard the fundamental right to shelter of genuine homebuyers," the Court said.

Thus, it called for fortification safeguards for bona fide homebuyers to insulate the real estate market from speculation and artificial inflation and to secure speedy and time-bound adjudication as mandated by the Code. 

"This Court seeks to restore faith in the regulatory and insolvency framework, deter speculative misuse, and ensure that the “dream home” of India’s citizens does not turn into a lifelong nightmare," the bench said.

The directions issued by the Court in this regard are:

NCLT/NCLAT and RERA infrastructure

Vacancies in NCLT and NCLAT shall be filled on a war footing, the Court ordered. It also suggested that dedicated IBC benches with additional strength should be constituted and services of retired judges may be utilized on ad hoc basis until regular appointments are made.

This Court is cognizant of the fact that similar directions have been issued in the past but no effective step has been taken on the ground, the order recorded.

Hence, it directed the Union government to file a compliance report within three months on measures taken to upgrade NCLT/NCLAT infrastructure nationwide, the Court said.

"The recent closure of Chandigarh NCLT and portions of Delhi NCLT due to water seepage in the Courtrooms and Chambers of Members underscores the urgency of robust infrastructural support," the judgment highlighted.

The government shall prioritize e-filing, video-conferencing and dedicated case management systems for IBC matters in view of the heavy caseload before NCLTs, the Court further ordered.

With regard to real estate regulatory authorities, the Court directed that States shall ensure that they are adequately staffed with infrastructure, experts, and resources.

"At least one member of every RERA must be a legal expert or consumer advocate with proven expertise in real estate field. RERAs must conduct thorough diligence before granting approval to any project. Failure to do so, resulting in miscarriage of justice, shall amount to an error unpardonable in law and may invite strict intervention by this Court," the Court said.

Reforms in real estate sector

Committee to suggest reforms

The Court directed that within three months, a Committee chaired by a retired High Court Judge shall be constituted, with representatives from the Ministry of law, Ministry of Housing, domain experts in Real Estate, Finance and IBC from National Institute of Urban Affairs (NIUA), HUDCO’s HSMI, IIMs, NLUs, and NITI Aayog, as well as two eminent industry representatives.

The Committee shall suggest commercially viable systemic reforms for cleansing and infusing credibility into the real estate sector, the Court ordered, adding that NITI Aayog/NIUA shall provide research and secretarial support. The Committee shall submit its report within six months of its constitution, the Court ordered.

Guidelines needed for insolvency proceedings in real estate

The Court directed that since real estate is the second largest sector in IBC proceedings, IBBI in consultation with RERA authorities shall constitute a council to frame specific guidelines for insolvency proceedings in real estate, including timelines for project-wise CIRP and safeguards for allottees.

Resolution of real estate insolvency should, as a rule, proceed on a project-specific basis rather than the entire corporate debtor, unless circumstances justify otherwise, the Court said.

The Court further directed that at the admission stage of Section 7 petitions filed by allottees, NCLTs must record a prima facie finding on whether the applicant is a genuine homebuyer or a speculative investor. This would prevent unnecessary admissions and reduce docket burden, it said.

Directions to protect homebuyers

Every residential real estate transaction for new housing projects shall be registered with local revenue authorities upon payment of at least 20% of the property cost by buyer/allottee, the Court ordered.

"In projects at nascent stages, such as where land is yet to be acquired or construction has not commenced, proceeds from allottees shall be placed in an escrow account and disbursed in phases aligned with project progress, as per a RERA-sanctioned SOP. Every RERA shall devise such SOPs within six months from today," the Court further directed.

The Court also said that the Union government should undertake a consultative exercise to bring about uniformity in RERA Rules across States, to remove ambiguity and fill lacunae in what is otherwise a watershed legislation.

It further said that the Union government may also consider establishing a body corporate, on the lines of National Asset Reconstruction Company Limited (NARCL) or otherwise, promoted by real estate/ construction-focused PSUs or through Public-Private Partnerships, to identify, take over, and complete stalled projects under the IBC framework. 

"Unsold inventory from such projects could be utilized towards affordable housing schemes like PMAY or for Government quarters, thereby addressing both the housing shortage and revival of sick projects," it suggested.

The Union government shall consider establishing a revival fund under NARCL or expanding the Special Window for Affordable and Mid-Income Housing (SWAMIH) Fund, to provide bridge financing for stressed projects undergoing CIRP to prevent liquidation of viable projects and safeguarding homebuyer interests, the Court further said.

"SWAMIH Fund is a commendable initiative; however, being a large fund involving public money, every rupee must be utilised strictly for its intended purpose of last-mile financing. To prevent misuse, we direct that a comprehensive periodic performance audit by the CAG carried out, with reports placed in the public domain in a form comprehensible even to laypersons," the Court ordered.

[Read Judgment]