The Compromised Position of “Secured Creditors” under The Real Estate Regulatory Authority Act, 2016
Aryaditya Chatterjee
3rd year (5th Semester), B.A. LL.B. (Hons.), School of Law (Christ Deemed to be University), Bangalore
The RERA Act was introduced with the objective to safeguard the rights and interests of home buyers in India. More often than not buyers were suffering from the wrongful acts of the builders and real estate agents. The parliament came up with the RERA Act to regulate the real estate market and protect it from “market failure”. The act has definitely helped the home buyers to protect their rights and interest but the position of the secured creditors has been seriously compromised. In any economy, there should be a mechanism which should help the creditors recover their dues from the borrowers. In India, the Securitization Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002(SARFAESI) facilitates the recovery of loans upon default and reducing non-performing assets in the financial system. However, the RERA Act has caused hindrance for the secured creditors to recover dues from promoters (builders) because RERA is given precedence over SARFAESI. In such a scenario, it becomes nearly impossible for the secured creditors to recover dues from the promoters. The aim of this post is to analyze the judgments pronounced by the Hon’ble Supreme Court (SC) in this regard. Secondly, it critically analyzes the possible implications of giving RERA precedence over SARFAESI. Thirdly, it provides some recommendations that would help in resolving the concerns discussed throughout the post.
Decoding Judgments given by the Supreme Court
The Supreme Court (SC) in the land mark judgment of Union Bank of India v Rajasthan Real Estate Regulatory Authority and Ors. [1]discussed the issue of applicability of SARFAESI in cases where RERA has jurisdiction and affirmed to the decision of the High court of Rajasthan (HC). The primary issue of this case stems from the judgment by the High Court in the case of Union Bank of India v Rajasthan Real Estate Regulatory Authority and Ors.[2] , wherein the Union Bank of India challenged the section 9 of the RERA Act. The Bank argued that Section 9 of the RERA Act is not applicable to Bank (secured creditor) as RERA Authority can issue directions only against a promoter, allotee or a real estate agent and Bank is none of these entities. However, the court referred to the decision of the Supreme Court in the case of M/s. Newtech Promoters and Developers Pvt. Ltd. v State of UP and Ors.[3] and stated that Section 9 of the RERA will be applicable and is not ultra vires because bank is the assignee of the promoter and also assumes the role of a promoter. The second issue which the court dealt was the course of action that should be taken when there is a conflict between RERA and SARFAESI. The judicial trend would make it quite clear that in cases where there is a conflict between two central legislations, the law which came at a later date(subsequent) would prevail. However, the court referred to the decision of Bikram Chatterji v Union of India[4] wherein the Supreme Court (SC) held that RERA protects the interests of the lenders and does not take away the rights of statues such as RDB, Transfer of Property Act and SARFAESI. However, RERA is a special legislation created to protect the interests of the home buyers and upon conflict between two central legislation RERA would only prevail. The third issue that the court dealt is whether RERA will have jurisdiction over the agreement between secured creditor and builder prior to the introduction of RERA. In this regard the court held that if the agreement between the creditor and developer was prior to the introduction of RERA then it will not have any jurisdiction over such agreement where mortgage is created until there is some material fraud in creation of such mortgage. The fourth issue that the court dealt is whether the RERA Authority has the jurisdiction to entertain a complaint by an aggrieved party against the Bank as a secured creditor if the bank takes any recourse contained in the provision of 13(4) SARFAESI. The court discussed this issue in great detail and observed that the Bank (Secured Creditor) has the right to take any action against the borrower if there is a default, but the moment it takes any action against the borrower under Section 13(4) of the SARFAESI, the RERA Authority will have the jurisdiction to entertain such complaint by the aggrieved party.
Possible implications in the future
The judgment of the Supreme court has given precedence to RERA over SARFAESI which clearly means whenever a secured creditor or a financial institution will take any decision against the homebuyer , they will be subjected to the jurisdiction of the RERA. Even if the property is mortgaged to the Bank, RERA will have precedence over the recovery process laid down under the SARFAESI. The judgments of the Supreme Court is directly affecting how RERA and SARFAESI interact, leading to financial institutions needing to balance their recourse options for promoter defaults with the rights of homebuyers. When security measures are carried out under SARFAESI, a financial institution or a secured creditor will be held accountable like the promoter, subjecting them to the jurisdiction of the RERA Authority. The extent of this accountability will be determined over time. Under the SARFAESI Act, the court’s role in enforcing secured property was decreased in order to expedite the process. Nevertheless, homebuyers’ rights will now be under the jurisdiction of RERA and if there is a default on the loan, the RERA Authority can also be involved. Nevertheless, it is important to note that the judgments by the Supreme Court has not offered complete protection to the Developers from SARFAESI, and established certain guidelines for it. Initially, the effectiveness of RERA will be assessed based on whether the financial institution established security interest before RERA was implemented, except in cases where the transaction was deceptive. Secondly, the Allottees must personally file a complaint if they believe their rights as Allottees are being violated due to the financial institution’s decision to enforce the security.
Another significant effect is that financial institutions will now be required to take on the responsibilities of the Promoters rather than seizing the secured property to repay the debt. The rights of homebuyers must be safeguarded, but the secured interest of lenders should not be weakened, requiring a delicate balance by all involved parties. Financial institutions and Secured Creditors face a unique challenge because they cannot be held responsible or take on the defaults/errors that have already happened in the project. However, the major issue face by the Financial Institutions will be to take significant amount of risk before giving loans to builders, as they will not have the recourse available under the SARFAESI to recover the dues. This will affect the economy of the country as these institutions will not be able to recover public money. Financial institutions may choose alternative options like seeking help from the National Company Law Tribunal under the Insolvency and Bankruptcy Code 2016, and requiring additional securities not included in the original mortgage.
Recommendations for Financial Institutions and Secured Creditors
Now the Financial Institutions will have to take greater care when sanctioning loans to the builders/developers. They will have to carry proper due diligence and track records in repayment of loans to provide financial assistance to the developer otherwise the recovery process will be a cruel one if it comes within the jurisdiction of the RERA Authorities. Secondly, additional securities must be given to the Bank/Financial Institutions which are not included in the original mortgage. If there is a conflict upon the mortgaged property, then these additional securities can be acquired to recover the dues. Thirdly, the additional securities should be of such value, that substantial portion of the debt can be recovered by acquiring those securities. The guidelines to decide value of additional securities must be decide by Reserve Bank of India. After the judgments of the Supreme Court (SC) favouring rights of the home-buyers over the rights of the secured creditors, it is the right time for RBI to release fresh guidelines to sanction loans to developers and manage the recovery through alternative procedures in an efficient manner.
Conclusion
At this point of time, it is clear that the position of the secured creditors have been compromised due to the judgments of the Supreme Court where the RERA has been given precedence over the SARFAESI . In such a scenario, the secured creditors will only be able to recover dues after completion of the project or if the agreement between the creditor and developer was prior to the introduction of RERA. Additional guidelines should be released by RBI to tackle the issue because recovery recourse under SARFAESI is not available.
References:
[1] Union Bank of India v Rajasthan Real Estate Regulatory Authority and Ors., (2022) ibclaw.in 18 SC
[2] Union Bank of India v Rajasthan Real Estate Regulatory Authority and Ors., (2022) 1 RLW 343 (Raj.)
[3] M/s Newtech Promoters and Developers Pvt. Ltd. v State of UP and Ors. (2021) ibclaw.in 188 SC
[4] Bikram Chatterji v Union of India AIRONLINE (2019) SC 2195 (India)
