Restoring Homebuyer Confidence via Regulation 46-A: A Flawed Truce?
Yadu Krishna
Fourth Year B.B.A LL.B (Hons),
Symbiosis Law School (Pune)
Anjana O.C.
Fourth Year, B.B.A LL.B,
St. Josephs Law College Bangalore
On February 12, 2024, the Insolvency and Bankruptcy Board of India notified amendments to the IBBI (Liquidation Process) Regulations 2016 (Amendment) aimed at enhancing efficiency and transparency in the liquidation process. Among other changes, it introduced Regulation 46-A, which stipulates that if an allottee in a real estate project has obtained possession of their property or unit from the corporate debtor, then such an asset will be excluded from the liquidation estate.
The post aims to analyse Regulation 46-A and offer a critique of the same by first giving an overview of how the Insolvency and Bankruptcy Code (Code) treats those properties in possession of the Allottees. Second, it delves into Regulation 46-A, formulated by the Insolvency and Bankruptcy Board of India (Board). Thirdly, it outlines the complexities surrounding possession without title transfer and its implications, including concerns regarding alignment with existing laws and potential challenges. It concludes by advocating for a nuanced approach, emphasising the need for clarity on possession, safeguards against exploitation, and alignment with existing laws to protect allottees’ rights and enhance the insolvency resolution process.
Property in Allottees Possession under IBC: Backdrop
In the current real estate scenario, it is common for builders to hand over the possession of a built-up unit to be handed over to an allottee after obtaining the occupation certificate of the constructed building and the respective buyers having duly inspected their purchased units without actually executing the conveyance for the same. In the event that the builder goes into insolvency during this twilight period, allottees are in a precarious position, with their property potentially becoming part of the builder’s liquidation estate.
The jurisprudential trail also shows inconsistency in determining whether allottees who have taken possession of a property yet await transfer registration with relevant authorities should be included within the liquidation estate. One set of judgements, including Alok Sharma & Ors. vs. . M/s. I.P. (2022) ibclaw.in 459 NCLAT, Bikram Chatterjee & Ors. V. Union of India & Ors. [2018] ibclaw.in 38 SC, and Tharuvai Ramachandran Ravichandran, pointst to excluding such properties from the liquidation estate by reasoning that these properties cannot be considered assets for the company but rather a part of its ongoing business operations, even during the Corporate Insolvency Resolution Process (CIRP), with their sales revenue listed under “Revenue from operations” in the profit and loss accounts. Further, it reasons that claims such as registration of these properties breaches the moratorium under Section 14 of the Code lack merit, considering registration is only a procedural requirement for real estate companies, particularly when buyers already possess the properties. The Tribunal’s decision underlines the Code’s goal to preserve and protect the allottees interests and finds it imminent to ensure their peaceful possession of their residence. On the other hand, the Tribunal has taken a contrary stance in cases like M/s. Samruddhi Realty Ltd. and K Jayant Prabhu vs. PankajSrivastava,a holding that property cannot be excluded from the liquidation estate. The ratio employed was that no security interest was created in favour of the allottees, and without a registered sale deed, they had no ownership rights, thereby denying them any relief.
Regulatory Proposal
Through the amendment, the board has exercised its discretion under Section 36 (4)(e) of the Code to introduce Regulation 46-A, which in essence adds to the list of assets excluded from the liquidation estate of a corporate debtor under Section 36 (4) of the IBC, those assets in a real estate project whose possession the corporate debtor has transferred to the allottee. The regulation will retrospectively impact ongoing liquidation proceedings, necessitating liquidators to revise the liquidation estate by excluding flats occupied by allottees.
Earlier, while the homebuyers were categorised according to the stage of the creditor-in-class, considering possession status and registration status, ambiguity persisted regarding the inclusion of properties where allottees have taken possession but registration of the conveyance instrument is pending, within the liquidation estate. This was also identified in the earlier discussion paper of the IBBI in November 2023 on CIRP and liquidation of real estate-related proposals. There have been cases where homebuyers who were allotted and were in possession of flats before the real estate company became insolvent found themselves with no recourse but to seek a refund and vacate the premises.
Possession without title transfer: A discrepency
Regulation 46-A essentially purports to exclude those properties whose possession has been transferred to the allottee from the liquidation estate of the real estate company. For the property to be exempted from the liquidation estate of the corporate debtor, it is crucial that the ownership of such properties lie with the allottee and not the corporate debtor themselves. Exclusions that do not require the alottee to have actual ownership of property are contrary to the tenets of the Real Estate Regulatory Authority Act 2016 (RERA). Under Section 17 of the RERA, the execution of a registered conveyance deed is mandatory along with possession for a valid and complete transfer of title, and the regulation clearly runs against this mandate.
Further, the language used in the regulation suggests that possessing a property doesn’t always necessitate the transfer of title through a registered sales deed, which essentially runs against Section 54 of the Transfer of Property Act 1882 (ToPA), which defines and lays down the essentials to constitute a valid sale of a tangible, immovable property. Whittling down a registered sale deed to just a procedural requirement is unwarranted considering Section 54 provides that a registered instrument is pre-requisite for the transfer of ownership and mere possession does not result in the transfer of ownership. Also, going by the rulings of the Supreme Court in Maru Ram v. Union of India and Pakala Narayana Swamy v. The King Emperor, the provision addressing a specific situation under general law will take precedence if the same isn’t covered by special laws. Consequently, the Code cannot override ToPA in this matter, considering it does not specifically deal with the transfer of title and the specific provision (Section 54 of TOPA) shall prevail. Overall, given that neither the Code nor the RERA define the term “possession,” there is significant ambiguity regarding how evidence of possession is to be established in the absence of a property’s title
Implication and Challenges
First, Section 52 of the Code, mandates that only those assets can be left outside the liquidation estate of a corporate debtor, of which there is a security interest attached to the secured creditor. Defined under Section 3(31) of the Code, security interest is the right, title, interest, or claim to property, created in favour of a secured creditor through a transaction that secures payment or performance of an obligation. If Regulation 46-A remains in effect, properties of allottees with mere technical possession and no registered sale deed, lacking any security interest, cannot be excluded from the liquidation estate, considering it contradicts Section 52 of the Code. Also, the code is silent on whether allottees will be treated as secured or unsecured creditors under the code, considering this determination is contingent upon individual buyer-builder agreements and the rights granted to allottees. Given the compelling arguments supporting their inclusion among secured creditors, the regulation should have clarified this matter and formally recognised homebuyers as secured financial creditors.
Secondly, there is a risk that developers facing insolvency may try to selectively segregate their assets to control what’s included or excluded from the liquidation estate, potentially leaving property buyers at a disadvantage. This provision could be exploited by defaulting developers, who might pressure buyers into taking possession of unfinished units that do not meet promised specifications.
Also, the regulation could be interpreted to imply that only completed, registered projects handed over to allottees are excluded, while projects under construction, where allottees have made partial payments but registration and handover are pending, are included in the liquidation estate. Such an interpretation could undermine the objective of ensuring fairness for homebuyers and hinder the ability to achieve swift and efficient resolution.
Conclusion and Way Forward
The amendment helps protect allottees of real estate projects, ensuring they don’t face the risk of losing their homes after taking possession. It aligns with the February 2024 amendments to CIRP Regulations, which allow resolution professionals to seek plans for individual projects and mandate separate bank accounts for each project and judicial trends in cases like Jaypee Orchard Resident Welfare Society v. Union of India and Chitra Sharma v. Union of India, where the Courts haveassured tod do everything possible to protect the interests of the homebuyer.
However, the regulation has introduced a new set of issues that require attention. The Code must define “possession” and harmonise it with the existing framework, particularly Section 17 of RERA and Section 54 of ToPA. Merely having possession should not qualify for exemption; instead, a registered sale deed or completion of the purchase process, as stipulated by the regulation, should be mandatory. Moreover, the exclusion should encompass unfinished projects,, given that it is common for allottees to take possession in the pre-completion stages. Further, there’s a need to clarify the secured creditor status of allottees under the Code and safeguards are to be implemented to prevent developer exploitation by manipulating possession to exclude assets from liquidation. Independent verification of possession status and project completion levels could serve as effective measures.
The IBC is a beneficial legislation that is aimed at putting the company back on its feet rather than being mere recovery legislation for the creditors. Such an effort to recoup the company requires adequately tending to all the stakeholders involved, including its customers, which herein translates to the allottees of a property. The Amitabh Kant committee report on real estate projects also emphasised the need to reform the Code to better address the challenges faced by allottees. Regulation 46-A serves as a tool toward achieving that goal. While not flawless, making appropriate modifications can help align with existing laws, protect homebuyers’ rights, and enhance the insolvency resolution process.
