The Supreme Court's decision to treat banks as promoters for the purposes of the RERA Act will create a stumbling block in the implementation of the three laws, namely the RERA, the SARFAESI Act, and the IBC.
ON FEBRUARY 14, the Supreme Court's division bench of Justices M.R Shah and B.V Nagarathna upheld the Rajasthan High Court's judgment in Union Bank of India v. Rajasthan Real Estate Regulatory Authority & Ors., which had caused a conflict in this regard between the Real Estate (Regulation and Development) Act, 2016 (the 'RERA Act') and the Securitization, Reconstruction, and Enforcement Act.
The Supreme Court's decision expands the RERA authority's jurisdiction in cases where an aggrieved person files a complaint against the bank as a secured creditor and the bank invokes any of the regulations under Section 13(4) of the SARFAESI.
Section 13(4) of the Act states:
"4) If the lender fails to fully discharge his obligation within the period mentioned in clause (2), the creditor may seek several of the great plans to recover his existing loans:
(a) take possession of the borrower's secured assets, including the right to transfer the secured asset through lease, assignment, or sale;
(b) assume management of the borrower's business, such as the right to transfer the secured asset via lease, assignment, or sale:
Provided, however, that the correct transfer by lease, allocation, or sale may be exerted only where a substantial portion of the borrower's business is held as safety for the debt: Furthermore, where the leadership of the entire business or a portion of the business seems to be severable, the lien holder accepts over the governance of the borrower's business that is related to the safety for the debt.
(c) appoint anyone (hereafter alluded to as the manager) to oversee the secured assets seized by the bondholder;
(d) at any time, by written notice, require any individual who has obtained any of the securities from the creditor and to whom any funds are owing or could become due to the lender to pay the protected creditor a sum sufficient to cover the secured loans."
"Also, due to the possibility of multiple complaints being filed by allottees, the process of enforcing security interests by financial institutions as per section 13(4) of the SARFAESI Act will be difficult."
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The goal of RERA legislation was to protect homebuyers' interests against the influence of promoters in the real estate market, and the goal of SARFAESI legislation was to protect banks against debt defaults committed by promoters of real estate projects. The law has become even more complicated as a result of the inconsistencies created by the judgment, causing a snag in the implementation of three statutes: the RERA Act of 2016, the SARFAESI Act of 2002, and the Arbitration and Conciliation Code of 2016. This is explained further below.
RERA will triumph over SARFAESI.
The Supreme Court upheld the Rajasthan High Court's decision on three major points of disagreement between the two laws:
On the first point, the Supreme Court's bench stated that banks will be considered promoters for the purposes of the RERA Act and that if the bank implements any measures under Section 13(4) of the SARFAESI Act, it triggers a statutory assignment of the borrower's right to the secured creditor, giving RERA authority jurisdiction to hear a complaint filed by an aggrieved person. This means that a lender cannot recover its debts from a developer by selling the property and must instead act as a promoter or developer. However, the court made it clear that the RERA will only have jurisdiction in this regard if homebuyers approach the authority to protect their interests.
On the second point, the Rajasthan High Court cited Bikram Chatterji v Union of India and Ors(2019), in which the Supreme Court ruled that if the two acts conflicted, the provisions of RERA would take precedence. This was stated again.
Finally, the Supreme Court determined that RERA would not be retroactive unless the security interest was created through fraud or collusion.
The effect on financial institutions
Because financial institutions are now considered "promoters," they must follow the promoter responsibilities outlined in the RERA Act. Furthermore, financial institutions will now be subject to RERA's jurisdiction, which means they must comply with RERA's notice and represent themselves if allottees file a complaint. Furthermore, due to the possibility of multiple complaints being filed by allottees, the process of enforcing security interests by financial institutions under Section 13(4) of the SARFEASI Act will be difficult.
"Previously, financial institutions could file a case under Section 13(4) of the SARFAESI Act without involving tribunals or courts." However, if the promoter fails to pay the dues, the proceedings may be delayed due to the involvement of the RERA Authority."
Financial institutions could previously file a case under Section 13(4) of the SARFAESI Act without the involvement of tribunals/courts. However, if the promoter fails to pay the dues, the proceedings may be delayed due to the involvement of the RERA Authority. Finally, if a developer defaults on a loan and a financial institution considers auctioning off the mortgaged property, the financial institution must obtain prior written permission from the RERA authority.
It can also be argued that putting the lender in the borrower's shoes leads to an absurd situation in which the lenders are perceived to be participating in any and all activities that they finance. The section of the order requiring banks to obtain RERA approval before transferring a secured asset violates legal standards because the Act is silent on the method for transferring property.
Furthermore, applying the principles of subrogation and guarantee in the context of the current conflict can lead to erroneous conclusions. If the real estate project is delayed or becomes a non-performing asset, the promoters are required by law to first settle their debts to the lenders. However, according to the decision, in this case, the lender is required to protect homebuyers' rights first, creating a legal gap between the requirements of the SARFAESI Act and the Real estate regulatory authority Act because the latter infringes on the former's purview of implementing recovery powers, which are solely vested with the Debts Recovery Courts ('DRTs').
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As a result, the Supreme Court's decision will have an impact on the rights of financial institutions that lend to real estate businesses in relation to the rights of project allottees. It calls into question RERA's authority to evaluate the validity or invalidity of a mortgage generated by a registered instrument, or to completely overturn the actions of a bank or financial institution, given that RERA's jurisdiction in such circumstances is clearly limited by Section 34 of the SARFAESI Act. Furthermore, under Section 17 of the SARFAESI, any person (including a dissatisfied flat purchaser) who is dissatisfied with a secured creditor's actions under the SARFAESI Act has the right to file a statutory appeal.
"More importantly, putting lenders in the shoes of a promoter or his assignee under RERA Section 2 (zk)(i) goes against the core duty of financial institutions."
The RERA may not have the authority to set aside, alter, or modify a registered mortgage or charge made in favor of the bank/financial institutions, or to adjudicate the issue of fraud, as these matters will be decided by the DRT/civil courts, as applicable. The authority also lacks the ability to hear appeals or set aside physical possession orders under Section 14 of the SARFAESI Act. Under Section 17 of the SARFEASI Act, the only option is to file a complaint with the DRT.
Furthermore, unlike the IBC, the SARFAESI Act does not require a moratorium. As a result, prospective homebuyers will be able to file complaints with RERA authorities. Such claims may be made as soon as a bank or financial institution takes enforcement action in accordance with Section 13(4) of the SARFAESI Act.
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