This article is written by Jotsna O, pursuing Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.

Introduction

Another brick in the foundational wall being built granting protection to the prospective home buyers has been laid by Ambika Prasad Sharma vs. Horizon Buildcon Pvt. Ltd. & Anr. This protection is granted under the Insolvency and Bankruptcy Code, 2016 [hereinafter referred to as the “Code”], which is in addition to the remedies provided under the Consumer Protection Act, 2019 and the Real Estate (Regulation and Development) Act, 2016 [hereinafter referred to as “RERA”]. Real Estate projects have a habit of getting delayed and it is not unusual for Home Buyers to be dragged around according to the whims and wills of the Developers. Under the Code, one more avenue has now been availed to the prospective Home Buyers for exercising their remedy.

Facts of the case in brief

Horizon Buildcon Private Limited [hereinafter referred to as “HBPL”/ “Appellant”] and Kaveri Sahakari Awas Samiti [hereinafter referred to as “Kaveri”], a co-operative society, had on 28.08.2012 entered into a Collaboration Agreement for the Development project [hereinafter referred to as “project”] of a residential complex on the land owned by Kaveri. Pursuant to achieving the objective of the aforementioned Collaboration Agreement, HBPL had entered into an Assignment Agreement on 05.07.2013 with Horizon Concept Private Limited [hereinafter referred to as “HCPL”], through which the Assignor – ‘HBPL’ assigned all its rights and liabilities with respect to marketing and sales of the project to the Assignee – ‘HCPL’. Subsequently, on 06.07.2013, HBPL and HCPL entered into a Marketing Agreement, wherein the marketing for the project was contracted to HCPL. On 14.02.2014, HCPL entered into an Apartment Buyer Agreement [hereinafter referred to as “ABA”] with the Home Buyer [hereinafter shall also be referred to as “Allottee”/ “Respondent No. 2”], and later on, HCPL issued an Allotment Letter in favour of the Allottee on 25.02.2014. From the ABA, the date of delivery of possession was 14.02.2017, i.e., three years from the date of execution of the ABA, and all payments made by the Allottee were directly made to HCPL and were concurrently credited to the account of HCPL. 

Problems arose when there was a default in the completion of the project, and the Allottee filed a Section 7 Application under the Code for initiating insolvency proceedings against HBPL. The application was admitted by the Hon’ble National Company Law Tribunal – New Delhi Bench [hereinafter referred to as “NCLT”], citing its reasons for doing so, the ones relevant to the author being, 

1. It is an admitted fact that HCPL is a creation and the marketing arm of HBPL.
2. The allottee has established the default on the Financial Debt on the part of HBPL.

The order, dated 08.11.2019 admitting the application of the allottee was challenged in the present case by the erstwhile Director of HBPL, contending that since all payments by the Allottee was made to HCPL directly, which was a separate legal entity from HBPL, and due to this reason, there exists no financial debt against HBPL, and also that the allottee is the ‘financial creditor’ for ‘HCPL’ and not ‘HBPL’.

On the other hand, the allottee contended that vide the Collaboration Agreement, it was evident that HBPL had the sole developmental rights for the project, wherein 64% share of the entire super built-up area of the complex was to be held by HBPL, and also that the permission for transferring the ownership of the Flat/s to the prospective Allottees shall be given by HBPL [out of the 64%]. The allottee also highlighted the Assignment and Marketing Agreements, which clearly indicated that HCPL was only a creation of HBPL and was intended to be the marketing arm of HBPL, and therefore held no right, title and interest in the said project.

Issues raised for assessment

1. Whether the home buyer/allottee may be considered a ‘financial creditor’ vis-a-vis ‘HBPL’?
2. Whether ‘HBPL’ may fall within the purview of a ‘corporate debtor’, as it is defined under Section 3(8) of the Code?

Judgement

The National Company Law Appellate Tribunal, New Delhi Principal Bench [hereinafter referred to as “NCLAT”], in an eagle-eyed manner focused on defining the exact relationship between HBPL and HCPL, before venturing deeper. For doing so, all of the foundational agreements relevant to the project were examined with a fine-tooth comb, along with relevant judgements and even provisions of contract law.

In regards to the first issue, even a bare perusal of the agreements executed between the related parties, it is clear as day that the relationship of HBPL and HCPL was one of principal-agent, despite the fact that it was not mentioned explicitly. In ‘Chairman, LIC and Ors.’ vs. ‘Rajiv Kumar Bhasker’, the Hon’ble Supreme Court had laid down the principle, that where any person, by words or conduct has been represented or permitted to be represented by another person, such person shall be bound by the acts or omissions of the other, to the same extent as in a principal-agent relationship, despite the lack of such actual authority being extended. The Hon’ble Supreme Court also stated that the use or omission of the word “agent” is not conclusive proof in determining the legal relationship between an alleged principal and agent. Following the same rationale in the present appeal, the Hon’ble NCLAT identified that HBPL as a principal had created HCPL as its marketing arm, the Assignment and Marketing Agreements. And even in the ABA, it is clearly specified that HBPL is the developer which has the rights, title and interest in the project. In so doing, the Hon’ble ruled that the contention of the HBPL that all rights with respect to the project had been assigned to HCPL and therefore, the sole responsibility of completing the project vested with HCPL, was incorrect and does not hold water.

Addressing the second issue before the Hon’ble NCLAT on whether there had been an actual breach in respect of terms of the ABA, the focus was given to Clause-C of the ABA in explicit terms stipulated that HBPL shall deliver possession on or before the expiry of 36 months from the date of execution of ABA. While one of the contentions of HBPL was that the non-completion was on account of ‘force majeure’, the same was found to be untenable by reason, based on the evidence placed on record, that there was never any injunction for any substantial period of time, which could have prevented HBPL from continuing the construction activity of the project. Once again, the Hon’ble NCLAT placed reliance on another enlightened judgement of the Hon’ble Supreme Court, ‘Pioneer Urban Land and Infrastructure Ltd. & Anr.’ vs. ‘Union of India & Ors.’ [hereinafter shall be referred to as “Pioneer”], which stated that any amount raised with profit in mind would be subsumed within Section 5(8)(f) of the Code and that subsequently, the sale agreement between a developer and a homebuyer would have the “commercial effect of borrowing”. Therefore, the Hon’ble Supreme Court ruled that even without relying on the Explanations introduced by the Amendment Act, 2018, Allottees shall fall within Section 5(8)(f) of the Code. Explanation (i) and (ii) to Section 5(8) provide more cadence to bringing Allottees under a Real Estate project within the purview of the Code. The Hon’ble NCLAT, relying on Clause-C of ABA as well as the Pioneer Judgement, gave the considered view that HBPL was the corporate debtor and the allottee was the financial creditor, within the operation of the Code.

Critical analysis of the case

Although the instant ruling of the Hon’ble NCLAT is one to be expected given the recent string of judgements in relation to home buyers under real estate projects and also the 2018 Amendment, it has nevertheless brought consistency and rationality to the table, one that the home buyers no doubt appreciate. It would also be remiss to not appreciate the clear interpretation of the principal-agent relationship, which was fundamental in identifying who the actual financial creditor was. In essence, it was similar to lifting the veil, behind which the financial creditor had managed to camouflage themselves, in an effort to hoodwink not just the allottee but also the Hon’ble Tribunal. Rulings such as these render more power to the legislative intent and provide a lending hand to the ones needing protection. In addition to placing reliance on landmark judgements, there has been a certain interpretative element that provided clarity while assessing the issues placed before the Hon’ble NCLAT.

Conclusion

Even though the Code and RERA may be functioning in different spheres and under different objectives, they are able to go hand-in-hand on occasions such as the present case. The 2018 Amendment should be a clear indication of the legislative intent, that both Acts should be interpreted liberally when bound together, and unless there is direct conflict, the Code need not necessarily override RERA. The first step of bringing the Acts together, in an effort to prevent the real estate developers from touting legal jargon and making the home buyers run circles, was done by linking the definitions for “Allottee” and “Real Estate project” under IBC with the meanings provided for them under RERA. The judgement in addition to bringing the allottee squarely within the operation of the Code had also made it clear that only the project in question would be affected by the insolvency proceedings and that any other project of HBPL shall remain unaffected. This has brought a balance and fairness in the judgement.

References

• https://nclat.nic.in/Useradmin/upload/1554656391606ee4038ac96.pdf 
• https://indiacorplaw.in/2021/02/straining-conceptual-consistency-home-buyers-as-financial-creditors.html 
• https://economictimes.indiatimes.com/wealth/real-estate/big-boost-for-homebuyers-sc-gives-nod-to-financial-creditors-status/articleshow/70600662.cms?from=mdr 
• https://blog.ipleaders.in/homebuyers-considered-financial-creditors/  

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