Real Estate – IndiaCorpLaw

Who is a Consumer? Parallel Proceedings under RERA and CPA

Guest — Fri, 23 Jul 2021 04:50:43 +0000

[Varda Saxena is a 3rd year B.A., LL.B. (Hons.) student at Jindal Global Law School in Sonipat]

Section 2(7) of the Consumer Protection Act, 2019 (“CPA“) mandates that a person who obtains goods for commercial purposes is not a consumer. This means that a person who obtains goods for reasons other than the sustenance of their livelihood or for reasons other than self-use is not considered a consumer within the meaning of this Act. Also, an allottee has been defined under section 2(d) of the Real Estate Regulations Act, 2016 (“RERA“) as someone to whom the promoter (builder or seller) transfers any flat, building or other real estate within the meaning of RERA. The preamble to RERA explicitly states that the statute has been specially created for consumers in the domain of real estate for the speedy redressal of complaints by such consumers (allottees). These allottees are entitled to compensation under section 18 of RERA due to delay in obtaining possession of the property in question, alongside other remedies mentioned in the Act.

Recently, the Supreme Court of India in Imperia Structures Ltd. v Anil Patni passed a judgment stating that allottees under RERA can be incorporated under the ambit of “consumers” mentioned within the CPA. Further, the Court observed that the consumer forums cannot be construed as “civil courts: under section 79 of RERA. This post intends to explore the misdirected approach of the Supreme Court while considering the inclusion of “other remedies” under section 18 of RERA. The author intends to highlight that allottees cannot be construed as “consumers” under section 2(7) of the CPA. It is further argued that consumer courts are essentially civil courts. Consequently, consumer courts do not have jurisdiction to provide redressal in complaints falling within the ambit of RERA. Hence, the inclusion of allottees within the category of consumers is not a legally sound remedy.

Background of the Case

A housing scheme called ESFERA was launched by Imperia Structures Ltd, wherein Mr. Anil Patni and other allottees bought flats for commercial purposes. Hence, it was argued that the case could not fall within the category of a consumer dispute in accordance with section 2(d) of the CPA. When goods are purchased for the purpose of reselling or commercially exploiting them to gain extra profit, such buyer or user is not a consumer under the Act.

Due to the demonetisation exercise initiated by the Government, which was recognised as a force majeure event, the project incurred heavy losses and a shortage of labour. Subsequently, the possession of the flats was not handed over even after four years of execution of the Builder-Buyer Agreement. Imperia Structures offered separate residence to the allottees, which they refused due to the commercial nature of the sale and filed a representation in the Consumer Forum. Thereafter, the National Consumer Disputes Redressal Commission (“Commission”) ordered Imperia Structures to pay a refund with interest at the rate of 9% per annum according to the dates of deposits. Imperia Structure had registered their project under the RERA authority. It challenged the adjudication of the Consumer Forum based on the exclusion of allottees from the definition of consumers, which excludes sales for commercial purposes.

Court’s Ruling

The Supreme Court ruled that the allottees will be considered consumers within the CPA, as section 18 of RERA does not bar the existence of other remedies. Further, the Court stated that section 71(1) of RERA only talks about the withdrawal of proceedings before legislation came into existence, and excludes those filed after the statute was enacted. The Court further went on to rely on the judgment in Secretary, Thirumurugan Cooperative Agricultural Credit Society v M. Lalitha (dead) through LRs, and stated that the provisions of the CPA could be considered “additional remedies” within the meaning of section 18 of RERA. Additionally, the Court relied on Malay Kumar Ganguli v Dr Sukumar Mukherjee and reiterated that National Commissions could not be construed as civil courts within the meaning of this CPA.

The Court went on to rely on Pioneer Urban Land and Infrastructure Limited v Union of India while specifying that the provisions of the Insolvency and Bankruptcy Code, RERA and the CPA should be construed harmoniously and the remedies should be available to all aggrieved allottees.

Analysis

Although the Supreme Court referred to its judgment in Pioneer Urban Land, it failed to distinguish the fact that the allottees in that case were not transacting for commercial purposes. The present judgment clearly mentions that the allottees were offered alternate accommodation in “Takshila Heights, Gurgaon”. The developers also offered to pay the rent for such alternative accommodation; however, it was refused by the allottees, which indicated that the apartments were booked for personal profit only. Hence, the equation of an aggrieved consumer with a commercial buyer within the meaning of section 2(7) of the CPA is incoherent. Further, the case of Smt. Pushpa Meena v. Shah Enterprises (Rajasthan) Ltd. (1990 Raj LT 59) also reiterates the same position while specifying that a car bought for imparting taxi services inhibits the buyer from being called a “consumer”. Hence, as the facts state that the allottees bought the flats for the purpose of raising rent, they can only be classified as allottees.

The proviso to Section 71(1) of RERA entitles a complainant who had filed an appeal under the CPA before RERA came into force to withdraw their complaint and file a representation before the relevant RERA authority. While stating that its applicability is restricted to projects promulgated before RERA came into force, the Court not only failed to take the proviso to section 71 (1) into account, but it also failed to acknowledge the retrospective and retroactive nature of the legislation as stated in the case of Neelkamal Realtors Suburban Pvt. v. Union of India. The judgment in this case clearly states the demerits of approaching different forums even when the remedy under RERA exists. The Court mentions that RERA was enacted so that complaints of allottees could be filed before a single tribunal to ease, simplify and expedite the process of seeking redressal. Hence, RERA should be upheld as the appropriate authority for adjudicating all real estate disputes instead of indulging in forum shopping by involving Consumer Forums. The judgment highlighted that the importance of distributing the jurisdiction and limiting RERA complaints to RERA tribunals was to organise the judicial system and provide speedy redressal. However, including allottees within the ambit of consumers negates the possibility of speedy redressal, making the process tedious for both promoters and allottees.

Further, the Supreme Court held that the bar under section 79 of RERA states that civil courts cannot adjudicate on matters governed by RERA and, as Consumer Forums do not fall under the umbrella of civil courts, this section will not apply to proceedings initiated under the CPA, even if the subject matter relates to RERA. However, one needs to keep the case of Ethiopian Airlines vs Ganesh Narain Saboo in purview while taking a stance on this matter. The Supreme Court, in this case, specified how the term “suit” should be understood in its ordinary dictionary meaning, which includes all proceedings initiated for the realisation of a right provided by the law. The Court highlighted that the proceedings under Consumer Forums are summary proceedings that are referred to civil courts when complex contentions arise.

Further, the judgment in Imperia Structures is silent on the fact that a complaint and a suit is one and the same, and the proceedings before a Consumer Court are in the nature of a suit. Hence, section 86 of the Civil Procedure Code (“CPC”) should ideally be applicable. Additionally, the judgments in Economic Transport Organisation, Delhi v. Charan Spinning Mills Private Limited and Patel Roadways Limited v. Birla Yamaha Limited have also concurred with the opinion that Consumer Forum proceedings are “suits” within the meaning of the CPC.

Even in Kesoram Industries Ltd. v. Allahabad Bank, the Calcutta High Court specifically highlighted that Consumer Forums and Commissions are “courts” in terms of section 11 of the CPC. The judgment has also reiterated the precedent laid down in Harinagar Sugar Mills Limited v. Shyam Sundar Jhunjhunwala while stating that “court means court of Civil judicature and tribunals which decide controversies arising under certain special laws.” Further, in Ethiopian Airlines v Ganesh Narain Saboo, the Supreme Court stated: “The Consumer Protection Act clearly enumerates those provisions of the CPC that are applicable to proceedings before the consumer fora. Such provisions include 13(4), in which the Consumer Protection Act, 1986 vests those powers vested in a civil court under the CPC to the District Forum.” Therefore, it can logically be argued that the bar specified under section 79 of RERA should be applicable to the proceedings initiated under the CPA. Such proceedings will be considered civil proceedings under the said section. Additionally, it has been argued elsewhere that District Forums and Commissions ought to adopt and establish principles of the CPC to do complete justice as and when it is needed.

It is notice-worthy that RERA entails special qualifications and thresholds for the appointment of chairpersons and the members of the Authority under section 22 and for the Appellant Tribunal under section 46 of the legislation. Hence, the institution of parallel proceedings before both tribunals will increase the financial drain of the promoter. Hence, provisions of RERA, including section 79 thereof, further the aim behind the creation of the legislation by restricting the adjudication of real estate disputes. The Supreme Court does not address this issue and instead states that the allottees can still go under section 18 of RERA while referring to “other remedies”. The judgment reflects an over-assumption while referring to section 100 of the CPA and stating that the section legitimises the initiation of RERA proceedings in Consumer Forums, as the CPA was passed after RERA.

Lastly, the Supreme Court held in Global Energy Ltd. v. Central Electricity Regulatory Commission that the qualifications mentioned in statutes for specific judicial processes are important because they promote accountability and letting multiple agencies or fora do the same work acts against such accountability. Therefore, labelling allottees as “consumers” and divulging discretion to Consumer Forums and Commissions in respect of commercial real estate matters would abrogate the accountability of tribunals while assessing the cases.

Conclusion

The present judgment reflects no distinction between commercial real estate transactions and those of personal nature. This distortion in the definition of consumers may benefit non-commercial allottees; however, it parallelly creates financial constraints on promoters or builders in states of duress. The judgment separates the Consumer Forums and Commissions from the umbrella of civil courts, without coherently ascribing the intent of both these legislation. Simultaneous litigation emanating due to this precedent will work against the speedy redressal of complaints filed in both these fora and will work against the aim of reducing the burden of the judiciary.

– Varda Saxena

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Fractional Ownership: Recommendations for Regulation

Guest — Mon, 12 Jul 2021 04:12:10 +0000

[Malavika Devaya is an Associate at Poovayya & Co., Bengaluru]

Myre Capital, a fractional ownership platform by Morphogenesis, recently made headlines by raising INR 50 crores for its offering of the integrated township Magarpatta Cybercity. A concept that is fast gaining popularity in India but has been around in developed countries for a while now, fractional ownership is the obvious answer to making an income from extremely highly valued prime commercial real estate with fairly limited resources. The basic idea behind fractional ownership is simple – what an individual cannot afford to purchase, a group of people can pool in money and jointly purchase.

A modern-day fractional ownership platform (FOP) in India is ordinarily a company that identifies suitable high-value properties and invites investors to own a fraction of the same to earn income from the rent generated or the appreciated resale price. Once the property has been identified and investors have been secured, the most common investment route is by incorporating a special purpose vehicle (SPV) to purchase the property. Investors hold securities in the SPV and receive the profits of rent or income as interest or dividends. A new route also seems to be gaining popularity nowadays, wherein sale deeds are registered directly in the names of the purchasers of the property. High tech operators may even use blockchain technology to store and maintain the register of owners securely. The direct deed of ownership method allows the FOP to circumvent even the bare minimum corporate compliances since no SPV is incorporated.

In both cases, after the purchase of the property, the FOP takes on the role of a property manager, allowing the owner-investors to sit back and reap the rewards without having to dirty their hands in the day-to-day management of the property. Exiting a scheme is limited to three options – (i) secondary sale on the platform operated by the FOP; (ii) private sale; or (iii) sale of the underlying property by the SPV, with the consent of majority shareholders.

Existing Regulations

Since these FOPs operate as real estate agents or brokers before the property is purchased and as property managers thereafter, they would ideally need to register as ‘real estate agents’ under the provisions of the Real Estate (Regulation and Development Act), 2016 (RERA). However, it is unclear whether FOPs actually follow this practice, as the website of only one such FOP discloses that it is ‘RERA Registered’.

While RERA does lay down some obligations of a real estate agent, including maintaining books or accounts, not getting involved in unfair trade practices and facilitating the provision of all information to the allottee at the time of booking, these generic functions do not offer sufficient protection for investors since the context in which they have been introduced is significantly different from the context in which an FOP operates. From an Indian securities market perspective, the Securities and Exchange Board of India (SEBI) has not introduced any specific guidelines or regulations that address the operation and management of FOPs, and as a result, FOPs have so far managed to fly under the radar and avoid having to comply with any major regulations.

Collective Ownership Schemes

Whether or not an FOP would amount to a collective investment scheme, defined under the SEBI Act, 1992 (the SEBI Act) and regulated under the SEBI (Collective Investment Schemes) Regulations, 1999 (CIS Regulations), is an interesting question. The definition of a collective investment scheme set out in section 11AA of the SEBI Act largely mirrors the principles laid down by the US Supreme Court in the case of SEC v. W.J. Howey Co. (popularly known as the ‘Howey Test’), viz. to qualify as a collective scheme, (i) the contributions or payments made by investors must be pooled and utilised for the purposes of the scheme or arrangement; (ii) such contributions by investors must be made with the view to receive profits; (iii) the property or investment forming part of the scheme must be managed on behalf of the investors; and (iv) the investors must not have day-to-day control over the management and operation of the scheme or arrangement.

From a bare reading of section 11AA of the SEBI Act, FOPs arguably do qualify as collective investment schemes and must register as such and comply with the regulatory framework set out in the CIS Regulations. In PGF Limited v. Union of India, the Supreme Court of India (SC) found a similar but very rudimentary form of this concept to fall squarely within the purview of the SEBI Act and the CIS Regulations. PGF Limited operated a scheme wherein they invited individuals to contribute money and purchase portions of agricultural lands, the end goal being to earn an income from the development and management of those lands by PGF Limited. PGF Limited argued that there was no investment scheme as such and the matter would not fall within the scope of securities, but the Supreme Court rejected this view and held that the activity of PGF Limited was nothing but a collective investment scheme in disguise.

While the question of whether they fall within the scope of ‘collective investment schemes’ or not may still be up for debate, assuming arguendo that they do, the existing CIS Regulations would need to undergo certain modifications to be able to regulate FOPs effectively and unambiguously. Such amendments to the CIS Regulations may need to consider, amongst other things, the following:

Inclusion of SPV and direct ownership models

The CIS Regulations presently only contemplate a transaction structure wherein the investment scheme is in the form of a private trust, constituted in terms of a registered trust deed, that holds the securities in trust for the investors (see Chapter IV, CIS Regulations). To regulate FOPs without arresting innovation, the CIS Regulations must be amended to introduce the concepts of (i) collective investment through the incorporation of an SPV and allotment of its securities to investors; as well as (ii) the registration of sale deeds directly in the names of the investors, by-passing the need for an intermediary in the form of a trust or SPV.

Compulsory due diligence and disclosures

Since investors do not interact directly with the property owners and rely upon the offerings of the FOP, it is essential for the FOP to engage reliable and recognised advocates to conduct a thorough title due diligence of the shortlisted property and then make the complete title opinion, including any exceptions or caveats drawn by the advocates, available to the prospective investors to enable them to make an informed decision. Even in the FOP’s role as a property manager post-purchase, it must be required to disclose any disputes, concerns or issues that may arise and provide regular updates. In addition to this, every investor must have unrestricted access to the complete title, revenue and survey documents of the property, along with the documentation executed with tenants or occupants of the property. In case of leased properties, the FOP must undertake a stringent tenant-vetting process and provide all necessary information to the owners.

Advertisements

Under the CIS Regulations, collective investment management companies are permitted to advertise new investment schemes, subject to strict compliance with the guidelines set out therein (see regulation 27). However, in the FOP context, while this may work for the direct ownership model, it may give rise to some confusion in the case of the SPV route, since the Companies Act, 2013 prohibits the advertisement of private placements of securities (see section 42 (7)).

Skin in the game

A popular mechanism that features across most money management and investment schemes, this would require the FOP and/or key management personnel above a certain level to hold a specific percentage of units in the investment scheme (in the form of shares of the SPV or undivided share in the property directly) for a minimum period, before divesting. The current CIS Regulations restrict the collective investment management company from investing in a scheme floated by it unless it adheres to certain conditions (see regulation 13). In contrast, it may be advisable instead to make it compulsory for FOPs to invest in their schemes themselves, as this would ideally increase the FOP’s level of care and due diligence before offering properties for investment by making the stakes more personal.

Accredited investors

SEBI has been contemplating introducing the concept of ‘accredited investors’ in the Indian securities market and had earlier released a consultation paper setting out the broad framework, which was recently approved. Some of these principles in the framework could find application in the FOP context as well, for example, FOPs that are only inviting investment from accredited investors being allowed certain regulatory relaxations and those opening to all classes of investors being subjected to more stringent compliances.

Conclusion

A seemingly major reason for the popularity of FOPs today is the absence of rigid, time-consuming and expensive compliances. However, regulation of these FOPs is important to protect investors from being defrauded out of their hard-earned money and have in place safeguards against any unexpected turn of events. FOPs and market regulators need to work together to achieve the bottom-line, which is stimulating economic growth while maintaining investor security.

– Malavika Devaya

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Straining Conceptual Consistency: Home Buyers as Financial Creditors

Guest — Sat, 06 Feb 2021 11:30:10 +0000

[M P Ram Mohan is Associate Professor, Indian Institute of Management Ahmedabad and Vishakha Raj a Research Associate, Strategy Area, Indian Institute of Management Ahmedabad.

This post is based on the authors’ article Apartment Buyers as Financial Creditors: Pushing the Conceptual Limits of the Indian Insolvency Regime published in the Columbia Journal of Asian Law]

A unique feature of the Indian insolvency regime is its classification of debt into “operational” and “financial” debt, thus creating operational and financial creditors. Operational debt is characterized as dues payable by the corporate debtor for services and goods consumed (instances include payments to employees and suppliers). Financial debt refers to dues that represent a solely financial relationship between the debtor and creditor. A key feature of all financial debt as explained in the Insolvency and Bankruptcy Code, 2016 (IBC) under section 5(8)(f) is that it must comprise disbursements against the “time value of money.”

In 2018, the IBC was amended to include amounts raised from allottees (persons to whom an apartment or plot in a real estate project has been allotted) within the definition of financial debt, thus making allottees financial creditors. Though the amendment was recommended and enacted to empower allottees in India’s real estate sector, it seems to dilute the definition of what characteristics are germane to the classification of financial creditors under the IBC. This reduces the clarity with which stakeholders can ascertain whether they are financial or operational creditors. The focus of categorizing debts seems to have shifted from the nature of the debt to the relative vulnerability of the creditors (in this case apartment buyers).

The 2018 amendment was challenged, albeit unsuccessfully, before the Supreme Court of India in Pioneer Urban Land & Infrastructure Limited v. Union of India on the grounds that apartment buyers were more suited to the category of operational creditors than financial creditors. The 2018 amendment, its rationale and the litigation surrounding it have provided an opportunity to scrutinize the characteristics of financial and operational creditors as delineated by the IBC. Clarity in understanding this classification is significant in the Indian context as only financial creditors have the ability to vote on insolvency resolution plans that decide how the corporate debtor will be reorganized. When one is a financial creditor, they also have an easier path to initiate insolvency resolution proceedings against the corporate debtor who is not allowed to dispute the default.[1]

The Centrality of Time Value of Money to Financial Debt

The key conceptual justification for the 2018 amendment equates the substantial investment apartment buyers make when buying homes to moneys disbursed by financial creditors. The Report of the Insolvency Law Committee, 2018 (ILC Report) which recommended the amendment noted that apartment buyers pay large sums of money to developers only to be met with delays and incomplete projects. This problem certainly deserves regulatory attention, and even recognition during the developer’s insolvency proceedings; however, characterizing apartment buyers as financial creditors risks stretching the conceptual limits of the IBC.

While it is true that apartment buyers disburse money to the developer, they do not do this in return for consideration for time value of money. Time value of money essentially represents opportunity cost or other ventures in which the money could have been injected. For apartment buyers, this opportunity cost becomes less clear; a better characterization of their disbursal to the developer is an advance consideration. This is why in Nikhil Mehta and Sons v. AMR Infrastructure Ltd the National Company Law Appellate Tribunal (NCLAT) held that apartment buyers could be considered financial creditors only under specific circumstances – when they received assured returns from the real estate developer for their advances as consideration. The consideration for time value of money (such as payment of interest) that is a key element of identifying financial debt under the IBC is not present in all transactions between an apartment buyer and real estate developer. The ILC Report generalizes the nuanced finding of the NCLAT in Nikhil Mehta regarding when apartment buyers can be considered financial creditors. The NCLAT held that the periodic payments for the apartment buyers’ disbursements by the real estate developer constituted the consideration for the item value of money. Further, when the element of committed returns is present, the transaction can be characterized as purely financial as the returns are there to induce the initial disbursement which may not have occurred simply to secure the construction of the flat.

In the absence of the element of committed returns, the transaction between apartment buyers and financial creditors would simply be one for the purchase of a service (construction of an apartment). This type of transaction would seem to fit the definition of an operational creditor, but its arrangement is different when compared to a typical operational creditor (such as an employee or supplier). This is because when a supplier of raw material is a financial creditor, the corporation owes the supplier payments for the product supplied. In the context of apartment buyers, what is owed by the corporate debtor is not money but a service (construction and delivery of an apartment). This reasoning was used by the Supreme Court to hold that apartment buyers could not be operational creditors.

In Overseas Infrastructure Alliance (India) Pvt Ltd v. Kay Bouvet Engineering Ltd, however, the NCLAT held that receivers of goods and services would be considered operational creditors. Here, a sub-contractor did not refund sums that were extended to it for the construction of a sugar mill. When insolvency proceedings were filed against the sub-contractor for the sums paid, the NCLAT found that it was an operational debtor. This case appears to be analogous to that of the apartment buyer – in both instances a service (against advance payment) is owed by the corporate debtor rather than money. If one were to use the Supreme Court’s approach through which instances in which payment moves to the corporate debtor in advance can be characterized as financial debt, it is possible that all pre-paying consumers may have to be considered as financial creditors. The features of the transaction between apartment buyers and real estate developers can be found in other industries too such as interior designing, or even the customization of any equipment where payments are made in advance. The 2018 amendment in combination with the Supreme Court decision in Pioneer seems to have diluted the meaning of consideration for time value of money which is a key element of financial debt and consequently relaxed the category of financial creditors.

Alternatives to Classifying Apartment Buyers as Financial Creditors

A more cohesive solution to the problem apartment buyers could have been crafted within the IBC without straining the definition of financial debt. Sections 18 and 36 exclude assets of a third party held in trust by the corporate debtor from the scope of the insolvency resolution and liquidation processes respectively. The driving force behind the amendment appears to be the delays faced by apartment buyers and non-delivery of apartments. A solution that would have focused on returning an apartment buyer’s money could have been devised using these sections. The protection of such advances by consumers in general would be a good practice to adopt. This was also suggested in the context of home owners in the United Kingdom whose had made substantial advances for home improvements. A Report of the UK Law Commission suggested that consumers’ pre-payment exceeding a certain amount be given priority in the event of liquidation. Such solutions could have been adopted within the Indian context as well.

In the context of liquidation, the amendment has not substantially changed the position of the apartment buyer. In Pioneer, the Supreme Court has observed that even after the 2018 amendment, the debt owed to apartment buyers would be unsecured. As unsecured financial creditors, they will be paid 4^th as opposed to 6^th (which was their position prior to the 2018 amendment). The underlying problem of unprotected consumer pre-payments could have been addressed by giving them a higher priority within the liquidation waterfall. This would have also reflected in the distribution of proceeds of an insolvency resolution plan because section 30(2)(b)(ii) requires such distributions to follow the scheme of the liquidation waterfall. The most concerning aspect of the 2018 amendment is thus not that it chose to empower apartment buyers against real estate developers but rather the modality used to achieve this. It will now be difficult to offer a justification to other stakeholders that are receivers of products (against advance payments) for being excluded from the category of financial creditors under the IBC.

Conclusion

As noted at the outset, India uniquely differentiates between financial and operational creditors when it comes to their ability to initiate insolvency resolution proceedings and vote in the Committee of Creditors. This means that the constituents of each category must be clear and predictable. Though the IBC had enumerations (through an inclusive list) of what comprises a financial debt even prior to the 2018 amendment, all of them could be reconciled with the overarching definition of financial debt – the disbursement of sums against consideration for the time value of money. The 2018 amendment appears to have allowed a different category of persons to be characterized as financial creditors, thus reducing the predictability of how the definition of financial creditors will be applied to other transactions. The IBC, or any insolvency law for that matter, reflects the priorities of the society it governs. The present approach, however, appears to create tension between the policy imperative to reflect these priorities and fundamental concepts of the IBC.

– M.P. Ram Mohan & Vishakha Raj

[1] The Insolvency and Bankruptcy (Amendment Act) 2020 (No. 1 of 2020) amended the IBC requiring 100 allottees (apartment buyers) or ten percent of a real estate developers allottees, whichever is lesser, to jointly file an application for initiating the insolvency resolution process. This means that a single apartment buyer cannot initiate the insolvency resolution process. The Supreme Court of India has since upheld the constitutional validity of the 2020 Amendment in Manish Kumar v. Union of India.

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Flat Buyer’s Right To Claim Compensation For Delay In Handing Over Possession

Guest — Sat, 30 Jan 2021 04:37:09 +0000

[Ashish Singh is an Advocate and Former Managing Associate at L&L partners and Megha Shaw is a 4^th year student at NUJS, Kolkata]

Delays in handing over the possession of flats has become a rampant practice in the Indian real estate industry, due to which numerous innocent home buyers are being penalized. Such home buyers are not only left in the lurch without delivery of possession of their flats on time, but they are also being forced to pay EMIs due to the non-delivery of possession of the flats. Hence, the vital question that arises is whether the home buyers ought to continue to suffer due to the inordinate delay caused by the developers in handing over possession of the flats?

This post analyzes the decision of the Supreme Court of India in DLF Home Developers Ltd. v. Capital Greens Flat Buyers Association, wherein the Court came to rescue of, and ignited a ray of hope, amongst the flat buyers. In the said judgment, the Court has come down heavily on the developers, and it directed that even if the developers have given exit offers to the flat buyers, the flat buyers would still be entitled to claim compensation from the developers on account of delay in handing over the possession of the flats.

Factual Background and Contentions

In the present case, DLF Home Developers Ltd. has assailed the judgment passed by the National Consumer Disputes Redressal Commission (‘NCDRC’), granting relief of compensation and refund of money to the homebuyers. In the said appeal, DLF sought that they should not be asked to pay any additional compensation apart from the contractual rate of compensation (Rs 10 per square foot per month) as agreed in the Apartment Buyers Agreement (‘ABA’). In addition, DLF also denied the obligation to refund the club and parking charges as directed by the NCDRC.

DLF contended that the delay was caused due to force majeure events beyond their control, and hence they should not be made liable to pay additional compensation to the flat buyers. They submitted to the Supreme Court that delay in the approval of the building plan as well as stop-work orders given due to the fatal accidents invoked the force majeure clause. Further, they relied on Wing Commander Arifur Rahman Khan and Aleya Sultana v. DLF Southern Homes Pvt Ltd and argued that they are not liable to refund the parking and club charges. They submitted that since the flat owners were given exit offers on account of delay caused by the developers, it would bar the flat buyers from seeking compensation later, as they have forgone the chance of claiming a full refund of the amount along with the interest rate of 9%. Moreover, the buyer’s agreements provide compensation of Rs 10 per square foot per month towards compensation. Hence, it was contended that the relief of seeking compensation at the annual rate of 7% by NCDRC on account of the delay by the developer is erroneous and, thus, should be set aside.

The respondent Flat Buyers Association that the NCDRC, after detailed deliberation, had rightly rejected the force majeure defence. It argued that the exit offers and contractual rate of compensation did not compensate the flat buyers sufficiently. Hence, additional compensation at the rate of 7% was rightly awarded to the flat buyers, along with compensation at the contractual rate as stipulated in the ABA.

Judgment & Analysis

The Supreme Court dealt with the two major issues in this case: firstly, whether there was a force majeure event that caused the delay in handing over possession to the flat buyers; and secondly, whether the flat buyers are entitled to compensation in addition to the contractual rate of compensation when exit offers were given to them on account of delay.

On the issue of force majeure events, the Court observed no substantial evidence was produced to prove that delay was caused due to force majeure events as claimed by DLF. The Court further stated that delay in the approval of building plans is a very common phenomenon in the real estate industry, and the developer should have taken such delays into account while deciding the period of delivery of the possession to the flat buyers. Even the stop-work orders were given because of the fatal accidents caused due to the negligence of the developer while constructing the project. Therefore, the Court held that there was no force in the defence of invocation of force majeure clause raised by DLF.

On the second issue of seeking additional compensation, the Court held that the mere fact that the developers had given exit offers to the flat buyers along with the interest rate of 9% would have no bearing on deciding whether such flat buyers, who did not opt for such exit options, would be entitled to claim compensation. In the present case, the Court held that where a genuine flat buyer has purchased a flat intending to shift into the flat, and not just as a financier or an investor, then a mere refund or an exit offer would not exempt the developer from paying additional compensation for the delay. A refund of the entire amount along with a 9% interest rate is not a just compensation for a genuine buyer who continues to remain in the contract to fulfill his or her dream to get possession of the flat. Hence, an additional compensation at the rate of 6% should be provided annually.

While deciding the rate of compensation, the Court considered that in Wing Commander the rate of contractual compensation was Rs 5 per sq. ft. and in the present case the contractual compensation rate was Rs 10 per sq. ft. Since the contractual compensation rate was higher in the present case, the Court brought down the additional annual compensation rate from 7% to 6%, even though the NCDRC held that compensation should be paid at the rate of 7% annually. Relying on the same case, the Court cancelled the refund of the parking and club charges that were supposed to be refunded as per the NCDRC Order.

In Wing Commander, where similar issues had arisen, it was decided that the Court could grant additional compensation to the flat buyers, even though they have agreed to a lower rate of compensation in the ABA because the bargaining power of the flat buyer is negligible, and they have to sign a one-sided ABA that is drafted by the developers. Further, the Court relied on principles laid down in Pioneer Urban Land and Infrastructure Ltd v. Govindan Raghavan where the Court observed that “a term of a contract will not be final and binding if it is shown that the flat purchasers had no option but to sign on the dotted line, on a contract framed by the builder […] The incorporation of such one-sided clauses in an agreement constitutes an unfair trade practice as per Section 2(1)(r) of the Consumer Protection Act, 1986 since it adopts unfair methods or practices for the purpose of selling the flats by the builder.“

Further, in DLF Homes Panchkula Pvt. Ltd. v. D S Dhanda, the Court held that the parties needed to provide strong and exceptional reasons to seek additional compensation from the consumer forum. However, in Wing Commander, the Court held that Dhanda did not prohibit the consumer forum from detracting from the agreed compensation rate, but it merely lays down that there should be a requirement of strong and exceptional circumstances to claim additional compensation, apart from the contractual rate of compensation that was agreed between the parties. The Supreme Court also stated that a court must take a logical approach while deciding compensation by noting that the flat buyers have to take loans and payback their EMIs to the banks for such loans. Delays caused by the developers postpone the date of possession and, as a result, the flat buyers have to live in alternative accommodation, which incurs a lot of expenses. Hence, the Court held that where an inordinate delay of two to four years has occurred, the jurisdiction of the consumer forum to award reasonable compensation cannot be foreclosed by a term of the agreement.

Conclusion

Thus, in the present case, the Supreme Court held that there was no force majeure event in the present case, as delay in obtaining building approval is a common phenomenon that the developers should take into account while committing the date of handing over possession. Relying on the principle laid down in Wing Commander and Pioneer, the Court held that additional compensation should be granted at the rate of 6% per annum until the delivery of possession is given to the flat buyers, apart from the agreed contractual rate. Moreover, the Court also held that merely because exit offers were given to the flat buyers would not disentitle them to claim additional compensation.

By way of the aforesaid decision, the Supreme Court came to the rescue of the flat buyers, who do not have any bargaining power to decide the contractual rate of compensation, by entitling them to seek additional compensation from the developers on account of delay in handing over possession of flats. As such, the developers can no longer shrug off the liability of paying just compensation to the flat buyers on account of delay.

– Ashish Singh & Megha Shaw

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Andhra High Court Rejects Insider Trading Claims on Land

Umakanth Varottil — Thu, 21 Jan 2021 02:07:01 +0000

Rooted in preserving market integrity, the concept of insider trading emerged and has been ingrained in the context of the securities markets. Despite the well-understood nature of the subject-matter of insider trading, a question recently arose on whether the offence can be extended to the purchase and sale of land. In Chekka Guru Murali Mohan v. The State of Andhra Pradesh (decided 19 January 2021), a single judge of the Andhra Pradesh High Court squarely answered the question by limiting claims of insider trading only to the securities market, and declined the invitation to apply similar concepts where the subject matter of trading is land. For reasons discussed below, this is not at all a surprising outcome.

Facts and Ruling

The above case arose on account of a complaint filed by an individual pertaining to the Andhra Pradesh Capital Region Development Authority Act, 2014 introduced by the former chief minister, Mr. Chandra Babu Naidu, through which certain areas of land were declared to be the capital region of the then newly constituted state. The allegation was that several persons became aware of the location of the capital region even before the information was widely disseminated, and such privileged possessors purchased land in the region for a paltry sum beforehand and earned handsome profits as a result. The complainant claimed that government officials and political leaders who were privy to this sensitive information divulged them to their kith and kin who acquired lands from farmers in the region at undervalue. The complaint was filed under sections 420, 409, 406 and 120-B of the Indian Penal Code (IPC), and the accused persons moved the High Court under section 482 of the Criminal Procedure Code (CrPC) to quash the complaint.

This much is understandable, as the trajectory followed is not atypical to such cases. The intrigue arose when the State and the prosecution invoked insider trading claims to embellish their charges under the IPC. As the judge noted:

“This a very peculiar and very interesting case and in fact a case of first of its kind where the prosecution seeks to criminalize private sale transactions entered into between the petitioners as buyers of the land and the sellers of the land long back about six years ago by invoking the concept/theory of offence of insider trading applying the same relatively to the facts of the case, primarily on the ground that the petitioners as buyers of the land did not disclose to the owners of the land that the capital city is going to be located in the said area and thereby concealed the said material fact and cheated the owners of the land and on the ground that as the location of the capital was officially declared subsequently that there is a phenomenal increase in the value of the land and the owners of the land sustained loss on account of concealment of the said fact.”

The question, therefore, is whether the buyers of the land had an obligation to disclose to the sellers the information the buyers possessed that the land would become part of the capital region and whether, for failure to do so, they can be said to have indulged in insider trading. In analysing the issue, the Court delved into the history and objective of insider trading law in India, as enshrined in the Securities and Exchange Board of India Act, 1992 (SEBI Act) and the relevant regulations thereunder. It also drew strands from comparative experience in jurisdictions such as the United States and the United Kingdom. All of these clearly left only one conclusion: that “the said offence of insider trading is essentially an offence relating to trading of public company stocks or other securities such as bonds or stock options based on material, nonpublic information about the company.” The sale and purchase of land were completely alien to the concept of insider trading. This was also clear from the provisions of the SEBI Act (sections 12-A and 15-G), which reference “securities” of a company.

The Court stalled the attempt of the prosecution to read into and import the provisions of the SEBI Act relating to insider trading while dealing with an offence under the IPC. It noted that “the offence of insider trading is totally alien to our criminal law under IPC. It is a concept or offence totally unknown to our criminal law under Indian Penal Code”. The Court was categorical in its conclusion not to apply the concept of insider trading in such circumstances, given that was never the parliamentary intent as it clear from both the SEBI Act as well as the IPC. Ultimately, the Court rejected the charges under the IPC regardless of the insider trading argument.

Comments

The outcome in on the insider trading issue could not have been any other way. Insider trading is well-entrenched in securities regulation, and the historical evolution too establishes its close linkages with the securities markets. That is consistent with the position in India law whereby the concept does not extend to other forms of property such as real estate. Even within the domain of securities regulation, the bite of insider trading lies on “marketable” securities, and not private untraded securities. Among other things such as the definition of “securities” under the Securities Contracts (Regulation) Act, 1956, this is also evident from the fact that while insider trading had somehow wound its way into the Companies Act, 2013 (applicable to both listed and unlisted companies) by virtue of section 1956 of that legislation, it was subsequently eliminated by way of the Companies (Amendment) Act, 2017. This suggests that even in the context of corporate securities, the element of marketability is essential, thereby limiting the operation of insider trading to a very narrow sphere.

The decision in Chekka Guru Murali Mohan also raises another interesting issue, namely the nature and content of the inside information that was allegedly unpublished and price sensitive. That relates to prospective government decisions or policy changes such as, in this case, the announcement regarding the location of a new capital region. Political functionaries and government officials are often privy to that information before it is released into the public domain. Conventional insider trading regulation may not easily ensnare such conduct as the information does not relate to the company whose securities are traded, but to a more generally policy change. The United States has sought to address this gap through the Stop Trading on Congressional Knowledge Act (STOCK Act) enacted in 2021, which too though applies in the context of securities.

Despite the rather clear and unavoidable outcome based on the current law, the issues before the Andhra High Court raise some interesting policy-level questions, whether: (i) there is merit in consideration the application of insider trading-type principles to property other than securities, such as for real estate that can be subject to market fluctuations; and (ii) insider trading issues must be extended beyond corporate insiders to legislators and policymakers on the lines of the STOCK Act.

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Examining the Issues Related to TDR under GST

Guest — Sun, 11 Oct 2020 11:05:52 +0000

[Madhura Karanth is a fourth year student at NALSAR University of Law, Hyderabad. The author is thankful to Mr. Mihir Naniwadekar for valuable inputs]

A Joint Development Agreement (“JDA”) is common in the Indian construction industry. A landowner and a developer enter into such an arrangement, where the developer undertakes to develop the owner’s land. Usually, the constructed area is shared between the two parties in an agreed ratio, and each party is entitled to market their respective share. The developer is providing a service through such development/construction to his buyers as well as to the landowner for his part of the share. Hence, the developer is liable to pay GST with respect to such services provided by him.

However, what has been a contentious issue since the advent of the GST regime is the treatment of Transferable Development Rights (“TDR”). According to the CBIC, the developer is liable to pay GST on the service provided by the landowner in the form of TDR. The consideration for such service is in the form of constructed area from the developer for whom, the receipt of development rights acts as the consideration.

In this post, I examine the relevant provisions and notifications on this issue, followed by a look at prevailing jurisprudence. This will be juxtaposed with the position of tax implications on TDR under the pre-GST regime to understand the reason behind the dissatisfaction and the confusion among developers under the current regime.

GST Implications in Relation to TDR

Section 148 of the CGST Act (“Act”) empowers the government to notify “certain classes of registered persons and the special procedures to be followed by such persons”. Accordingly, a notification dated September 25, 2018 was issued – firstly, persons supplying “development rights to a developer, builder, construction company” for consideration in the form of construction service and secondly, persons supplying construction services against consideration in the form of TDR were notified as registered persons liable to pay central tax on supply of the respective services. Thereby, it was affirmed that GST was applicable to service by the landowner in the form of TDR to a developer. Further, the Government through Notification No. 4/2019 – Central Tax (Rate) sought to exempt GST payable on TDR for transfer effected after April 1, 2019 only for construction or development of residential apartments the consideration for which was received before the issue of completion certificate.

In Re Maarq Spaces Pvt. Ltd., the Karnataka Authority for Advance Ruling (“AAR”) was faced with the question of whether an activity of development as well as sale of land would attract GST. Here, the applicant involved in property development had entered into a JDA with landowners for development of a piece of land into a residential layout, under which the consideration was agreed to be on revenue sharing basis.

It was the contention of the applicant that “sale of land” could neither be treated as a supply of goods nor as that of services as it is one of the entries under Schedule III of the Act. It further relied on sections 2(30) and 2(90) that define composite supply and principal supply respectively to submit that in case of two supplies of which one constituted the predominant element while the other was only ancillary or incidental to it, the supplies were to be regarded as a single supply. Accordingly, it was contended that the predominant supply in this case was land and the development activity was only ancillary to such sale. Sale of land being out of the purview of GST on account of falling under Schedule III meant that the development service would remain so too (being naturally bundled with sale of land).

Upon close examination of the contents of the agreement between the developer and the landowner, AAR found that the agreement did not intend to pass on the title to the developer and hence, it did not ‘own’ 25% of the plot. Therefore, it could not be claimed that there was sale of land to be falling under Schedule III. The agreement did allow the developer to enter into sale agreements but that was only incidental to its principal activity of developing the land. Without relying on any notification or provision, it was held that the activities undertaken amounted to supply of service.

In January 2020, the Maharashtra AAR was faced with a similar situation in Re Vilas Chandanmal Gandhi, wherein the applicant being the landowner presented arguments that were similar to the treatment of TDR in the pre-GST era. It was submitted that service through TDR “being in nature of transaction of sale of land/immovable property” was not to be taxed on account of being covered under Schedule III. Referring to various definitions of immovable property from allied laws, the applicant arrived at the conclusion that immovable property included land and benefits arising out of land. The observations of the Maharashtra AAR stemmed from the direct reading of Notification No. 4/2018 – Central Tax (Rate) and an answer regarding GST on TDR in a compilation of FAQ put forth by the Finance Ministry. Therefore, it held GST to be applicable without getting into the immovable property/sale of land discussion.

Certain Observations

Section 65B (44) of Finance Act, 1994 in its definition of service specifically excluded “a transfer of title in goods or immovable property, by way of sale, gift or in any other manner”. Section 3 (26) of the General Clauses Act, 1897 defines immovable property to include land as well as benefits that arise out of land. Similar phraseology has been used to define immovable property under section 2(6) of Registration Act, 1908. TDR was recognized as a benefit arising out of land and thereby, an immovable property under the pre-GST regime. Hence, it was exempt from service tax.

Firstly, the Department has long contested the exclusion of TDR from the definition of services under section 65BB (44). Such contestation was based on the fact that the words “transfer of title in … immovable property” connote a transfer in ownership and TDR could not be construed as transferring ownership in any manner. However, there is sufficient support in law for the contention that title is not always construed as ownership. For instance, the Supreme Court in Syndicate Bank v. Estate Officer and Manager held that a title to a property in the legal sense need not be a title of ownership but one that is a limited title. The observation that title in property means a bundle of rights as held in Canbank Financial Services Ltd. v. The Custodianwill hold good for TDR as being title in property in as much as it is one such right in the bundle.

Secondly, one needs to observe the different words used under the two regimes. Under the service tax regime, immovable property was excluded from the ambit of services. This would then cover land as well as benefits arising out of land. However, under the GST regime, Schedule III to the Act which lists the entries outside the purview of supply contains sale of land as its fifth entry. Hence, it may be argued by the Department that it was the deliberate intention of the drafters to maintain such specificity, so as to include everything that came under the ambit of transfer of title in immovable property except sale of land.

However, the definition of the word “land” has not been defined under GST. To understand whether land in itself could cover ‘benefits arising out of land’ under its ambit, reference may be made to several statutes like Land Acquisition Act, Bombay Land Revenue Code etc. that hold land to include benefits arising out of land. However, it would be pertinent to examine the Income Tax Act to ascertain the treatment of ‘land’ in taxing statutes. The Mumbai ITAT in Prem Rattan Gupta v. Department of Income Taxheld that the words ‘land’ and building’ did not have as wide a meaning asthe words ‘immovable property’ to include benefits arising out of land. This was said in the context of section 50C of the Income Tax Act which uses the specific words ‘land and building’.

Further, the words used in Schedule III refer to saleof land as opposed to transfer of titlein immovable property. While it has been suggested above that transfer of title need not necessarily be construed as transfer ownership, the same may not be said about the word ‘sale’. Section 54 of the Transfer of Property Act defines sale as the transfer of ownership. Hence, a strict transfer of ownership has been envisaged as sale of land under Schedule III and nothing below that threshold. Accordingly, TDR will then stay out of the purview of Schedule III.

Given the above observations of the replacement of ‘immovable property’ with ‘land’ and that of ‘transfer of title’ with ‘sale’, the Revenue will be able to justify its stance of there being a deliberate change in the legal position. It can then argue successfully that TDR is indeed within the purview of GST.

– Madhura Karanth

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Applicability of Force Majeure in Commercial Lease Agreements Amid Covid-19

Guest — Tue, 02 Jun 2020 09:43:00 +0000

[Sumit Kumar Gupta is a 4th year student at the West Bengal National University of Juridical Sciences, Kolkata]

Covid-19 has unleashed an unprecedented economic crisis, and has brought with it a plethora of issues surrounding commercial lease agreements, as tenant associations increasingly seek waivers. The question whether the lockdown would entitle tenants a guarantee of waiver or claim exemption from payment of rent will undoubtedly emerge in a huge number of cases. These problems have been exacerbated further due to the ambiguity in executive orders seeking to give protection to some classes of tenants such as migrants, labourers and students, by suspending payment of rent. This post seeks to analyze the doctrine of force majeure in commercial lease agreements and explore whether such an invocation is permissible in the context of lease agreements.

By way of its judgment dated May 21, 2020, the Delhi High Court held that the doctrine of frustration under section 56 of the Indian Contract Act, 1872 is not applicable to lease agreements. While discussing the nature of lease agreements, the High Court relied heavily on the past jurisprudence surrounding the applicability of force majeure on commercial lease agreements. The Court also noted that such applicability of force majeure would be subject to any provisions to the contrary in the lease agreement executed between the parties. In hindsight, this case has raised the issue of incorporating a comprehensive and well-structured force majeure clause when the parties execute a lease deed. Against this background, author revisits the jurisprudence surrounding the doctrine of force majeure and its relevance in lease agreements.

Force Majeure means “an event or effect that can be neither anticipated nor controlled, is unexpected and which prevents someone from doing or completing something that he or she had agreed or officially planned to do.” [Black’s Law Dictionary (10th ed. 2014)] In simpler terms, force majeure is an extenuating circumstance that renders the performance of the contracts beyond the control of parties. The concept of force majeure finds its genesis under the Contract Act. The relatability to an express or implied clause in a contract is governed by section 32 of the Contract Act, while insofar force majeure event occurs de hors the contract, it is dealt with under section 56 of the Contract Act.

Interplay of Force Majeure and Commercial Lease Agreements

The evolution of the principle of force majeure has been aided by a catena of judgments. Section 56 of the Contract Act enshrines the principle of force majeure. The key elements for a successful invocation of this principle are two-fold: (a) the occurrence of the event that could not be prevented; and (b) the impossibility to perform such obligations arising out of the contract due to the occurrence of that event. Further, it has been held that the impossibility to perform is not limited to physical or literal impossibility, but also includes practical impossibility. However, mere commercial hardship or economic unviability does not frustrate the contract.

The Supreme Court had the occasion to consider the application of this doctrine on lease agreements. It drew a distinction between a ‘completed conveyance and an ‘executory contract’. The Court mentioned the limitation of the wording of section 56 of the Contract Act and stated explicitly that the said section does not apply to cases in which there is a completed transfer. The reason is that only executory contracts are capable of getting frustrated and not executed contracts. In a contract for lease, the lessee obtains possession of a property from the lessor. During the duration of the lease, the lessee only has to pay consideration periodically. A contract for lease is an executed contract. Therefore, it has been a settled position that section 56 of the Contract Act will not apply to lease agreements.

As no contractual stipulations are arising from the Contract Act, the provisions of the Transfer of Property Act, 1882 (TPA) would govern the encapsulated disputes in tenancies and leases. The Supreme Court in T. T. Lakshmipathi v. P. Nithyananda Reddy has settled the conundrum regarding the applicability of section 56 of the Contract Act and categorically held that section 108(B)(e) of the TPA would apply in case of lease agreements. Section 108(B)(e) recognizes the doctrine of force majeure. Three criteria must be satisfied for the invocation of this section, i.e. (a) the existence of irresistible force, (b) such situation should render property ‘substantially and permanently unfit’ for the purpose, and (c) the lessor must be notified by the lessee about lease deed becoming void. Additionally, the Supreme Court also held that a temporary non-use of the property by the tenant due to any factors would not entitle the tenant to invoke this section. This section places the onus on the lessee to establish the irresistible force due to lockdown, and that this lockdown has rendered the property permanently unfit for the purpose for which it was leased out. The Supreme Court has also held that until and unless there is a complete destruction of property, which is permanent in nature, this section cannot be invoked. Thus, the temporary non-use of property by the tenants due to lockdowns enforced by the government cannot be the ground for refusal to pay rents.

The decision of Delhi High Court on May 21, 2020 has cemented the already established legal position surrounding the applicability of force majeure in commercial lease agreements. Thus, even in the accentuating circumstances of coronavirus outbreak, tenants will have to pay the rents as stipulated under the lease agreement. The enforced lockdown has not resulted in meeting the criteria for the invocation of section 108(B)(e). Neither the pandemic nor the lockdown has rendered the property permanently unfit for use. Technically, there is no respite for the tenant in the law. Therefore, in the present circumstances, the parties should mutually negotiate suitable terms in order to avoid any economic hardships and tenants can be discharged from their obligations under the lease agreement.

Way Ahead for Tenants

A further question arises. If the force majeure clause is enforced neither under 56 of the Act nor under the TPA, then under what legal premises such force majeure clauses can be enforced? The author endeavours to explain one scenario wherein force majeure clause can be enforced in a lease agreement. If the terms of the lease agreement encompass such unforeseen circumstances, then it may become a valid ground to claim force majeure. The principle of pacta sunt servanda embodies that a concluded contract must be observed truthfully. This means that the parties have the legal obligation to fulfil the promises and the terms of the contract would be legally binding between the parties. Further, the Supreme Court has observed that “while interpreting provisions of an agreement, courts should not endeavour to imply terms into the language of the contract; rather, read the contract as per its express terms.” The jurisprudence evolved reveals that the judiciary has confined itself within the contours of the terms of the contract. There should be limited judicial intervention unless the wordings of the contract go beyond the purview of public policy, immorality, and the like. Hence, the holistic understanding is that the intent of the parties should be taken within the unambiguous, clear and express terms of the contract.

Therefore, it follows that in instances where the terms of the lease agreement contain a force majeure clause providing a waiver of rent in extreme inevitable circumstances (which goes beyond the control of parties) the terms of the agreement must be enforced. The clause should be read in the strict sense so as to respect the intent of the parties. Furthermore, the incorporation of the force majeure clause will not violate any established law and would not be in contravention of the public policy. For future reference, such incorporation will not only protect an onerous obligation of such economic inviable situations but also avoid unnecessary litigation for both lessee and the lessor.

– Sumit Kumar Gupta

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IBC Ordinance, 2019: Impleadment of Allottees in a Pending Application

Guest — Mon, 16 Mar 2020 02:45:06 +0000

[Pareekshit Bishnoi is an advocate based in Delhi]

The President of India on 28 December 2019 promulgated the Insolvency and Bankruptcy Amendment (Ordinance) Act, 2019 (the “Ordinance”) to amend several provisions of the Insolvency and Bankruptcy Code, 2016 (the “Code”). Pertinently, section 3 of the Ordinance amended section 7 of the Code by adding three provisos to it. The provisos have limited the right of two classes of financial creditors to file an application for initiation of the corporate insolvency resolution process (“CIRP”) before the National Company Law Tribunal (the “Tribunal”). One, the first proviso has limited the right of the financial creditor specified in clauses (a) and (b) of sub-section 6A of section 21 to approach the Tribunal. Such a financial creditor is now mandated to file an application for initiating the CIRP jointly with 100 or 10%, whichever is less, of the total financial creditors of the same class of creditors. Similarly, two, the second proviso has limited the right of an allottee in a real estate project to file an application for initiating the CIRP against a corporate debtor such as a developer. The amendment has mandated the allottees approaching the Tribunal to be 100 or 10%, whichever is less, of the total number of allottees of the “same real estate project”.

The present post, however, seeks to explore an anomaly in the third proviso of section 3 of the Ordinance. It directs that the application filed (but pending admission) by a financial creditor(s) referred to clauses (a) and (b) of sub-section (6A) of section 21 in first proviso or allottee(s) referred in the second proviso shall be “modified” to comply with the aforesaid requirement within a period of one month. If such an applicant fails to modify within one month, the application shall be deemed to be withdrawn before admission. However, the legislature has not explained the word “modified” and, thus, it raises a question concerning nature of modifications that are to be made in pending applications. Does it mean that the applications of an allottee have to be modified in terms of the averment of a fact that allottee meets the requisite numbers along with a list of allottees annexed against whom default has been made by the corporate debtor? Or does it mean that all such allottees of the “same real estate project” shall be impleaded in one umbrella application pending before the Tribunal and thereafter the Tribunal shall proceed collectively if found satisfying the requisite numbers?

Recently, in Sudarshan Goel v. M/s Assotech Moonshine Urban Developers Pvt. Ltd., several allottees filed interlocutory applications for impleadment as a party under one umbrella application pending before the Tribunal to comply with the above-said requirement. The Tribunal rejected the application of impleadment and observed that “the Petitioners can jointly file a Petition, but the scope of impleading themselves in another person’s Petition as a Joint Petitioner cannot be done”. The author in the present post argues that such an interpretation of the third proviso of section 3 is erroneous, and the impleadment of parties in one pending application is not contrary to the legislative intent.

It is a settled principle of statutory interpretation that the words used in a provision must generally be construed in their natural and ordinary meaning. However, where ambiguities exist, regard must be had to the context and object of the statute or amendment therein. The Supreme Court of India in Poppatlal Shah v. The State Of Madrasaptly noted that “to ascertain the legislative intent, all the constituent parts of a statute are to be taken together and each word, phrase or sentence is to be considered in the light of the general purpose and object of the Act itself”. However, where the amendment does not provide any specific object behind the amendment in a provision, “the purpose or object of the legislation” is to be construed in light of the “circumstances which prevailed at the time when the law was passed and which necessitated the passing of that law”[Shashikant Laxman Kale v. Union of India].

Thus, first, considering the aforesaid legal position for interpretation of words used in a provision, it is apposite to conclude that the legislature has directed the applicants whose applications have not been yet been admitted by the Tribunal to be “modified” in terms of providing the fact of meeting the pre-requisite numbers. They must thereafter also implead such allottees together as a party in a pending application instead of separate application afresh by such allottees either singly or jointly, provided they intend to be impleaded. The Ordinance was introduced to contain multiple independent application by individual allottees against the same corporate debtor. This burdened the corporate debtor in having to file repetitive replies and unduly entangled such corporate debtor in litigation. Given the surge of applications against real estate developers due to multiple applications, it is reasonable to conclude that the word “modified” under proviso 3 of section 3 of the Ordinance directs the parties to “modify” it in terms of amending the pleadings and also impleadment of parties if they intend to.

Second, the above said interpretation is fostered by the legislature providing that the requisite number of allottees are to be of the “same real estate project”. This limitation facilitates the impleadment of the numerous allottees under the single umbrella application.

Third, the above-said interpretation is also in consonance of the doctrine of necessary implication. It means “an implication that is absolutely necessary and unavoidable” [The Gujarat University, Ahmedabad v. Krishna Ranganath Mudholkar]. The Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. held that “necessary implication of a provision has the same effect and relevance in law as an expressed provision has, unless the relevance of what is necessarily applied is excluded by the use of clear words”. Thus, considering the object of the legislature behind the amendment, i.e., to check multifarious applications and collate multiple applications against the same corporate debtor under one application, the modification of application must be implied to mean the impleadment of the allottees of “same real estate project” in the single pending application. Such a conclusion is a necessary implication of the amendment.

Fourth, it must be noted that once an application for initiation of the CIRP is admitted by the Tribunal against a corporate debtor comes to a halt, other applications pending before the Tribunal against a same corporate debtor for the same project becomes infructuous and parties have to then file their claim before the interim resolution professional or resolution professional. Herein, it is reasonable to conclude that a pending application in which the impleadment can be made will be decided earlier than the applications that will be filed afresh by such additional allottees. Thus, once a pending application is admitted, the exercise of other applications will become a futile exercise. Moreover, it will bring about mischief by financial creditors wherein despite the dismissal of pending application in respect of the same project, the corporate debtor can be entangled in insolvency proceedings filed by individual allottees repetitively.

Fifth, rule 11 of the National Company Law Tribunal Rules, 2016 provides inherent power to the NCLT to pass interim orders to meet the ends of justice or to prevent abuse the process of the Tribunal. Thus, it will be an appropriate circumstance to implead the parties in one pending application instead of directing to file a fresh application by such fresh financial creditors praying to be impleaded.

Lastly, section 7 of the Code already provides that a financial creditor can apply to the Tribunal “either by itself or jointly”. The Tribunal, despite recognizing this legal position in Sudarshan Goel, held to the contrary. This legal position instead corroborates the implication as to impleadment. Class applications are not barred under the Code. There is nothing in the language of the provision suggesting to the contrary.

Thus, allottees can be impleaded under one application as an umbrella application. This will optimally tap the ills against the corporate debtor. The Tribunal can, after the impleadment, determine the application(s) singly or collectively depending on the facts and circumstances of the case at the time of hearings for admission of the applications.

The only pertinent reason for not allowing impleadment can be court fees, as impleadment will allow the party to take service of the Tribunal without payment of any court fee. Thus, it needs to be considered whether such an impleaded party isobliged to pay a court fee of Rs. 25000 on impleadment and, if no, whether it a sufficient ground for non-impleadment of a party.

The issue can be appreciated in light of the Court Fee Act, 1870, which prescribes court fee to be paid in different suits. The Court Fees Act, 1870 provides numerous ground for calculation of court fee depending on the nature of relief, the nature of the property involved or the amount of consideration. For example, Section 7(i) provides as under:

“for money.-(i) In suits for money (including suits for damages or compensation, or arrears of maintenance, of annuities, or of other sums payable periodically) – according to the amount claimed;”.

However, the Court Fee Act, 1870 does not prescribe or vary the court fee depending on the number of applicants or plaintiffs. For example, if a suit by one party for the recovery of money bears Rs. 1000 as court fee, a prayer for the same relief by five persons does not make the court fee Rs. 5000. It solely depends on the amount claimed. Similarly, in a class action or representative suit, the court fee is not determined based on the number of parties praying for relief but it depends on the nature of suit or relief. Likewise, while registering a sale deed, stamp duty is paid on the value of the property and not the number of persons who are party to a sale deed. It is for the parties to divide the amount inter-se and pay the requisite court fee or stamp duty. Each party does not pay the requisite stamp duty on a sale deed.

Thus, similarly, under the Code too, a financial creditor, while applying to initiate the CIRP, is liable to pay a court fee which is determined by the legislature and not depending on the number of financial creditors who file the application. The Schedule to theInsolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides as follows:

SCHEDULE

[See sub-rule (3) of rule 10]

S. No.	Applicant	Fee payable (in ₹)
1.	Application by financial creditor (whether solely or jointly)	25000

Note that the Schedule does not provide that, where the financial creditors file an application to initiate the CIRP jointly, they need to pay court fee multiplied by the number of financial creditors. Had this been the legislative intent, the legislature would have expressly provided so. Thus, an interlocutory application by allottees or other financial creditors shall not be refused on the ground that a party is trying to avoid payment of court fee or will not be obliged to pay court fee if impleaded.

Thus, for the above-mentioned reasons, it is reasonable to conclude that the allottees of “same real estate project” can be impleaded as a party in an already pending application of another financial creditor, unless the court finds it unduly burdensome in any particular case and the parties agree inter-se. Initiation of the insolvency proceedings for default in same real estate project buttresses the process impleadment and hassles of collective hearing. Lastly, the non-collection of court fee by such impleaded allottees cannot be a ground for non-impleadment of a party unless specifically provided by the legislature. It can instead be paid to the applicant of pending application in which such allottees have been impleaded as a party. Moreover, given the fact of multiple applications are pending against the same corporate debtor, the parties will predominantly be those who have already paid the prescribed court fee. It will only be allottees who are completely afresh to the insolvency proceedings who will not be liable to pay a court fee. This, in itself, is not a sufficient ground in view of the author to refuse impleadment of these allottees in one pending umbrella application to comply with the amendment through the Ordinance.

– Pareekshit Bishnoi

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Budget 2020: What’s there for the Real Estate Sector?

Guest — Wed, 05 Feb 2020 06:35:19 +0000

[Akash Kumar Prasad is a fourth-year student at NALSAR University of Law, Hyderabad]

The Union Budget 2020-21 was presented on February 1, 2020 by the Finance Minister Nirmala Sitharaman. Amidst sharp decline in the economy, the Union Budget was awaited with great expectations to foster growth in the real estate sector. However, with no major announcement for catalysing the same, the Budget fell short of the expectations of the real estate and construction industry. For instance, the shares of leading real estate companies declined after the Budget failed to announce any specific beneficial measure for the industry.

The proposed cuts in personal taxes and tax sops for affordable housing, which were expected to increase purchasing capacity, failed to stimulate the stocks and did not result in any meaningful boost in the real estate shares. The industry was hoping that the Budget would enhance the demand for housing, but the new tax regime which implies no tax benefit on interest and principal for housing loans has turned out to be an let-down for the industry. Nevertheless, there are certain things in box for the sector in the Budget.

Housing for all

An annual deduction of one lakh fifty thousand rupees granted on the interest paid on loans taken to achieve affordable housing, which was supposed to be allowed on loans sanctioned on or before March 31, 2020 only, was proposed by the Finance Minister to be extended for another year in order to incentivise the scheme. Further, an extension of another year has also been granted on tax holiday that is provided on the profits made by the developers of such projects that are approved by March 31, 2020.

Infrastructural projects

The initial corpus of Rs. 103 lakh crore set aside on the December 31 last year on account of the National Infrastructure Pipeline has been increased by Rs. 100 lakh crore which would be invested on infrastructure over the course of next five years that would comprise 6500 projects ranging from housing to transportation and to other similar projects.

Concessions in tax rates and exemptions for co-operatives

Currently, co-operatives are taxed at 30% with surcharge and cess. The Finance Minister proposes that, in order to bring parity between the co-operatives and the corporates, no exemptions or deductions would be granted to co-operatives, but a taxation rate of 22% plus 10% surcharge and 4% cess would apply. In addition, just like the companies which are being exempted from the Minimum Alternate Tax (MAT) under the new tax regime, exemption from the Alternate Minimum Tax (ALT) has been proposed for the co-operatives.

Non-banking financial companies (NBFCs)

To qualify for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, the limit has been reduced to an asset size of Rs 100 crore from Rs 500 crore and, in cases of loan amounts, it has been reduced to Rs 50 lakh from Rs 1 crore.

Conclusion

In totality, these are steps in the right direction, but the Budget 2020 in its entirety does not have much bearing on real estate and continues to focus on urban infrastructure. There are many specific areas wherein announcements could have been made to benefit the real estate sector but were conveniently overlooked. Under section 24 of the Income Tax Act, 1961, a hike in the tax rebate of Rs 2 lakh on housing loan interest rates could have enhanced the demand for housing amongst the middle class, but the Finance Ministry failed to take it into consideration and made no announcements regarding it. Neither was there any discussion regarding project delays, which is an alarming concern for the sector, nor did the Budget announce anything pertaining to implementation of land reforms. Further, the Ministry missed on an opportunity to attract more foreign investors and simplify the approval process of real estate projects, which they could have achieved by updating the existing outmoded land records system. The Budget also does not propose any major incentives to boost sales and has little to offer to resolve the liquidity crunch with regards the housing sector. Nothing either has been done to enhance the loans considerably so as to attract the homebuyers’ sentiment.

– Akash Kumar Prasad

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The Supreme Court Ruling in Pioneer: The Curious Case of Allottees under the IBC

Guest — Sat, 11 Jan 2020 03:57:18 +0000

[Saurabh Gupta is a third year student at the National Law School of India University. He is an Editor of the Indian Journal of International Economic Law and Law School Policy Review]

The Supreme Court in Pioneer Urban Land and Infrastructure v Union of India [2019 SCC OnLine SC 1005] (“Pioneer”) upheld the constitutional validity of the Insolvency Code (Second Amendment) Act of 2018 (“2018 Amendment”). There were many contentious issues for consideration before the three-judge bench. I shall be limiting my discussion to the Court’s classification of allottees as financial creditors. I argue in disagreement with the Court’s decision of upholding the inclusion of all allottees as financial creditors under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and critique the reasoning used by the Court.

The statement of objects and reasons to the 2018 Amendment refers to the recommendations of the Insolvency Law Committee (“ILC”) Report, published by the Ministry of Corporate Affairs in March 2018, as the basis for the changes introduced through the Amendment. The Supreme Court in Pioneer too refers to the same. While the ILC made a recommendation to include allottees as financial creditors, the basis for doing so was a discussion of the decisions of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) prior to the 2018 Amendment. However, the ILC has reached a conclusion quite different from what these cases have actually held.

Under the IBC, a financial creditor is one who is owed a financial debt. The definition of financial debt is provided in section 5(8) of the IBC to mean “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. The requirement of a disbursal ‘against the consideration for the time value of money’ is a prerequisite to satisfy this definition.

In Nikhil Mehta & Sons (HUF) v. AMR Infrastructure Limited [C.A. (I.B.) No. 543/KB/2017 arising out of C.P. (I.B.)/170/KB/2017] , the NCLT and NCLAT both agreed that an advance payment by an allottee to the real estate developer is not a financial debt in and of itself. This case is significant since it was the first judgement which allowed allottees to initiate the process under section 7 of the IBC. Both the tribunals held ‘consideration for the time value of money’ to be a prerequisite for a debt to be financial debt. The case involved a ‘committed returns scheme’, under which the homebuyers pay for their property while the developer makes periodic payments to the homebuyers until the handing over of possession. In Nikhil Mehta, the NCLT held that the allottees could not be financial creditors since there was no consideration against the time value of money. However, this was overruled by the NCLAT.

The NCLAT accepted committed returns as consideration for time value of money. The payments under the committed returns scheme were being made until the transfer of possession to the allottees. The NCLAT observed that the allottees had to simply make advance payments in order to receive benefits under the committed return scheme. According to the tribunal, this demonstrated that the committed returns to the allottees were in consideration of the advance payments made by the allottees to the developer. Further, since provision of committed returns in consideration for advance payments allowed the developer to raise finances for the project without any other obligation, the committed return scheme was held to be an instrument to raise money. Thus, the NCLAT justified how where there was a committed returns scheme in the case of homebuyers, advance payments could fall under the definition of financial debt (section 5(8)(f) of the IBC). This has been followed by the NCLT in many cases including Neelam Singh v Megasoft Infrastructure [(2017) SCC Online NCLT 10612], Anubhuti Aggarwal v DPL Builders Pvt. Ltd [(2017) SCC Online NCLT 12672], Pawan Dubey v J.B.K. Developers [(2018) SCC Online NCLT 794].

This shows the conceptual significance given to ‘consideration for the time value of money’ in characterizing a debt as financial debt. While the ILC Report discusses the same, it bases its recommendation on a different point. It interprets Nikhil Mehta as saying that while all forwards sales may not include financial debt, if structured as a tool for raising finance, these would qualify as financial debt. It then compares this to homebuyers who help finance the construction of a project, thus characterizing the advance payments made by homebuyers as financial debt. This interpretation is clearly averse to what Nikhil Mehta actually held, since in that case the committed returns scheme was the basis to satisfy the prerequisite of ‘consideration for the time value of money’.

In Pioneer, it was argued by the respondents that even transactions between the real estate developers and the allottees illustrated ‘consideration for time value of money’. The respondents argued that the allottees gained time value of money due to the benefit that they acquired by making advance payments rather than paying for the property after the completion of the project. This assumed that the latter would be more expensive for the allottees, thus the gain. Hence, the argument essentially hinged on the assumption that the allottees were gaining by making advance payments, and this gain was in terms of time value of money.

However, such an understanding of ‘time value of money’ seems incongruous. In fact, it is in dissonance with various authorities that have been cited by the Supreme Court itself in this judgement. According to Black’s Law Dictionary, ‘time value’ refers to the “price associated with the length of time that an investor must wait before an investment matures or the related income is earned.” Basically, the time value of money refers to the price of deferring the spending power of money to a later time. For instance, in case of loan, the time period until the repayment of the amount is an illustration of this, since this money cannot be used by the creditor until it is repaid.

In case of real estate developers, the money paid in the form of advance payments is to purchase the property. Thus, it cannot be said that the spending power of money is being deferred to a later time. The allottee has nothing to lose by spending money at a later time instead of making advance payments, since the money is not going to be repaid. The allottee already uses the money when making advance payments. Merely because the allottee obtains a better deal by making the payment in advance does not mean there is a ‘time value of money’ associated. If this were to be the case, then any company that pays to get its machinery manufactured rather than buying it on retail would be gaining time value of money. Simply saving money on a transaction is not equivalent to gaining time value of money.

Even in Nikhil Mehta, the NCLAT clarified that forward sale agreements and transactions involving advance payments that create financial debt are different. An additional requirement that made the sale transaction a tool to raise finance was required, and this was identified as the committed return scheme by the NCLAT. The Supreme Court in Pioneer upheld the validity of an Amendment Act that deems all allottees as financial creditors, and that too on an erroneous understanding of what constitutes ‘consideration against time value of money’.

Having demonstrated why the Supreme Court erred in classifying allottees as financial creditors, I shall now comment on the consequence of the Court’s analysis in Pioneer. A classification based on such loose reasoning sets a bad precedent. If we were to go strictly by the analysis given by the Supreme Court in this case, the significance of ‘consideration for the time value of money’ is vastly diluted. The way that the court has accepted time value of money for allottees, simply because they gain due to advance payments, gives basis to others for making a similar argument. In case of insurance companies, the premia charged can be compared to advance payments, since both are made in order to acquire some product at a later point in time, which might be more expensive if paid in its entirety at a later time. Further, while developers use money raised by way of advance payments to fund the projects, insurance companies use this money for investments. Essentially, both the developer and insurance company raise money by way of advance payments or premia. An argument can be made by the insured to say theirs is a financial debt too. Thus, the Supreme Court’s disregard for the committed returns logic accepted by NCLAT in Nikhil Mehta sets a bad precedent in IBC jurisprudence.

Further, the ILC Report quite conspicuously accepts that the state of the real estate industry played a key role in the recommendation for inclusion of allottees as financial creditors. However, without a clear conceptual boundary as to what qualifies as financial debt, the Supreme Court in Pioneer has validated a sector specific amendment by upholding the constitutionality of the 2018 Amendment. Due to the inadequacy of justification for inclusion of all allottees as financial creditors, the Court has hampered certainty and predictability under the IBC. There may now be other instances where such treatment is demanded (the insurance sector, for instance), without a reasonable claim to the same backed by an unambiguous conceptual reasoning.

Thus, in order to achieve the policy goal of protecting homebuyers in an industry plagued with problems, the Supreme Court seems to have upheld an amendment that may have far reaching consequences for the IBC in the future.

– Saurabh Gupta

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