Individual homebuyers cannot seek a refund under the Real Estate (Regulation and Development) Act (RERA) if their claim conflicts with an insolvency resolution plan approved by a majority of homebuyers, the Mumbai bench of the National Company Law Tribunal (NCLT) has held in a recent order.
The tribunal also said that a new developer taking over a stalled project through insolvency cannot necessarily be required to honour every contractual term agreed between the original developer and homebuyers.
The Mumbai bench was hearing a plea filed by four homebuyers in Spenta Enclave’s Altavista project. They had sought a refund after the developer failed to hand over possession and argued that their rights under Section 18 of RERA, which provides for a refund in certain cases of delayed possession, should be protected under the resolution plan, a report by Financial Express said.
“The contention that the Resolution Plan ought to incorporate refund rights under Section 18 of RERA also cannot be accepted in the manner canvassed by the Applicants. The insolvency resolution process under the Code proceeds on the basis of collective resolution of claims and balancing of stakeholder interests. By virtue of Section 238 of the Code, the provisions of the Code prevail in case of any inconsistency with other enactments,” the order said.
“It is also pertinent to note that the applicants’ claims as homebuyers stand admitted in the CIRP and their rights are governed by the treatment accorded under the resolution plan approved by the CoC. The applicants cannot insist upon a separate individualised remedy outside the framework of the insolvency process under the Code,” the order stated.
Why is the order important?
The order is important for homebuyers because it clarifies what happens when an individual buyer’s RERA claim conflicts with a resolution plan approved in insolvency proceedings. For a homebuyer, the order underlines that once a project enters insolvency and a resolution plan is approved, an individual buyer’s right to seek a refund may be affected by the collective decision and the terms of the resolution plan.
Individual refund claims may not prevail: A buyer seeking a refund under Section 18 of RERA may not be able to enforce that claim if it conflicts with an insolvency resolution plan approved by the required majority of homebuyers.
Majority decision can bind individual buyers: The ruling reinforces the principle that, in insolvency proceedings, a resolution agreed to by homebuyers as a class can take precedence over the preferences or claims of individual buyers.
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Completion of the project gets priority: The is aimed at reviving and completing a stalled project. This can mean that buyers who want their money back may have to accept the outcome of the approved resolution plan if their individual claim is inconsistent with it, say legal experts.
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Why the NCLT Mumbai order matters for homebuyers
The NCLT Mumbai order is an important clarification of how RERA remedies operate once a real estate project comes within the insolvency framework.
“Where an individual homebuyer’s claim for refund or exit is inconsistent with an approved resolution plan, the collective insolvency process will take precedence by virtue of Section 238 of the Insolvency and Bankruptcy Code, 2016. The decision also recognises that a successful resolution applicant cannot automatically be expected to honour every contractual obligation of the erstwhile developer,” says Ketan Mukhija, National Co-Head PE, VC Practice at Kochhar & Co.
The ruling, however, should not be understood as taking away the protections available to homebuyers under RERA; rather, it underscores that those rights have to be examined in the context of the IBC once insolvency proceedings have commenced, he explains.
For homebuyers, the message is to engage with the at the earliest rather than rely exclusively on an individual RERA remedy. Buyers should ensure that their claims are properly filed and admitted, understand how the resolution plan proposes to deal with their claims, and make full use of the mechanism, he said.
In particular, buyers should carefully examine whether the plan provides for possession, refund or any other form of settlement, because once a resolution plan is approved, it can significantly shape the remedies available to individual homebuyers, he added.
Sahil Chandra, Associate Partner, Dispute Resolution at AK & Partners, said that once a real estate project enters insolvency, the outcome is shaped collectively, with a resolution plan reflecting the will of all stakeholders, homebuyers included.
Within that, however, the individual homebuyer is not left unprotected.
The Code gives them at least four concrete safeguards: first, they are recognised in law as financial creditors, placing them on the same footing as banks and other lenders; second, they can file their claim directly with the resolution professional handling the case; third, they get a voice in decision-making through an authorised representative, chosen by their own class of allottees; and fourth, they retain the right to appeal the decision before the NCLAT and, where appropriate, subsequently before the Supreme Court of India. And where a case falls outside this framework altogether, homebuyers are not left without options either, Chandra explained.
NCLT Mumbai order brings clarity on RERA claims in insolvency proceedings
The Supreme Court, in its earlier decisions, has already engaged with the interplay between homebuyer protection and collective insolvency resolution, recognising homebuyers as financial creditors while clarifying how their claims are to be addressed within that framework.
“This order simply applies that settled law to a new set of facts. What it does offer is clarity: for developers, resolution applicants, and homebuyers alike, it’s a useful reminder of how the process is meant to work, especially with more and more real estate insolvency cases coming up,” he said.
Venket Rao, Supreme Court lawyer and founder, Intygrat Law Offices LLP, said the objective of an insolvency code is to resolution to stuck company or even a project (in case of real estae ). Given this objective, the Supreme Court has held that, in the larger interest of the project, if rights or provisions under other laws, including RERA, come in the way of implementing an approved resolution plan, they must give way to the insolvency process.
“In light of this settled position, the recent Mumbai judgment upholds the principle that a resolution approved by the majority of homebuyers in a class will prevail, and that the approved resolution plan must take precedence over individual rights or claims. Where a course of action is decided in the overall interest of the project, individual rights arising under RERA or the Consumer Protection Act, as well as contractual claims, cannot override the resolution plan and the insolvency process undertaken to implement it,” said Rao.