Date : January 21, 2020
Deeming Fiction under IBC
“Deeming fiction”[i] literally means supposing the existence of state or position of a thing, for the purpose of law, which factually is not in existence. However, it’s not necessarily confined to said parameter. Rather it can also be explanatory in nature, intended to remove all possible doubts w.r.t the fact concerned being inclusive or exclusive, as the case may be, in interpretation of the concerned provision.[ii]
Testing the same in light of ‘explanation to Section 5(8)(f) of the IBC’[iii] which explicitly includes ‘such minimum no. of homebuyers’[iv]in real estate as “financial Creditor”, is merely clarificatory in nature and not a concept which would have otherwise fallen out of the purview of the main provision.
The claim that nature of investment by homebuyers being that of the “financial debt” (FD) has always been inferable from the residuary clause (f) of the definition, which states “any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”. In this respect, it is to be understood that when the homebuyers pay any advance amount to the builder, as a consideration for flat, apartment etc. being their future asset, the said payment amounts to “disbursal” of money. Now to give it a character of “borrowing” it must be reflected that such disbursed amount, used by the builder to finance his real estate project, would yield something back to the homebuyer in return. Needless to mention that Builder is under a legal obligation to handover the possession of the home on time as agreed upon or later along with the compensation for delay. Moreover, in such a case of delay, homebuyer is also entitled to withdraw the purchase, & to claim entire refund of the amount invested. To be noted that, in each scenario homebuyer is legally entitled to get something equivalent in return, as a consideration for huge amount invested in the project of the builder, which remains profitable for the builder, as builder always keeps enough profit margin, while planning out the purchase agreement, giving thereby a “commercial” feature to the transaction.
Hence, undoubtedly investment by the homebuyers to finance business project of the builder, has commercial effect of lending, who therefore fall in the category of financial creditor.
Real estate transaction was capable to be interpreted under both “financial debt” as well as “Operational Debt”[v] (OD), however our lawmakers carefully using the wisdom based on social scheme of consumer welfare, has chosen to deem it FD as opposed to OD, being well aware of the different legal requirements under both the scenarios, as It would be more difficult for the builder to defend the case in case of FD, than it would have been, had it simply been the case of OD. So, apparently legislature wanted builder not to simply get over by raising the “dispute”[vi], rather to proof the same. Legislature thereby primarily intended to achieve social justice in respective sector, which constitutes substantial portion of today’s GDP & expected to increase further in future.
The term “Deemed Insolvency” is further relevant to understand the ‘shift’ from authority under RERA to NCLT. The concept has a role when builder company is not factually insolvent, still under the code will be deemed insolvent, if “Default”[vii] is ascertained.
When the builder commits default in repayment of such minimum amount, as prescribed under IBC, due to the allottees under any statue including RERA, allottee is entitled to file an application for initiation of resolution process under IBC. If builder fails to defend its case w.r.t such default as claimed, there does not remain any substantial defence left with the builder to raise & NCLT is empowered to admit the application.
It is to be noted that entire case of financial creditor depends upon the existence of “Default”. Following the insolvency law of USA in this respect[viii], there is no requirement under the code to strictly prove the fact of “Insolvency” i.e. the financial inability of the builder to repay its debt(s), itself. Legislature therefore appears to have deemed the state of “insolvency”, in every case where “default” is duly ascertained.
Therefore, even where builder was not financial sick in fact & had committed “default”, let say by deliberate conduct due to mismanagement, which certainly is no defence for it to raise under the Code, Insolvency is liable to be deemed.
Parallel Jurisdiction of NCLT & Authority under RERA
Similarly, under RERA where registration of the builder is revoked, authority may require the appropriate government to carry out the remaining development work so as to protect the stake of allottees.[xi]
Similarly, in case of revocation of registration of the builder under RERA, the association of allottees, has been given the first right to refuse the development of remaining work[xii]
Comparison & Conclusion
RERA’s objective is to ensure the ‘financial solvency of the builder company’[xiii], fair trade play, transparency in work, equal bargaining power, protection of socio-economic interest of the allottee, as well as the timely development of the project. So, it is intended not only to adjudicate the disputes arising between the builder & allottee, but also to supervise the functioning of builder & development of project, as a preventive measure to avoid unnecessary litigation in future, thereby having wider & comprehensive scope than any other law for the protection of interest of allottees.
While IBC, can be helpful for the group of allottees so far as the speedy repayment of debt is concerned through effective negotiation process between the parties for planning out the resolution within fixed time frame.
[i]Retailers Association& Ors. v. Union of India, Writ Petition No.2238 of 2010 – “legislature in enacting a law is entitled to provide for a deeming fiction”.
[ii]Pioneer Urban Land & Anr.V. UOI & Ors., Writ Petition (Civil) No. 43 of 2019.
[iii]Ins. by Act No. 26 of 2018, sec. 3 (w.e.f. 6-6-2018).
[iv]At least 100 or 10% of all the allottees, whichever is less, shall only jointly have locus before NCLT so as to initiate CIRP against the builder company. The threshold has been set by the Insolvency and Bankruptcy Code (Amendment) Ordinance,2019.
[v]Section 5(21), The Insolvency & Bankruptcy Code, 2016, defines “Operational Debt”“operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 2 [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.
[vi]Section 5(6) of The Insolvency & Bankruptcy Code, 2016.
[vii]Section 3(12) of The Insolvency & Bankruptcy Code, 2016.
[viii]https://www.icsi.edu/media/webmodules/ILP_Study_with_TP.pdf, International Practice, Page No. 9
[ix]Section 19, The Real Estate (Regulation &Development) Act, 2016.
[x]Section 14(2) & (2A), The Insolvency & Bankruptcy Code, 2016.
[xi]Section 8, The Real Estate (Regulation & Development) Act, 2016.
[xiii]Section 4, The Real Estate (Regulation & Development) Act, 2016, Compulsory audit of separate account maintained by the builder for money paid by allottees.