Revisiting the IBC-RERA Interplay in light of Umang Realtech

Introduction

Recently, the Delhi High Court in Umang Realtech Pvt. Ltd. v. Mrs. Daphne Reita Rajan Sharma and Anr. (“Umang Realtech”) inter alia decided whether the pendency of the moratorium under the Insolvency and Bankruptcy Code, 2016 (“IBC”) can be a ground for not depositing the mandated amount under Section 43(5) of the Real Estate(Regulation and Development) Act, 2016 (“Act”).The High Court was dealing with an appeal filed against an Order of the Real Estate Appellate Tribunal (“REAT”)wherein an application filed by the Appellant was dismissed. In the said application, the Appellant offered to attach a flat/unit in its real estate project in lieu of the amount to be deposited with the REAT at the time of filing an appeal under Section 43(5) of the Act. Inter alia, the grounds for making the said prayer also included that there were Corporate Insolvency Resolution Proceedings (“CIRP”) pending against the Appellants, and thus, the moratorium imposed there under exempts the deposit under Section 43(5) of the Act.

In this backdrop, the Delhi High Court had to decide whether the REAT was justified in dismissing the Appellants’ application, as well as whether the pendency of a CIRP against the promoter company of a real estate project would entitle such a company to be exempt from the mandate under Section 43(5). The judgement of the Delhi High Court relied on two important judgements, one of the Supreme Court and the other of the National Company Law Appellate Tribunal (“NCLAT”),to arrive at its findings.

Section 43 – Scope and Ambit

Section 43 of the Act providesfor the establishment of the REAT. The proviso thereof applies to cases when anappeal is filed by a promoter challenging an order of the Real EstateRegulatory Authority (“RERA”) underwhich he has been penalized or has been directed to pay compensation or any otheramounts to the allottees. The requirement under the said proviso is that at thetime of filing said appeal, the promoter is to deposit with the REAT atleast 30% (thirty percent) of such amount before the appeal is heard.

The scope and ambit of the above provisioncame to be considered by the Supreme Court in New Tech Promoters and Developers Pvt. Ltd. v. State of UttarPradesh, (2021) 18 SCC 1 (“NewTech Promoters”), wherein it was inter alia held that the proviso toSection 43(5) prescribes a mandatory precondition to an appeal being filed bythe promoter. The said provision was also upheld as it is based on intelligibledifferentia. In Umang Realtech,the Delhi High Court, relying on NewTech Promoters, held that since Section 43(5) of the Act lays down amandatory precondition, its scope cannot be interpreted to accept the furnishingof security such as a flat/unit in lieu of the amount to be paid under the saidprovision. Pertinently, the Delhi High Court also negatived the contentionraised by the Appellants that the appeal before the REAT was filed by the IRP(Interim Resolution Professional), who is not a "Promoter", andhence, the same was not maintainable. The Delhi High Court categorically heldthat the IRP represented the Appellant company itself, which is the promoter ofthe project and, hence, is a “Promoter” for the purposes of appeals andapplications under the Act.

The above observations arecrucial in reinforcing the mandatory nature of Section 43(5) of the Act, aswell as in preserving the rights of allottees in consonance with the objectivesof the Act. In effect, the said observations also ensure that promoters areprecluded from circumventing the mandate of Section 43(5) to the detriment ofallottees.

The IBC Moratorium and Real Estate Companies

Interestingly, the CIRP andmoratorium referred to by the Appellants were initiated by Flat Buyers Association Winter Hills – 77, which is anAssociation of Allottees for one of the real estate projects being carried outby the Appellant company. It was in this context that the NCLAT in Flat Buyers Association Winter Hills –77 v. Umang Realtech and Ors. held that qua real estatecompanies, CIRP is limited to a project as per the approved plan of theCompetent Authority and does not relate to the company or any other projects undertakenby it.

Relying on the NCLAT’s judgement,the Delhi High Court held that the Appellants cannot use the CIRP as a causefor exemption from the Section 43(5) mandate because the CIRP in the presentcase is related to a different project and not to the project in considerationbefore the REAT. Therefore, in UmangReality, the Delhi High Court did not directly consider whether amoratorium can be an exception for meeting the Section 43(5) mandate, as theground for rejecting such exemption is with regards to the objections in the NCLAT’sjudgement and not the pending CIRP and moratorium.

However, the question isinteresting because it is settled that the provisions of the RERA must give wayto the provisions of the IBC in the event of any clash between the two, byvirtue of Section 88 of the Act and Section 238 of the IBC.^[1] Thelogical corollary, therefore, is that if the mandated deposit has not been madeand CIRP commences against the concerned real estate project, the RERA cannotrequire promoters to make the said deposit.

Conclusion

Therefore, the judgement of theDelhi High Court in Umang Reality,while reliant on two other judgements of the NCLAT and the Supreme Court, isstill a significant reiteration of not only the ambit and mandatory nature ofSection 43 of the Act but also of the aforementioned aspects of the interplaybetween the IBC and the Act.

References

[1] The Supreme Court in thelandmark Pioneer Urban Land and Infrastructure Ltd. and Ors. vs. Union ofIndia, AIR 2019 SC 4055 held that since Section 88 of the Act states that itsprovisions are in addition to and not in derogation of other laws for the timebeing in force, and because Section 238 of the IBC has a non-obstante clause,provisions of the IBC will prevail over those of the RERA in case of anyconflict.

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