the enigma RERA and SARFAESI – The Leaflet
The Supreme Court’s decision to consider banks as promoters for the purposes of the RERA Act will lead to a conundrum in the enforcement of the three pieces of legislation namely the RERA, the SARFAESI Act and the IBC.
ON On February 14, the Supreme Court Divisional Bench consisting of Justices MR Shah and BV Nagarathna upheld the judgement of the High Court of Rajasthan, voted in December 2021, in Union Bank of India v Rajasthan Real Estate Regulatory Authority & Ors., which has caused a conflict, in this regard, between the provisions of the Real Estate (Regulation and Development) Act 2016 (“RERA law”) and the Securitization and Reconstitution of Financial Assets and Enforcement of Security Act 2002 (“SARFAESI Law”).
The Supreme Court’s decision extends the jurisdiction of the RERA authority in cases where a claim is brought by an aggrieved person against the bank as a secured creditor in the event that the bank resorts to any of the provisions of the Article 13(4) of SARFAESI.
Article 13(4) reads as follows:
“(4) In the event that the borrower fails to pay his debt in full within the period provided for in paragraph (2), the secured creditor may resort to one or more of the following measures to recover his secured debt, namely :—
(a) take possession of the secured assets of the borrower, including the right of transfer by lease, assignment or sale for the realization of the secured asset;
(b) take over the management of the Borrower’s business, including the right to transfer by lease, assignment or sale for the realization of the secured property:
It being understood that the right to transfer by lease, assignment or sale is only exercised if the substantial part of the borrower’s goodwill is held as security for the debt; the business is divisible, the secured creditor takes over the management of the business of the borrower which is linked to the guarantee of the debt.
(c) appoint any person (hereinafter referred to as the manager) to manage the secured property the possession of which has been repossessed by the secured creditor;
(d) require at any time, by notice in writing, any person who has acquired any of the secured property of the borrower and from whom any sum of money is due or may become due to the borrower, to pay to the creditor secured, as much as enough money to pay the secured debt.
In addition, due to the possibility of multiple complaints being filed by beneficiaries, the process of enforcing security interests by financial institutions under Article 13(4) of the SARFAESI Act will not be a smooth process.
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The objective of the RERA legislation was to protect the interests of purchasers against the influence of developers on the real estate market, and that of SARFAESI was to protect banks against defaults by developers of real estate projects in the reimbursement of the debt. Due to the inconsistencies created by the judgment, the law has become even more complicated, causing a headache in the execution of three laws: the RERA law of 2016, the SARFAESI law of 2002 and the law Insolvency and Bankruptcy Code, 2016. This has been explained below.
RERA wins over SARFAESI
The Supreme Court upheld the decision of the High Court of Rajasthan on three major points of contention between the two laws:
- Does RERA have the power to hear claims by a grantee against a secured creditor?
- What legislation will survive in the event of a conflict between RERA and SARFAESI?
- Would the RERA law apply retrospectively to financial institutions in favor of which securities were provided before the promulgation of the law?
Regarding the first argument, the Supreme Court bench observed that banks will be considered promoters for the purposes of the RERA Act, and if the bank uses measures under Article 13(4) of the SARFAESI Act, this triggers a statutory assignment of the borrower’s right to the pledgee, giving jurisdiction to the RERA authority to hear a complaint filed by an aggrieved person. This means that a lender cannot collect its debts from a developer by selling the property, but must instead assume the role of developer or promoter. However, the court clarified, in this regard, that the RERA will only have jurisdiction when the purchasers apply to the authority to protect their interests.
On the second, the High Court of Rajasthan relied on Bikram Chatterji vs Union of India and Ors(2019), in which the Supreme Court had declared that in the event of a conflict between the two laws, the provisions of the RERA would prevail. It was reiterated.
Finally, the Supreme Court concluded that the RERA would not apply retroactively unless the security was created by fraud or collusion.
Impact on financial institutions
As financial institutions are now considered as “promoters”, they will have to comply with the responsibilities of promoters set out in the RERA law. In addition, financial institutions will now be subject to the jurisdiction of RERA, which means that they will have to comply with RERA’s advice and will have to represent themselves if beneficiaries file a complaint. In addition, due to the possibility of multiple complaints being filed by beneficiaries, the process of enforcing security interests by financial institutions pursuant to Article 13(4) of the SARFEASI Act will not be a smooth process.
Previously, financial institutions could bring an action under Article 13(4) of the SARFAESI Act without the intervention of courts/tribunals. However, if the promoter does not pay the contribution, the procedure may be delayed due to the intervention of the RERA Authority.
Previously, financial institutions could bring an action under Article 13(4) of the SARFAESI Act without the intervention of courts/tribunals. However, if the promoter does not pay the contribution, the procedure may be delayed due to the intervention of the RERA Authority. Finally, if a developer defaults on a loan and the financial institution plans to sell the mortgaged property at auction, the financial institution will need to obtain prior written approval from the RERA authority.
More importantly, putting lenders in the shoes of a promoter or its assignee under Division 2 (zk)(i) of RERA goes against the fundamental obligation of financial institutions. The role of financing housing construction is entrusted to banks and financial entities regulated by the National Housing Bank. It is not legally tenable to impose on financial institutions the obligation to put themselves in the place of a promoter in real estate activities because none of these regulations provides for the attribution of such an obligation to lenders.
It can also be argued that putting the lender in the shoes of the borrower can lead to an absurd situation in which lenders are seen to be engaging in whatever activity they finance. The part of the ordinance that requires banks to obtain permission from RERA before transferring secured property violates legal standards as the law itself is silent on the method of transfer of title under the law.
Moreover, the application of the principles of subrogation and guarantee in the context of this dispute may lead to unfounded conclusions. If the real estate project falls behind schedule or becomes a delinquent, developers have a legal and statutory obligation to settle their debts to lenders first. However, according to the decision of this case, the lender itself is asked to protect the rights of home buyers in the first place, creating a legal gap between the requirements of the SARFAESI law and the RERA law because the latter violates the jurisdiction of the former in matters of execution. collection powers, which are exclusively vested in the Debt collection courts (“TRD”).
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Thus, the Supreme Court’s decision will have an impact on the rights of financial organizations that offer credit to real estate companies in relation to the rights of project beneficiaries. This raises doubts as to the jurisdiction of RERA to assess the validity or invalidity of a mortgage generated by a registered deed, or to completely undo the actions of the bank or financial institution, given that the jurisdiction of RERA in such circumstances is clearly limited by Section 34 of the SARFAESI law. Also, under Section 17 of SARFAESI, any person (including an aggrieved apartment buyer) who is aggrieved by the actions of a secured creditor under the SARFAESI Act has the right to file a legal remedy.
More importantly, putting lenders in the shoes of a promoter or its assignee under section 2(zk)(i) of the RERA goes against the fundamental obligation of financial institutions.
The RERA may not have the power to cancel, vary or modify a registered mortgage or charge made in favor of the bank/financial institutions, or to adjudicate on the matter of fraud, as such matters will fall under the jurisdiction of the DRT/ civil courts, as the case may be. Below Section 14 of the SARFAESI Act, the authority also does not have the ability to hear appeals or overturn physical possession orders. The only option is to file a complaint with the DRT under Article 17 of the SARFEASI Act.
Also, unlike the IBC, there is no moratorium imposed under the SARFAESI Act. As a result, home buyers will be able to lodge complaints with the RERA authorities. These claims can be filed as soon as a bank or financial institution takes enforcement action under Article 13(4) of the SARFAESI Act.