1. INTRODUCTION

A divisional bench of the Rajasthan High Court ("Rajasthan HC") recently in a writ petition1 clubbed over seventy different petitions that dealt with certain key issues involving: (i) the retrospective application of Real Estate Regulatory Act, 2016 ("RERA Act"); (ii) the conflict between RERA Act and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") and (iii) the authority of Real Estate Regulatory Authority ("RERA") to issue directions to banks/financial institutions who claim security interest over the properties of home-buyers. The Rajasthan HC held that complaints against banks can be filed before the RERA if the bank (lender) has taken possession of a project as a secured creditor pursuant to the default of the promoter in paying its dues. The Rajasthan HC has also held that in the event of conflict between the RERA Act and the recovery of proceedings of the bank under the SARFAESI Act, RERA Act would prevail. The following update deals with the facts of one of these cases and also briefly deals with the reasoning of the Rajasthan HC as stated below.

2. FACTS

The matter in question relates to a project called 'Sunrise' which was launched in the year 2014 and subsequently registered with the Rajasthan RERA. The allottees of this project had taken a loan from the ICICI Bank against the allotted flats through a tripartite agreement between the developer, the concerned allottees and the bank and the security interest was also registered with the Central Registry of Securitization Asset Reconstruction and Security Interest of India ("CERSAI"). Around the year 2016, according to the allottees, the concerned developer and the landowner raised finance through a project loan by mortgaging the whole project in favor of the Andhra Bank (which is now merged with the Union Bank of India) ("Union Bank"). The project was to be completed latest by March 2018, but the project was not completed within the stipulated timeline and the possession was not offered to the allottees.

Further, the developer failed to repay the loan taken from the Union Bank. Consequently, the Union Bank took possession of the whole project and also conducted auction in respect of certain flats under the provisions of the SARFAESI Act. The concerned allottees approached the Rajasthan RERA for various remedies and certain adverse orders were passed against the Union Bank by which it was brought under the jurisdiction of the RERA and even termed as a promoter for all purposes of the RERA Act which had wide ramifications.

Aggrieved by the same, the Union Bank approached the Rajasthan HC through a writ petition and the Rajasthan HC consolidated 70 similar writ petitions and passed its judgment dated 14th December 2021 as set out below. In light of the observations made by the Rajasthan HC, the Rajasthan RERA or the appellate tribunal, as the case maybe, is to decide the various complaints on merit.

3. ISSUES

The following key issues were dealt with by the Rajasthan HC:

  1. Whether the RERA Act would have application where the transactions between the borrower and lender have been completed before the passing of the RERA Act? ("Issue 1");
  2. Whether the provisions of the RERA Act would prevail over the provisions of the SARFAESI Act, if the provisions of the SARFAESI Act are applicable as well? ("Issue 2"); and
  3. Whether the RERA has authority to issue directions against secured creditors i.e. banks and financial institutions when such institutions claim security interest over the properties which are subject matter of agreement between the allottee and the developers? ("Issue 3").

3.1 Issue 1 - Retrospective Application of the RERA Act:

The Rajasthan HC held that the RERA Act would have no retrospective application to transactions completed between the borrower (developer in such cases) and the lender (banks/financial institutions) wherein security interest has been created prior to the RERA Act. The RERA Act can have retrospective application only when the creation of security interest was made fraudulently or in collusion with the bank/financial institutions.

3.2 Issue 2 - RERA Act vis-a-vis SARFAESI Act:

The Rajasthan HC observed that both the RERA Act and the SARFAESI Act are special laws. Whilst relying on the order of Bikram Chatterji and Ors. Vs. Union of India2, the Rajasthan HC concluded that in case of a conflict between two special laws, the special law that was enacted later would prevail. Since, the RERA Act was enacted subsequent to the SARFAESI Act, the provisions of RERA Act would prevail over the provisions of SARFAESI Act.

3.3 Issue 3 – RERA & Secured Creditors:

The Rajasthan HC held that the RERA has the jurisdiction to entertain a complaint filed by an aggrieved person against the bank as a secured creditor. In this behalf, the Rajasthan HC observed that lenders such as banks who have entered into securitized transactions have the power in case of default under the SARFAESI Act to enforce their security interest through various measures such as taking possession of the secured assets, taking over management of the business of the borrower, etc. It was held that once the bank takes such actions for enforcing their security interest in terms of Section 13(4) of the SARFAESI Act, the secured creditor for all purposes enters into the shoes of the borrower/promoter as there is an assignment of statutory rights in favour of the lender.

4. INDUSLAW VIEW

The judgment of the Rajasthan HC confers wide powers on the RERA by bringing the secured creditors under the ambit of its jurisdiction at the time when the banks/financial institutions take steps to enforce their security interest under the SARFAESI Act. This may result in delaying the process of enforcement of security interest by the banks/financial institutions and as a consequence delay in recovery of its dues. Further, if the financial institutions are brought under the definition of the promoter 'being the assignee of the promoter', this will result in financial institutions being required to assume additional responsibilities and compliance liabilities of the promoter under the RERA Act and the rules thereunder.

In addition to the above, if there are any complaints filed against the promoter during the default period, it may invariably mean that the financial institutions may have to defend such proceedings filed by the home buyers on account of delay and latches in the project.

We may also have to look at how this judgment will impact the scenarios (i) where proceedings against the promoter have been initiated under the Insolvency and Bankruptcy Code 2016; or (ii) where there are multiple financial institutions involved; or (iii) when there is a security trustee who is holding the collateral on behalf of multiple financial institutions.

Footnotes

1. Union Bank of India, Jaipur vs. Rajasthan Real Estate Regulatory Authority & Ors., D.B. Civil Writ Petition No. 13688/2021 & 69 other connected Writ Petitions

2. Bikram Chatterji and Ors. vs. Union of India, 2019 19 SCC 161

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.