Through a recent decision in Union Bank of India Vs Rajasthan Real Estate Regulatory Authority & Ors, the Hon'ble Supreme Court delivered a significant order placing the interests and the rights of the homebuyers over the rights of the Banks/Financial Institutions. The Hon'ble Supreme Court upheld the judgement given by the divisional bench of the Rajasthan High Court thus resolving the conflict between Real Estate (Regulation and Development) Act, 2016 (hereinafter referred to as RERA Act) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as SARFAESI Act). The author of this article aims to analyses the given order in terms of its impact on the Banks/Financial Institutions.

Brief Facts:
In 2014, a real estate company called SNG Real Estate (hereinafter referred to as promoters) launched a project called Sunrisers. In order to purchase flats, the homebuyers/allotees had taken loan from ICICI Bank vide tripartite agreements thus creating mortgage in favour of the Bank. Thus, out of the total 38 flats, 9 flats were sold to homebuyers. Later, in 2016, SNG Real Estate took a loan of 15 crores from Andhra Bank (now merged with the Union Bank of India) by further creating a security interest of the 19 flats (including the 9 flats already sold) in favour of the Bank.

The project was not completed within the stipulated timeline and the possession was not offered to the allottees. Consequently, due to non-repayment of the said loan by the promoters, the building project was attached by the Bank and auction proceedings were initiated under Section 13(4) of the SARFAESI Act.

Fearing the loss of their flats, the allotees approached the RERA Authority under Section 11(4)(h) of the RERA Act. RERA Authority passed an order staying the auction proceedings. Subsequently, the Union Bank of India appealed before the Rajasthan High Court contending that the Banks/Financial Institution do not fall under the jurisdiction of RERA Act. The Hon'ble Rajasthan High Court consolidated 70 petitions to answer four crucial questions of law. The author will discuss three points of law as those issues have a glaring impact on the Banks/Financial Institutions.

Key Issues:

1. The Court considered three issues, first being whether RERA has jurisdiction to entertain complaints filed by allottees against a secured creditor. To answer this, the Court held that 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 ratio decidendi being that that once the bank takes 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 lender.
   
   Thus, bank becomes the assignee of the promoter and the definition of promoter given under Section 2 (zk) (i)[1] of the RERA Act includes the assignee of the promoter. However, the Hon'ble Supreme Court clarified that the jurisdiction will only be applicable if the proceedings are initiated by the allottees/home buyers to protect their rights and interests.
    
2. The second issue that arose in the Court was that in event of conflict between provision of RERA Act and SARFAESI Act, which Act would prevail. Section 35 of the SARFAESI Act provides that the 'provisions under the said Act shall have the effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law'. Similarly worded provision giving overriding effect to RERA Act is contained in Section 89. Therefore, there is direct conflict between the two sections of the Act.
   
   The Court relied on the case of Bikram Chatterji and Ors V/s Union of India and Ors[2], thus stating that in case of direct conflict between two central statutes, the legislation that was enacted later would prevail. In this case, since RERA Act was enacted in 2016 and SARFAESI Act was enacted in 2002, the provisions of RERA Act would prevail over those of SARFAESI Act.
    
3. The third issue answered by the Court was whether RERA would have a retrospective application or not. The Judgement stated that RERA would have no retrospective effect implying that the RERA would not apply to transactions between the promoter and bank/financial institutions wherein security interest has been created by mortgaging the property prior to the introduction of the Act. However, the RERA Act would have a retrospective application if the security interest is created fraudulently or in collusion with the Bank/Financial Institutions.
    

Impact on Banks/ Financial Institutions

1. Firstly, the Banks/Financial Institution will now come under the Jurisdiction of RERA. This implies that Financial Institutions will have to abide by the notice received by the RERA Authority and will have to represent themselves in case a complaint has been filed by the allotees. Not only this since banks can now be termed as 'promoters' they will have to comply with the liabilities and responsibilities of a promoter stated in the RERA Act.
    
2. Secondly, the process of enforcement of security interest by the Financial Institutions under the Section 13(4) of the SARFEASI Act will not be a smooth flowing process due to possibility of several complaints being filed by the allotees. Earlier, Financial Institutions could initiate proceeding under Section 13(4) of the SARFAESI Act without the intervention of the Courts or Tribunals. However, with this Judgement coming into play, the proceedings might be delayed due to intervention of RERA Authority in case the promoter defaults in payment of dues.

Author's View:
The Financial Institutions will now be required to exercise greater prudence before entering into real estate lending. The Financial Institutions will have to conduct a thorough Title Search Report/due diligence of each flat against which loan is being granted to ensure that security interest is not being created against a sold flat.

The Banks/Financial Institutions can also monitor the utilisation of the credit facilities being granted to the promotor so the projects are being completed in a timely manner which may prevent complaints being filed by allottees. In my opinion, this Judgement tends to protect the home buyers from promoters unscrupulous behaviour resulting in Financial Institutions bearing consequences.

This Judgement by all means tends to protect the home buyers. However, a lot of issues are yet to be resolved. Since, this Judgement is in a very nascent stage, a lot of questions remain answered. With time, we will be able to comprehend the outcomes of this judgement in the practical world and how it acts in favour of the homebuyers.

End-Notes:

1. a promoter means 'a person who constructs or causes to be constructed an independent building or a building consisting of apartments or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments to other persons and includes his assignees.
2. Bikram Chatterji and Ors. Vs. Union of India and Ors. SCC 2019 SC 161