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.
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
Impact on Banks/ Financial Institutions
- 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.
becomes the assignee of the promoter and the definition of promoter given under
Section 2 (zk) (i) 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.
- 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, 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
- 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
- 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.
- 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.
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.
- 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
- Bikram Chatterji and Ors. Vs. Union of India and Ors. SCC 2019 SC 161