One Darode Jog Homes Private Limited (added as a respondent promoter in this case) developing a project in Pune had created an exclusive mortgage over several properties in favour of IDBI Trusteeship (being the debenture trustee and the petitioner) by way of a registered debenture trust deed. The promoter failed to redeem the debentures on their due dates constituting an event of default thereunder and the debenture trustee became entitled to enforce its mortgage on the properties. The promoter also failed to complete the proposed project within the stipulated timelines, and certain flat buyers in the project filed RERA complaints and obtained orders from the Maharashtra Real Estate Regulatory Authority (MahaRERA) for refund of their monies along with interest and compensation for delay.

Since the promoter neither challenged nor complied with the said orders, execution proceedings were initiated against them under section 40 of the RERA read with rule 3 of the Maharashtra Real Estate (Regulation and Development) (Recovery of Interest, Penalty, Compensation, Fine Payable, Forms of Complaints and Appeal etc.) Rules, 2017. The MahaRERA issued recovery warrant to the revenue authorities of the State directing them to recover such monies from the promoter in the manner provided under the Maharashtra Land Revenue Code, 1966 (MLRC). Despite having knowledge of the rights of IDBI Trusteeship as a mortgagee and express objections being raised by them, the revenue authorities conducted an auction for sale of the properties owned by the promoter including the property which was mortgaged in favour of the trustee and went on to confirm the sale of the mortgaged property in favour of two individuals, being the auction purchasers (also added as respondents in this case). The auction sale was held in contravention of several other provisions of the MLRC.

Being aggrieved, IDBI Trusteeship filed this petition to set aside the auction sale of the mortgaged property on the ground that the same was conducted without considering or disclosing their rights as a prior mortgagee, and that they had a first ranking charge over the mortgaged property, which was also upheld by the Court. One of the main contentions that was dealt with by the Court was that of the priority of charges over the mortgaged property. While deciding whether the debenture trustee (by virtue of being a registered mortgagee) or the State government (seeking recovery of compensation and interest due and payable by Darode Jog Homes), had priority over the mortgaged property, the Court observed that the answer lied in section 169 of the MLRC.

Section 169(2) of the MLRC specifies that any claim of the State government to any monies other than arrears of land revenue, but recoverable as a revenue demand under the provisions of that chapter shall have priority over all unsecured claims against any land or holder thereof. The amounts of compensation and interest awarded by the MahaRERA which were recoverable from Darode Jog Homes in accordance with section 40 of the RERA cannot be said to be actual arrears of land revenue and only the manner of recovery of such amounts shall be as if they were arrears of land revenue. And, since IDBI Trusteeship had a secured claim, the State government cannot have priority over the claims of IDBI Trusteeship with respect to such amounts.

Another reason why IDBI Trusteeship’s claim took precedence over all other claims was because their interest was secured by way of a registered mortgage (making them a secured creditor) much prior to the adjudication by the MahaRERA of the claims of the flat buyers, and as per Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and Section 31-B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 read with the definition of the term ‘secured creditor’ provided thereunder, the secured debts of the secured creditors due and payable to them by sale of assets over which security interest is created, shall have priority over all the other debts and government dues including any revenues, taxes, etc. due to the Central government, State government or local authority, etc.

Even otherwise, considering that the mortgage in respect of the said property was created by way of a registered instrument in favour of IDBI Trusteeship, the revenue authorities and the auction purchasers were all bound and deemed to have knowledge of the debenture trust deed and the trustee’s rights created thereon, in light of the first explanation of Section 3 of Transfer of Property Act, 1882. The said explanation provides that any person acquiring any immoveable property or any part of, or share or interest in, such property (which is required by law to be effected by a registered instrument) shall be deemed to have notice of such instrument as from the date of registration. In other words, any subsequent purchaser is said to have implied notice of such transactions involving immoveable properties.

Further, it was noted that apart from the aforesaid contractual rights, IDBI Trusteeship had statutory rights as a mortgagee under Sections 67, 68, 69 and 69A of the Transfer of Property Act. The disputed auction sale was quashed and set aside by the Hon’ble Court. The MahaRERA was directed to refund the sale proceeds to the auction purchasers and it was stated that the remedy of the flat buyers lied elsewhere.

It is observed that the aforesaid judgment fully protects the rights of the registered mortgagee, but it does not grant any relief or provide any protection to the flat buyers rightfully claiming under RERA and it is uncertain as to where the alternate remedy lies for the flat purchasers, if not under RERA.

Registered mortgagee vs RERA flat buyers: striking a balance

Interestingly, a previous judgment dated March 19, 2019 passed by the Maharashtra Real Estate Appellate Tribunal in the case of Xander Finance Private Limited vs Trivesh Pooniwala & 28 others dealing with a similar issue, ruled in favour of the registered mortgagee but at the same time, fairly recognised the legal rights and legitimate claims of the flat buyers. The appellant, being a prior mortgagee of the project property and a secured creditor of the promoter, had challenged the order passed by the MahaRERA creating a further charge on the project property to recover the claims of the allottees under RERA. The appellant was not granted a hearing prior to passing of the impugned order by the MahaRERA. The tribunal observed that, since the promoter had defaulted, the appellant took possession of the properties by following the procedure prescribed under the SARFAESI Act to recover the loan. On the other hand, the allottees were also entitled under RERA to claim the amount, but in order to avoid a clash between the two, it was considered necessary by the tribunal to strike a balance.

In light of section 48 of the Transfer of Property Act and section 26-E of the SARFAESI Act, the tribunal stated that the first legal charge created by way of the registered mortgage deed shall have the first priority and will prevail while executing recovery warrant against mortgaged project property by the Collector. The tribunal also observed that even though there is no provision or rule authorizing or empowering MahaRERA to create a charge on the project property for recovery of the amount to which allottees are entitled, it was well within the power granted by the law to MahaRERA, to pass the impugned order (creating a second charge) to meet the objective of RERA and safeguard the interest of allottees.

Hence, the tribunal modified the impugned order passed by MahaRERA to the extent that the charge created thereunder should be made subject to the rights of the appellant as mortgagee in respect of project property as per registered deed of mortgage executed by the promoter in favour of the appellant. Any recovery warrant executed as per the impugned order shall also be subject to such modification.

Thereafter, a writ petition was filed by Xander Finance before the Bombay High Court and the Court held that as and when the auction sale is conducted to give effect to the RERA orders, it should be indicated to the bidders that the dues of Xander Finance which are a charge over the property (because the property is mortgaged to them) are also payable. This reasonably protects the rights of all parties. On the other hand, the IDBI case is silent on the aspect of whether a subsequent auction sale would be conducted to ensure enforceability of the RERA orders and also does not provide for any alternate remedy for the flat buyers.

Do the flat buyers possess secondary rights?

In the case of SREI Equipment Finance Ltd vs the State of Maharashtra & Ors., the Bombay High Court dealt with similar facts as that of the IDBI case, but the power of decision making was granted to the Collector. The property sought to be auctioned thereunder was mortgaged in favour of the petitioner (SREI). Keeping in mind the difference between the dues claimed by the petitioner and the proposed auction value of the property, the Collector was to examine the objections and decide on whether they should proceed with attachment of the property as directed by the RERA authority or inform the RERA authority that since the petitioner had a priority claim, the Collector was prohibited by law to proceed with the sale of such property.

Even though the Court did not decide on the final outcome in this case, it was observed by the Court that if such an auction sale were to happen, the priority of interest would require the sale proceeds from the auction sale to first be appropriated to clear the dues of the petitioner and if there was any surplus, it should get paid over as per the order passed by the competent authority under RERA to the flat buyers; as opposed to the IDBI case which does not address the fact that if only the secured creditors were to have the rights over the mortgaged property as well as other encumbered assets of the promoter, the recovery orders passed under RERA might be rendered unenforceable against promoters, thereby defeating the objective of RERA.

However, the outcome of the SREI case seems like a mere partial aid to the flat buyers as the funds of the promoter may get fully exhausted in satisfying the significantly high outstanding mortgage debt amounts, and the flat buyers would be left to suffer in the absence of any surplus.

Conclusion

The IDBI Trusteeship case holds that any entity bearing a secured interest and first charge over immoveable properties of a promoter (by way of a registered instrument) shall have primacy over all the other dues repayable by the promoter to any other person. In our view, it can be derived from the outcome that only unencumbered assets of a promoter of a project can be attached by the concerned revenue authorities for the purposes of complying with the enforcement order passed under RERA for recovery of refund and interest from such promoter. In most of the cases, it can be challenging to find an unencumbered asset to attach, and hence, the enforceability of RERA orders might come into question, thereby leaving the RERA authorities toothless. The repercussions could also be that the financial institutions may not be willing to allow the receivables of a project to be utilised towards making payments to any complainants/ allottees under RERA, as any orders passed by RERA authorities will not impact or affect the rights of such financial institutions to the project inventory mortgaged/ charged in their favour.

This article was originally published in Reality Plus  on 9 July 2021 Co-written by: Bhoumick Vaidya, Partner; Nishi Bharatiya, Associate. Click here for original article

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