MANSI BRAR FERNANDES VS SHUBHA SHARMA : CASE SUMMARY

The Supreme Court in Mansi Brar Fernandes Vs Shubha Sharma (Civil Appeal No. 3826/2020)  has reiterated that speculative investors cannot be permitted to misuse the code as recovery mechanism. The Supreme Court has also issued several important directions for reforms in Real Estate Sector.

BRIEF FACTS

Mansi Brar Fernandes and Gayatri Infra Planners Pvt. Ltd. (Corporate Debtor) entered into MoU dated 06.04.2016 with a buy back agreement at the discretion of Corporate Debtor for four flats. She paid a sum of Rs. 35,00,000/- via cheque towards part consideration. The Corporate Debtor could either buy back the units after 12 months for Rs. 1 Crore or hand over possession of the flats to the appellant at no extra cost. MOU was extended twice i.e. 07.04.2017 for six months and 07.10.2017 for twelve months. Cheques provided by the Corporate Debtor bounced. Possession was also not given by the Corporate Debtor.  

Mansi Brar  initiated proceedings IBC and her Petition was admitted by NCLT.  Admission was reversed by NCLAT on the ground that Mansi Brar was not Financial Creditor but speculative investor.

FINDINGS OF THE SUPREME COURT

The Supreme Court noted that schemes of assured returns, compulsory buybacks, or excessive exit options are in truth financial derivatives masquerading as housing contracts. These arrangements enable developers, on the one hand, to mislead gullible individuals, and seasoned investors, on the other, to ‘jump ship’ when the market turns or to hold developers to ransom by invoking the IBC as a coercive recovery mechanism, thereby creating a situation of “heads I win, tails you lose”.

The Supreme Court noted that it has drawn a crucial distinction between speculative buyer and genuine buyer and had observed that speculative investors cannot be permitted to misuse the code as recovery mechanism.

The Supreme Court noted that where there is an actual chain of delivery ending with possession by a genuine buyer, the transaction is not speculative. Conversely, in the present context, where there is no intention to take possession, the onus to find another buyer and effect resale is cast on the developer. Delivery in such cases is more in the nature of a lien or an option. For a genuine allottee, however, delivery and possession are a sine qua non. The determination of whether an allottee is a speculative investor, must be holistic, having regard to terms of the agreement, the allotment letter, the payment terms, and the overall conduct of the allottee.

The   Supreme Court concluded that in the present case the appellant’s true interest lay in assured returns, not possession. The MOU was in substance a buyback contract, not an agreement to sell flats. By the standard in Pioneer Urban, the appellant was a speculative investor, disentitling her from invoking Section 7.

The Supreme Court upheld the judgment of the NCLAT.

DIRECTIONS BY THE SUPREME  COURT

The Supreme Court issued several directions for reforms in Real Estate sector , some of which are – (i) filling of NCLT/NCLAT vacancies on war footing and upgradation of NCLT/NCLAT infrastructure. (ii) creation of a Committee under chairman of retired High Court Judge for suggesting reforms for cleansing and infusing credibility in real estate sector. (iii)  IBBBI to create Council in consultation with RERA to frame guidelines for insolvency proceedings in Real Estate.  (iv) Real Estate insolvency to be resolved on project basis as rule.  (v) NCLTs must record a prima facie finding on whether the applicant is a genuine homebuyer or speculative investor.

___________________________________________________________