Homebuyers can move courts against parent companies of SPV – SC

In an interesting turn of events, the Hon’ble Supreme Court has held that holding/parent company is equally liable for defaults committed by a special purpose vehicle (SPV) created for construction. Hon’ble SC in its recent judgment of “Jaypee Infratech Ltd (JIL) & Jaypee Associates Ltd (JAL)” and “Granite Gate Properties Pvt Ltd (GGPPL) & Three C Universal Developer Private Ltd (TCUDPL)” ruled in favor of Homebuyers. Even though JIL and GGPPL are under CIRP process, the Supreme Court has paved ways for homebuyers to move against JAL and TCUDPL, the parent companies of these SPV.

What is a Special Purpose Vehicle?

A Special Purpose Vehicle/Entity (SPV/SPE) is a separate legal entity created by an organization. The SPV is a distinct company with its own assets and liabilities, as well as its own legal status. Usually, they are created for a specific objective, often which is to isolate financial risk. Creating an SPV with limited liabilities has been the preferred choice of real estate developers in residential as well as commercial real estate in India. In case of delays in the projects, the parent companies often escape the law and action could only be taken against subsidiary companies.

Granite Gate Properties Pvt Ltd vs Association for Consumer Welfare

Homebuyers of Project Lotus Panache had filed case against the GGPPL and it’s holding company Three C Universal Developers Private Ltd in the NCDRC. NCDRC in its order dated July 2018 ordered deletion of Three C from list of parties to the case and admitted the complaint against GGPPL only. The NCDRC ordered deletion of Three C on following grounds:

 “The consumers on whose behalf this complaint is instituted did not hire or avail the services of opposite party No. 1 and therefore, they cannot be said to its consumers.” 
Arguments by homebuyers

Under Section 2(zk) of the Real Estate (Regulation and Development) Act, 2016, the definition of the expression “promoter” would include the entity which is constructing the building as well as the entity which is selling the apartments or plots.

Section 2(zk) reads as follows:- “(zk) “promoter” means,—

(i) 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; or

(ii) a person who develops land into a project, whether or not the person also constructs structures on any of the plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without structures thereon; or (rest of the clauses are omitted as they are irrelevant for current case, refer to RERA Rules for full Section 2(zk))

Explanation.— For the purposes of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the persons who sells apartments or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this Act or the rules and regulations made thereunder;”

Conclusion

On the basis of the material which is on record, it is not possible for the Court to conclude at the present stage that the second respondent is unconnected with the project, or has been impleaded as a party to the proceeding without any reason or basis. Consequently, we are of the view that on the basis of the averments contained in the complaint as well as on the material which has been placed on the record by the second respondent, an order for deletion was not warranted at this stage.

Order

We accordingly, allow the appeal and set aside the impugned order of the NCDRC dated 31 July 2018. The second respondent is accordingly restored as a party to the proceedings before the NCDRC. The complaint shall stand admitted against both the first and second respondents for final disposal.

Jaypee Associates Ltd vs Jaypee Buyers (multiple cases)

In Dec 2018, Justice V.K Jain had ordered that:

“In my opinion, JAL was a co-service provider along with JIL and not just an agent of JIL, qua the home buyers, I need not examine the contention of the complainants that this Commission should lift the corporate veil and hold JAL to be the service provider, on account of its being the promoter and holding company of JIL. For the reasons stated hereinabove, I hold that the complainants, being consumers not only of JIL but also of JAL, these complaints can, for the present, continue against JAL, though the same cannot at this stage continue against JIL.

Maintainability of the order was further challenged in SC with CIVIL APPEAL NO(S).1139-1228 OF 2019. Hon’ble SC upheld the judgment/opinion of NCDRC and sent the case back to NCDRC for further consideration.

Conclusion

Both the judgement discussed above will go long way in rendering justice to homebuyers. Developer getting away in the disguise of SPV shall no longer be able to put entire liabilities on bankrupt companies and the losses can be recovered from their cash rich parent companies.

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