Banks and builders show blatant disregard for subvention scheme directions, CBI investigation ordered for possible collusion

SC held that banks and builders-cum-developers showed blatant disregard for court directions regarding subvention schemes in housing projects across Noida, Greater Noida, and Gurugram. Only 9 out of 30 banks and 5 out of 40 builders filed compliance affidavits, suggesting possible collusion. Court directed CBI Standing Counsel to appear for constituting Special Investigation Team to investigate nexus between banks and builders regarding projects where homebuyers paid substantial amounts but construction remained incomplete or unlaunched. Banks must exercise due diligence before loan disbursement and homebuyers cannot be held liable for builder defaults under subvention schemes without possession delivery. Application allowed.

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The core legal questions considered by the Court revolve around the obligations and liabilities of the three parties involved in the subvention schemes for housing projects: the homebuyers, the builders-cum-developers, and the banks/financial institutions. Specifically, the issues include whether the banks can demand EMI/pre-EMI payments from homebuyers when the builders-cum-developers have defaulted, the legality and propriety of the banks' disbursal of loan amounts to builders without due diligence or adherence to RBI guidelines, the rights of homebuyers to possession of their units, and the appropriate recourse and remedies available to homebuyers given the incomplete or stalled projects and ongoing insolvency proceedings against builders.

Another significant issue concerns the procedural propriety of the High Court's dismissal of writ petitions filed by homebuyers on the ground of alternate remedies, and whether such dismissal was appropriate given the public interest and the scale of the grievance. Further, the Court examined the conduct of banks and builders in complying with Court directions to furnish information on project completion, payments, and possession status, and whether there exists collusion between banks and builders warranting investigation.

Regarding the first issue of liability for EMI/pre-EMI payments, the legal framework includes the tripartite agreements under the subvention schemes, the RBI Guidelines of 2013 governing loan disbursal and due diligence by banks, and the Insolvency and Bankruptcy Code, 2016 (IBC) concerning resolution of insolvent builders. Precedents emphasize the protection of homebuyers as consumers and the obligations of banks to ensure compliance with regulatory norms before advancing funds.

The Court reasoned that the subvention schemes were structured such that builders-cum-developers were to bear the burden of EMI/pre-EMI payments till possession or a cut-off date, and the banks' upfront disbursal of large loan tranches to builders without ensuring project milestones were met violated the RBI Guidelines. The failure of builders to make the payments and the subsequent demand by banks on homebuyers-who had not yet received possession-was inequitable and contrary to the contractual and regulatory framework. The Court noted that many projects remained incomplete, and homebuyers were unfairly burdened with loan repayments for undelivered properties.

On the issue of the High Court's dismissal of writ petitions, the Court acknowledged the availability of alternate remedies through Real Estate Regulatory Authorities and consumer fora but observed that the writ petitions involved substantial public interest affecting thousands of homebuyers. The Court implied that the High Court's dismissal might have overlooked the urgency and scale of the grievance, warranting this higher forum's intervention.

Regarding compliance with Court directions to furnish detailed affidavits on project status, payments, possession, and insolvency proceedings, the Court found gross non-compliance by most banks and builders despite repeated instructions. This non-cooperation suggested possible collusion, undermining the Court's ability to ascertain facts and provide relief. The Court emphasized the gravity of the situation and the need for a thorough investigation.

The Court's application of law to facts led to the conclusion that homebuyers should not be held liable for EMI/pre-EMI payments defaulted by builders, especially given the incomplete projects and ongoing insolvency proceedings. It underscored the banks' failure to exercise due diligence and comply with RBI Guidelines when disbursing funds. The Court also recognized the inadequacy of existing remedies and the necessity for judicial intervention to protect homebuyers' interests.

Competing arguments from banks and builders likely centered on the availability of alternate remedies, the contractual terms of loan agreements, and the procedural propriety of recovery actions. The Court treated these by balancing the regulatory framework, contractual obligations, and the equitable rights of homebuyers, ultimately prioritizing consumer protection and adherence to regulatory norms.

The Court concluded that recovery actions against homebuyers should be stayed pending resolution of the substantive issues and directed that no Recovery Certificate be executed against homebuyers in the meantime. It also ordered the constitution of a Special Investigation Team (SIT) to probe the nexus between banks and builders, with the Central Bureau of Investigation's Standing Counsel directed to assist and consider registration of a case or constitution of an SIT on its own motion.

In terms of significant holdings, the Court held:

"The banks and financial institutions violated several provisions of the 2013 RBI Guidelines when disbursing the amounts as the disbursal was done without any form of due diligence on behalf of the banks."

"This blatant disregard and ignorance of the Court's directions, coupled with their reluctance in appropriately assisting the Court, hints towards a possible collusion between the builders-cum-developers and the banks/financial institutions."

"Meanwhile, proceedings before the Debt Recovery Tribunals or any other Tribunal may continue. However, no Recovery Certificate shall be executed against the home-buyers."

These pronouncements establish the principle that banks must adhere strictly to regulatory guidelines and exercise due diligence before disbursing loans to builders, and that homebuyers cannot be held liable for payments defaulted by builders under subvention schemes where possession has not been delivered. The Court's determination to investigate possible collusion marks a significant step towards ensuring accountability and protecting consumer rights in real estate financing.

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