DIVERSION, MISAPPROPRIATION AND MISUSE OF FUNDS BY BUILDERS

The real estate sector is one of the most critical engines of economic growth. However, persistent issues of diversion, misappropriation, and misuse of funds by builders have severely eroded public confidence and caused immense financial and emotional distress to homebuyers. Despite paying substantial portions of the sale consideration, buyers are often left without possession while builders continue to launch new projects, exposing a systemic abuse of trust.

What Is Diversion / Misappropriation of Funds by Builders?

Diversion of funds refers to the practice where money received from homebuyers or investors for a specific project is used for purposes not legally or contractually permitted, such as:

  • Using homebuyers’ funds to complete other projects
  • Transferring money to group or associate companies
  • Servicing unrelated loans or liabilities
  • Lavish personal or corporate expenses by directors and key managerial personnel

Misappropriation involves a higher degree of culpability, where funds entrusted for a defined purpose are dishonestly used in breach of trust, contractual obligations, and statutory law.

Reasons for Misuse and Diversion of Funds by Builders

  1. Cash Flow Problems

Builders often underestimate costs or face delays. Instead of raising capital legitimately, funds of one project are diverted to meet obligations of another.

  1. Aggressive and Unplanned Expansion

In pursuit of rapid growth, developers launch multiple projects without financial capacity, using buyers’ money as working capital.

  1. Weak Regulatory Enforcement

Where oversight is ineffective or penalties are weak, erring builders continue fund diversion with impunity.

  1. Market Downturns

During real estate slowdowns, falling sales pressure builders into misusing pooled funds to remain afloat.

Legal and Regulatory Framework to Prevent Diversion of Funds

  1. Trust and Escrow Requirements

Modern real estate laws require customer advances to be deposited in project-specific escrow accounts, restricting usage strictly to construction and land costs.

  1. Real Estate (Regulation and Development) Act, 2016 (RERA)

RERA mandates:

  • Maintenance of a separate bank account for each project
  • Use of funds only for that project
  • Periodic disclosures and audits

Violation can lead to penalties, revocation of registration, and imprisonment.

  1. Contract Law

Builder–buyer agreements restrict fund usage. Breach attracts damages, refund, and compensation.

  1. Criminal Law

Diversion of funds may amount to:

  • Criminal breach of trust
  • Cheating
  • Criminal misappropriation
  • Conspiracy

Despite robust legal frameworks on paper, the ground reality remains grim. Fund diversion continues unabated, exposing enforcement gaps and regulatory failure.

Legal Solutions Available to Homebuyers Against Diversion of Funds

  1. Remedy Before RERA

Relevant Provisions:

  • Section 4(2)(l)(D) – 70% of collections to be kept in a separate project account
  • Section 7 – Revocation of project registration
  • Sections 35 & 36 – Inquiry, investigation, and interim directions
  • Sections 59–61 – Monetary penalties and prosecution

Reliefs:

  • Refund with interest
  • Compensation
  • Audit and freezing of accounts
  • Project takeover or cancellation

  1. Remedy Before Consumer Courts

Under the Consumer Protection Act, 2019, diversion of funds results in:

  • Deficiency in service (Section 2(11))
  • Unfair trade practice (Section 2(47))

Reliefs:

  • Refund with interest
  • Compensation for mental agony
  • Punitive damages

  1. Writ Petition Before High Court and Supreme Court

In cases of:

  • Large-scale diversion
  • Failure of regulatory authorities
  • Violation of constitutional rights

High Courts and Supreme Court can order:

  • Court-monitored investigations
  • Forensic audits
  • Attachment of bank accounts and assets
  • Directions to enforcement agencies

The Amrapali case is a classic example where courts intervened to stop systemic fund diversion.

  1. Criminal Proceedings

Relevant BNS provisions include:

  • Criminal breach of trust
  • Dishonest misappropriation
  • Cheating
  • Criminal conspiracy

Courts have clarified that homebuyers’ money is held in trust, and its diversion attracts criminal liability of promoters and directors.

How Builders Typically Defend Themselves

Builders commonly argue:

  1. Legitimate Business Use – Claiming fund movement was necessary for business continuity
  2. Accounting Interpretation – Labeling diversion as accounting adjustments
  3. Force Majeure – Citing pandemics or economic downturns
  4. Regulatory Compliance – Claiming adherence to law

Courts have consistently rejected these defences, holding that commercial difficulty cannot justify misuse of trust money.

Conclusion

Diversion and misappropriation of funds by builders is not merely a contractual lapse—it is a breach of trust, regulatory violation, and criminal offence. While the law today provides strong remedies through RERA, Consumer Courts, High Courts, and criminal prosecution, strict enforcement remains the key challenge.

For homebuyers, awareness of legal rights, timely action, and use of parallel remedies are essential to protect their interests. The law is now clear: builders cannot fund their ambitions on the backs of homebuyers.