Treatment Of Homebuyers Under Insolvency And Bankruptcy Code

Published on 30 Jun 2018 by Shivi

Buying a home is no less than a gamble in the present scenario, keeping in mind the cumbersome process of fulfilling the legal formalities, improper enforcement mechanism to enforce interest of home buyers and the risk of dealing with delay in property possession.

With RERA providing fragmentary protection to homebuyers from unscrupulous practices by builders and real estate promoters, there was no representation of buyers when the company faces bankruptcy or insolvency. Until now, home buyers had to knock on the doors of courts to receive their money, while other creditors and stakeholders benefited with the implementation of the Insolvency and Bankruptcy Code (IBC), 2016.

Recently, however, Indian President Ram Nath Kovind promulgated the ordinance amending the Insolvency and Bankruptcy Code (IBC) so as to recognize the homebuyers as financial creditors to real estate developers, providing huge relief to homebuyers who were outside the ambit of what was defined as financial creditors.

The Insolvency and Bankruptcy Code consolidates all laws relating to insolvency in India. While Insolvency is defined as the inability of debtors, individuals or corporates to repay their debts, the stage of bankruptcy occurs when debtors, individuals or corporates are declared incapable of repaying their debt. Thus, bankruptcy is a formal declaration of insolvency.

Treatment Of Homebuyers Under IBC Prior To Ordinance

The Code when passed, was a centre point of criticism as distressed house owners, who put their life savings into a housing and real estate project were given the lowest priority in the list of creditors- below the financial institutions and other industry leaders.

Homebuyers were widely regarded as mere consumers and did not fall under the liquidation claim umbrella because their debt was not regarded as a financial debt under the Code, placing them at a disadvantageous position as they neither received possession nor the money.

The only remedy available with homebuyers was to either file a case with the RERA Authority or to file a consumer complaint with the NCDRC with the help of a consumer complaint lawyer in India. However, the complaint with NCDRC also came with a condition that the claim must be more than Rs. 1 crore to be filed with the National Consumer Forum.

READ: Remedies Available To Homebuyers Against Builders

2018 Ordinance Amending The IBC

The IBC has been amended so as to change the status of homebuyers and their treatment in bankruptcy cases. They have been accorded the status of financial creditors, with the law being silent about the fact if they are secured or unsecured financial creditors.

The move was manifested when the Supreme Court held that the interests of homebuyers who had invested in Amrapali’s project and faced delay in delivery of possession of property, were to be given priority over the claims of banks and financial institutions.

The onus to prove the category in which the creditor is qualified lies on the homebuyer in accordance with the agreement signed with the real estate company. It is only the secured creditors who will get precedence in payment from the sale of assets when the company gets liquidated.

The question that arises is as to who will be considered as a financial creditor. Only buyers who have completed the registration formalities of an announced project recognised under state RERA (Real Estate Regulation and Development Act) would be considered a financial creditor. Further, to be at par with banks or financial institutions during the proceedings, the buyer must be a secured financial creditor.

When a company involved in real estate project defaults to pay a loan as well as delays the delivery of possession of flat, a home buyer can send a legal notice to the builder with the help of a property lawyer in India. In case of persistent failure, an insolvency case can be filed against the builder with the NCLT.

READ: How To Send A Legal Notice In India

The assets of the company are sold to discharge the claims of creditors. The debts of the secured financial creditors are first in the line to be discharged. Adding home buyers to the list of financial creditors secures their interest when the builder does not have assets to complete the housing project and deliver the possession of the property. Now, a home buyer can file an insolvency matter against a builder with the NCLT through a property advocate in India.

Conflict Between SARFAESI, RERA And IBC

There appears to be a clash between SARFAESI, Insolvency and Bankruptcy Code, and RERA- while SARFAESI strengthened the position of banks and financial institutions to enforce their security interest in case of Non-Performing Assets, the Insolvency and Bankruptcy Code places individual homebuyers above such banks and financial institutions.

In such a case, the priority would depend upon the registration of the homebuyer under RERA, which in turn relies on the Companies Act. The law needs clarity and amendments to ensure that the loopholes are not taken advantage of.

With the help of RERA, this amendment in law can prove to be a boon to homebuyers, developing a transparent system of debt discharge. It provides for timely delivery of flats under RERA, and discharge of debt on under IBC if the developer fails to deliver possession. Thus, it acts as a two-way shield for the homebuyer preventing the unscrupulous developers from fleeing away and abandoning the project.


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