Home buyers as financial creditors ? understanding the latest amendment to the Insolvency and Bankruptcy Code

By Aishwarya Bagri

Should homeowners be treated as financial creditors in the real estate sector? This was the question that the Insolvency Law Reforms Committee recently addressed. Set up in December 2017, the 14 member committee has published a 106 pages long report, suggesting various amendments to the Insolvency and Bankruptcy Code 2016. One such amendment is that homeowners should be treated as financial creditors in the proceedings pertaining to real estate businesses. If this suggestion is implemented, homeowners could get some relief in the proceedings against unfinished real estate projects.

A good move, say experts

Initially, homeowners were placed below financial and operational creditors in the hierarchy of stakeholders. They were required to file a special form, to be considered for the repayment of their dues out of the corporate insolvency proceedings. Now, homeowners would be a part of the Committee of Creditors (CoC) that decides on the resolution plan. Their voting rights would be in sync with their advance payments. Though, they will be third in preference to get liquidation proceeds.

Experts lauded this move as a complete revamp of the real estate sector. This makes the real estate sector “customer-centric”. In the case of incomplete projects, homeowners can claim refunds of their payments in the insolvency proceedings. In other words, they would not be left at the call of the developers.

Is it really a good move?

It is important to note that as per the new notification, homebuyers will be treated as unsecured financial creditors. Hence, in the case of a liquidation, as per the priority waterfall under section 53 of the Code, unsecured creditors (flat owners) are unlikely to receive any substantial amount since priority will be given to banks (secured lenders), to whom the bulk of the amount is due. Furthermore, including the claim of one kind of customers in ascertaining the claim of financial creditors, would lead to other customers demanding the same treatment in other cases.

This would require longer proceedings, more benches and committees, and would eventually cause greater complications. The very aim of providing swift remedies to the homeowners would be defeated. Additionally, the claims of banks, operational creditors, and other lenders would be diluted.

Although it can be argued that the incomplete flats should be given to another developer, as this will give the home-owners their houses, which will be a better bargain than a paltry claim in the insolvency proceedings. this suggestion in itself has a shortcomings. How many such flats can be given to a single builder? There is also some ambiguity about whether this will be similar to the sale of the assets of the bankrupt company to another company.

Case in point

There are about 1 million homebuyers that require relief from developers of unfinished real estate projects. Jaypee Infra Tech has about 31,000 such homeowners and Amrapali’s Suncity has 41,000. Corporate Insolvency and Resolution Proceeding (CIRP) against Jaypee has been a very significant case since it involved protests in Delhi-NCR by the homebuyers in Jaypee’s Wish Town project in Noida. It even required Supreme Court intervention.

On September 11th 2017, the apex court stayed the proceedings against Jaypee InfraTech to protect the interests of the homeowners. It resumed the proceedings on the condition that an interim resolution professional be appointed, and that she submit a report on the plan to protect the interests of the homebuyers. Ultimately, the Supreme Court declared that Manoj Gaur and his family, the promoters of Jaypee, would not sell personal assets and deposit Rs. 2,000 crore in a separate account for satisfying the claims of the homeowners. In SunCity’s case, the Supreme Court ordered the developer to submit a plan to deliver apartments to all homebuyers.

Though the amendment is a welcome move, since it solidifies the claims of the customers, it may not be the best suggestion. Credit: Flickr Commons/Jens Grabenstein

Taking the middle ground

It is best to avoid Supreme Court intervention—if court involvement was the way to resolve such cases, then the IBC would not needed in the very first place. Though the amendment is a welcome move, since it solidifies the claims of the customers, it may not be the best suggestion. IBC is a general law. Amending it to protect one kind of sectoral customers will lead to similar demands by customers of other kinds of companies. A better move would likely be to amend the Real Estate (Regulation and Development) Act, 2016, as argued by many experts.