At a crossroads

Recognizing homebuyers as financial creditors in the event of insolvencies is a welcome move, but the RERA remains the preferred route for recovering funds, writes Vineeta Bansal

Homebuyers have been given equal rights as financial creditors, as real estate projects have been constructed from their money and they are among the main financiers of such developments. When disputes arose earlier, homebuyers had only one option – to knock on the doors of consumer forums against the developer, where they sought compensations or refunds.

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), and Real and Estate (Regulation and Development) Act, 2016 (RERA), gave them more options for redressal of their grievances. Now, homebuyers and other allottees of real estate projects are able to not only demand a refund of their money, along with interest for any delay in handing over possession under the RERA, but also trigger the IBC and participate in the insolvency resolution process of a cash-strapped realtor.

The IBC was passed after great deliberation and pursuant to various committee reports, the most important of which was the November 2015 report of the Bankruptcy Law Reforms Committee. This was referred to by Justice RF Nariman in M/S Innoventive Industries Ltd v ICICI Bank, in August 2017.

As per the committee, the objectives and reasons of the code are to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. Its purpose is for maximization of the value of assets, to promote entrepreneurship, create availability of credit and to balance the interests of all stakeholders.

An effective legal framework for timely resolution of insolvency and bankruptcy will support economic development and encourage entrepreneurship. A key focus of the code is to rehabilitate the corporate debtor by replacing its management by means of a resolution plan, which must be accepted by 66% of the committee of creditors, in deciding the fate of the corporate debtor. Such a resolution plan then puts the same or another management in the saddle, subject to the provisions of the code, so that the corporate debtor may be pulled out of the quagmire and continue as a going concern. This benefits all stakeholders. It is only as a last resort that winding up of the corporate debtor is resorted to, so that its assets may be liquidated and paid out in the manner provided by section 53 of the code.