IBC amendment gives voice to beleaguered homebuyers

By Pranav Shroff, Vidhii Partners

The recent amendment to the Insolvency and Bankruptcy Code 2016 (IBC) has created a special status for the homebuyers as “financial creditors” with effect from 6 June 2018. The amendment was brought into force at a pivotal junction when the ongoing litigations in projects by Jaypee Infratech and Unitech brought to limelight the hapless situation of homebuyers and the lack of effective remedies available to them.

Pranav ShroffAssociateVidhii Partners
Pranav Shroff
Vidhii Partners

Pre-amendment scenario: The Real Estate (Regulation and Development) Act, 2016 (RERA), was not in existence when the IBC was brought into force and although there were certain civil remedies available for homebuyers both under central and state laws, they were not adequate in providing quick and effective relief. Even after the enactment of the IBC, homebuyers were not classified into any specific category of creditors under the code. Homebuyers had no right to voice their interests in the meetings of committee of creditors during a corporate insolvency resolution process. Further in the event of a liquidation they were placed right at the bottom of the waterfall in the category of any remaining debts and dues under section 53(f) of the IBC.

There were a lot of doubts regarding interpretation by the courts on how the homebuyers should be treated under the code. In the case of Col Vinod Awasthy v AMR Infrastructure Ltd, the NCLT, New Delhi, while dealing with the issue of whether homebuyers could be treated as operational creditors held that it is not possible to construe sections 9, 5(20) and 5(21) of the code relating to the concepts of operational creditors and operational debt so widely to include within its scope the cases of outstanding dues on account of advances made towards purchase of a flat from a construction company, especially when the homebuyers have remedies available under the Consumer Protection Act and the other civil laws.

On the contrary, the National Company Law Appellate Tribunal (NCLAT) in the case of Nikhil Mehta v AMR Infrastructure recognized the status of the homebuyer as a financial creditor. The reasoning given by the NCLAT for holding such was that the homebuyer, under the terms of their agreement with the developer, qualified as investors with an assured committed return plan and therefore, the amounts paid by the homebuyer in accordance to the sale purchase agreement was treated at par with a loan and bringing their investment within the meaning of financial debt. The same reasoning was applied by the NCLAT in the case of Anil Mahindroo v Earth Iconic Infrastructures Ltd.

Meanwhile, the Jaypee Infratech case (Chitra Sharma v Union of India) brought out the plight of about 32,000 homebuyers whose savings and investments were at stake because of the developer’s failure to hand over possession of the apartments booked by them. The NCLT, Delhi dismissed the homebuyers’ application on the grounds that they cannot be categorized as financial or operational creditors under the code. The homebuyers then filed a public interest litigation in the Supreme Court for securing their interests leading to the court acknowledging the lacuna in the IBC with regards to the rights of the homebuyers. The Supreme Court reasoned that the savings of the homebuyers cannot be brushed aside on mere technical grounds.

Key takeaways for homebuyers: The amendment catalyzed by the Jaypee Infratech case brought into effect significant changes in the IBC relating to homebuyers’ rights by recognizing them as “financial creditors”. The amendment specifically provides that the amount raised from a homebuyer in a real estate project has the commercial effect of a borrowing and hence, a financial debt. The result of conferring such a status to the homebuyers is that they are now entitled to invoke the corporate insolvency resolution process under section 7 of the IBC, and would be entitled to sustain their claim irrespective of a dispute between the homebuyer and developer.

With the amendment, the homebuyers will also have due representation in the committee of creditors giving them a right to voice their interests in a corporate insolvency resolution process.

Way forward: To confer a status on homebuyers and categorize them as financial creditors under the IBC is probably the need of the hour and the homebuyers would definitely stand to gain by the said amendment. However, it has yet to be seen how effective the participation of the homebuyers in the committee of creditors will be and what will be their contribution in assessing and approving resolution plans.

Pranav Shroff is an associate at Vidhii Partners.

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Law.asia subscripton ad red 2022