IBC protection for homebuyers

IBC protection for homebuyers

As per IBC regulations, only financial creditors can be a part of the Committee Of Creditors (COC). This committee decides every aspect regarding the proposal for revival, resolution process etc. Prior to amendment in 2018, the homebuyers or allottees were not of COC. Hence, they could not participate in the proceedings which triggered a demand to include the homebuyers under financial creditors.

On June 6, 2018, the allottees in real estate projects were included under the category of financial creditor with an explanation inserted in section 5(8)(f) of IBC through the IBC (Amendment) Ordinance, 2018. Now, the homebuyers or allottees in a real estate project can initiate insolvency process as financial creditors in class. They shall be represented by an Authorised Representative appointed in terms of Section 21 (6A)(b) chosen by a vote by the homebuyers, financial creditors, themselves while submitting their claim to the Resolution Professional.

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The same was challenged by a consortium of builders/real estate developers before the Hon’ble Supreme Court vide Writ Petition No. 43 of 2019 titled as Pioneer Urban Land and Infrastructure Limited and Ors. vs. Union of India and Ors, which held that the amendment of 2018 was constitutionally valid. The Honourable Supreme Court also held that the remedies available to the allottees under various statutes such as RERA, the Consumer Protection Act and the Code are concurrent. In case of conflict between RERA and IBC, the IBC would prevail.


How IBC may be of help to home buyers

IBC provisions may be a great support to home buyers who are facing a delay in possession or non-refund of money. Some of the major grievances of homebuyers are as follows:

  • Delay in possession: Most Homebuyers face the problem of inordinate delays in getting possession of their flats/homes on one excuse or the other;
  • The project is abandoned: If the project is abandoned, you may approach to NCLT under IBC to start corporate insolvency resolution process subject to the terms of the agreement and other legal parameters;
  • Non-refund of the agreed amount: If the allotment letter or agreement gives the right to claim the refund of the given amount and such obligation qualifies to be a default under IBC, the petition can be filed before NCLT under IBC for recovery and the same may be admitted for CIRP;
  • Subvention scheme: There are many kinds of interest subvention schemes offered by the builders to attract the buyers. Many of such schemes are not complied with in a proper manner. If there is any time value of money or consideration for use of money and such obligation qualifies as default under IBC, the allottee may file the application before NCLT under IBC.


Filing of claims before NCLT

Many real estate developers are facing CIRP (Corporate Insolvency Resolution Process) before NCLT. Filing of claim is compulsory to participate in the CIRP process and recover the amount from the company. After filing of the claim, the claim is evaluated and admitted as an amount due by the Resolution Professional. Thereafter, the homebuyer becomes a part of the COC and is able to take part in the Resolution of the company.


Current Position of Homebuyers vis-à-vis IBC, 2016

An amendment was inserted in the Insolvency and Bankruptcy Code, 2016 by the Ministry of Corporate Affairs vide Ordinance dated 28.12.2019 further amending the position of Homebuyers vis-à-vis their claim as financial creditors in class in the CIRP of real estate developers/companies. The same can be stated as follows:

“Provided that for the financial creditors referred to in clauses (a) and (b) of sub-section 6A of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10% of the total number of such creditors in the same class , whichever is less;

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less;

Provides also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by financial creditor referred to in the first or second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 ; such an application shall be modified to comply with the requirements of the first or second provisos as the case maybe within 30 days of the commencement of such ordinance failing which the application shall be deemed to be withdrawn before its admission.”

This Amendment seriously jeopardises the position of homebuyers vis-à-vis the usage to IBC to recover their dues from the real estate developers. Often the Homebuyers are a divided lot. Some may feel that taking such a step will be a waste of resources or some could not have the means to file a joint application comprising of 100 creditors. Some don’t even want possession of their flats/homes and would rather just wait for the proceedings to be initiated so as to get their money back. This makes the whole process a lot more cumbersome owing to the fact that the needs of one shall now be considered as the needs of many. The Hon’ble Supreme Court stayed the operation of the Ordinance vide its order dated 15.01.2020 and held that status quo be maintained with regard to pending applications.

There is currently no clarity on this while the government has notified the amendment on 13.03.2020.

Hence, it is quite clear that the position of Homebuyers and the IBC as an efficacious remedy to recover their dues from the Corporate Debtor has been topsy-turvy. IBC as a law has seen a lot of reactionary actions from the government from time to time leading to frequent amendments and change in the position of creditors. However, this does not negate the fact that it remains a remedy available to the Homebuyers who would now have their interests classified as a group and not as an individual.


Homebuyers- position vis-à-vis IBC

The insolvency and bankruptcy of major real estate companies such as Unitech and Amrapali Group have also led to the testing and effectiveness of the Insolvency and Bankruptcy Code, 2016. Thousands of “Homebuyers”, being the most prominent investors in the growth and development of these companies were left in the lurch as they remained bereft of a proper recourse in insolvency proceedings against these companies in financial distress.

One such example is the case of Jaypee Infratech Limited, a real estate company, the Application against which was filed by IDBI Bank Limited against the pending dues before the National Company Law Tribunal Bench at Allahabad.

Homebuyers in various projects, who had no option but to forget all about their investment, moved court against IDBI Bank taking the developer to the National Company Law Tribunal (NCLT) to start insolvency proceedings against the firm. Several of these homebuyers (a number touching approximately  40,000) directly affected by such a move moved the Supreme Court, saying the start of insolvency proceedings against the developer in the NCLT would thwart their right to justice and a rightful adjudication of their claims. If the company is admitted for Corporate Insolvency Resolution Process (CIRP), they will face two heavy consequences. One, their hard-earned money often arranged through loans would go down the drain and Second, they would not even get the home they wished to have. Homebuyers did not fall in the category of secured creditors and hence they could get back their money only if some amount was left after repaying the secured and operational creditors in line with the Waterfall mechanism in the Code given under Section 53. Keeping in mind the interests of homebuyers, the Honourable Supreme Court stayed the insolvency proceedings against the real estate firm.

Similar fears drove homebuyers of various projects of Amrapali Group to move the apex court when Bank of Baroda moved the NCLT against the developer. The Amrapali Silicon City Flat Owners Welfare Society moved the SC against an order of the NCLT that admitted the bank’s insolvency petition against Amrapali’s Silicon City project in Noida in Uttar Pradesh. The number of affected buyers, in this case, was estimated to be around 41,000. The SC recently asked the developer to devise a plan to deliver homes to buyers.

In the recent past, there have been numerous cases filed by the homebuyers against real estate companies before the National Consumer Disputes Redressal Commission (“NCDRC”) or the State and District Consumer Forums depending on the amount for deficient service and failure to deliver the flat/plot/home in time on one pretext or another. In the peculiar cases of Jaypee Infratech and Amparali Group, aggrieved homebuyers claimed deficiency in service on the part of developers post payment of full consideration. However, post the enactment of the Insolvency and Bankruptcy Code, 2016, the real estate developers face insolvency applications filed before the NCLT by the Financial Creditors such as Banks that financed these projects. Once the insolvency applications

were admitted, the Moratorium could be declared and the homebuyers’ suits/complaints were abated.

This meant that the developer companies could proceed with the Resolution or potential Liquidation under IBC while the homebuyers were left remedy-less.

The need for homebuyers to approach the Supreme Court was necessitated owing to the fact that the Insolvency and Bankruptcy Code (IBC), 2016, placed the homebuyers right to claim at the end of the queue when it comes to distribution of assets if a company was liquidated or being liquidated. They had no separate status in the list of creditors and it was unclear whether they would come under the head of financial creditors or operational creditors.

Such deficiencies in the law attracted considerable backlash given that several of these developers entered insolvency after having collected significant amounts of money from homebuyers who had to face inordinate delays in obtaining possession of the homes they had substantially paid for. Sufficient momentum was garnered to provide appropriate protection to this vulnerable constituency of creditors.

Accordingly, the Insolvency Law Committee, in its report released in March 2018, recommended that homebuyers should be treated as financial creditors so that they can take recourse to protection conferred under the Code.

President Ram Nath Kovind giving his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, on June 6, which stated the homebuyers will now be classified as “financial creditors in class‟ for the purposes of the Corporate Insolvency Resolution Process (“CIRP”). The intent behind such a classification was to enable homebuyers to participate in the insolvency resolution process in a constructive and egalitarian manner. The much needed reforms also sought to put to rest the homebuyers ambiguous status, which arose in Jaypee Infratech and Amrapali Group cases.

Magnus Legal Services LLP has been successfully serving clients who are looking for resolution of their matters through IBC.



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