INSOLVENCY AND BANKRUPTCY CODE AND HOMEBUYERS

Authors: Kriti Chaturvedi, HNLU

Rishika Nagpal, SLS, Pune


Editor: Anoushka Chauhan, NALSAR

Introduction

The Insolvency and Bankruptcy Code, 2016 was passed with an objective to ease the process of resolving insolvency. Under this code, if any company fails to repay a minimum debt of Rs. 100,000, an insolvency resolution process can be initiated against the company by financial creditors, operational creditors, or the company itself can endure this process. As per the IBC’s regulations, only financial creditors can be part of the Committee of Creditors (COC), who hold the authority to decide everything regarding the resolution process, the proposal for revival, etc. It becomes hard to differentiate financial creditors from operational creditors, because in cases where the CoC opts to distribute realized assets - i.e., liquidation - secured creditors are preferred over unsecure ones.


In furtherance to the objective of the IBC, the government passed the IBC Amendment Ordinance, 2018 on June 6, 2018. It amended the eligibility of certain parties - homebuyers and MSMEs - to initiate insolvency resolution under the IBC. It includes the amount raised from homebuyers in a real estate project to fall within the ambit of ‘financial debts’, in order to enable their claims as being financial creditors. The term ‘financial creditor’ within the context of the IBC is any person to whom a financial debt is owned[1].


Prior to this amendment homebuyers were not considered as financial creditors, hence they could not participate in the activities of COC. Following this amendment, the homebuyers are considered to be the financial creditors and can initiate the insolvency resolution process as financial creditors.[2]

Status of homebuyers before the ordinance

Before the IBC was amended to accommodate homebuyers as financial creditors, homebuyers had little legal recourse when the real estate companies they invested in declared insolvency. Due to homebuyers not having the status of ‘secured creditors’, they were only left to fend for whatever was left after the insolvent company had paid the secured and operational creditors[3]. The contention was that their rights were not secured under the IBC itself, and Courts had to protect their rights by way Articles 32 and 142 in respective batches of writ petitions in several cases[4]. Despite the fact that the amount raised from homebuyers - who purchased a property during its construction - contributed heavily to the construction of said properties, homebuyers were bereft of recourse in insolvency proceedings against these companies. Since the status of homebuyers before this ordinance was ambiguous and vague, they were unable to assert their rights as creditors (financial or operator) in initiating the insolvency resolution process in an absolute manner, that could only stem from recognition under the IBC. This enabled real estate developers to sideline their claims. That triggered the absolute need of homebuyers to be considered as financial creditors.


This Amendment was challenged by real estate developers in the landmark case of Pioneer Urban Land and Infrastructure Limited v. Union of India[5]. The Supreme Court of India upheld its constitutionality, thereby introducing homebuyers, or ‘real estate allottees’[6] under the Real Estate (Regulation and Development) Act, 2016, within the category of ‘financial creditors’, enabling them to initiate proceedings in a clearer light - which owing to the ambiguity of the IBC’s provisions prior to the amendment, they were deprived of.

Recent Amendment via The Insolvency and Bankruptcy (Amendment) Act, 2020

On 13th March 2020, an amendment under IBC was introduced by the Government of India through The Insolvency and Bankruptcy (Amendment) Act, 2020 published in Gazette of India and virtue of its 3rd proviso, a minimum threshold of 100 or 10% of the homebuyers, whichever be lower, to take a defaulting developer to the National Company Law Tribunal. [7]Such amendments do have a crucial impact upon the rights of the homebuyers who are treated as financial creditors under IBC. Thus after the validity of Second Amendment, Act 2018 was upheld by the Supreme Court in Pioneer[8], the said Amendment Act posed the following obstacles for the ‘real estate allottees’ or home buyers:


Firstly, a compulsion was imposed upon the homebuyers to bring in a Class Action so as to approach the National Company Law Tribunal. This restricted the entertainment of individual claims of the allottees since they must either be 100 in number or at least 10% of total home buyers under that very real estate project.[9]


Further, even the existing petitions which are not admitted under the said Code, by the individual buyers or whose number was less than 100 are to fulfill the conditions provided by the said Amending Act within a period of 30 days non compliance to which would result in consideration of such petitions as standing withdrawn.[10]

Aftermath of the Amendment

The amendment might result in irrational and unethical discrimination of homebuyers who have been recognized as financial creditors through statutory amendment (Second Amendment, 2018) in Code. The recent amendment would render their status arbitrary since it would introduce a class within the class of Financial Creditors which can be established by taking an example. A financial creditor with a claim of Rs. 1 or 2 Crores has the option to approach the NCLT but a Homebuyer with booking of a flat worth Rs 5 Crore, does not have this option since the NCLT will not entertain any individual claims. Secondly, rendering the recent amendment to be implemented retrospectively would affect the ongoing petitions upon whom the compulsion to bring in a Class Action has been suddenly imposed and any failure to fulfill the same would result in their petition standing withdrawn.


Glancing at its practical aspect, we find that the unavailability of proper mechanisms to access the contact details of other homebuyers would impose a hindrance in the fulfillment of the ‘10% or 100 in number’ requirement. In the light of the amendment only the minimum number of homebuyers are to be met, which imposes complete disregard to the amount owed to an individual homebuyer. Though the provision in question was introduced upon the pretext of preventing potential abuse of the Code through frivolous suits, the said lacunas render it a far cry from what was expected out of the amendment.

The COVID-19 Impact

Indian finance minister Nirmala Sitaraman announced the raising of the threshold of defaulting companies under Insolvency and Bankruptcy Code (IBC) from Rs. one lakh to Rs. One crore, with immediate effect. The said announcement was made to prevent triggering of insolvency proceedings and to provide some flexibility to the developers who had to fork out the labour expenses from their own pockets in the midst of downturn and liquidity concerns. The development however, would open a Pandora’s Box for the genuine aggrieved homebuyers whose situation is further worsened due to the limitation imposed upon the available measures of redressal.

Conclusion

The issue of homebuyers and their rights and remedies under the Insolvency and Bankruptcy Code has been evolving from its very onset - when their rights were not protected by the IBC and homebuyers thus had to seek recourse and protection from courts in different ways, thanks to the Amendment that addressed this problem and took homebuyers within the scope of ‘financial creditors’ to bring them at par with other creditors so as to initiate insolvency proceedings. While there are still problems that homebuyers often face in this regard, the IBC evolves with each day, and with it, the situations of homebuyers evolves too.

[1] See, Section 5(7) of the Insolvency and Bankruptcy Code, 2016. [2] See, Section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016. [3] Chitra Sharma & Ors. v. Union of India & Ors., W.P. (C) 744 of 2017. [4] Nikhil Mehta & Sons v. AMR Infrastructure Ltd. III (2017) BC 61 (NCLAT). [5] W.P. (C) 43 of 2019. [6] Legal construction of the term "home-buyers" is to be derived from "Allottees" under Section 2(d) of Real Estate (Regulation and Development) Act, 2016. [7] Prem Rajani, How Will the Recent Amendment to IBC Impact The Rights of Homebuyers?, Mondaq (29 May, 2020) https://www.mondaq.com/india/real-estate/942958/how-will-the-recent-amendment-to-ibc-impact-the-rights-of-homebuyers. [8] Supra note 5. [9] See, Section 3, Insolvency and Bankruptcy (Amendment) Act, 2020; Section 7, Insolvency and Bankruptcy Code, 2016. [10] Ibid.

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