EFFECT OF INSOLVENCY AND BANKRUPTCY CODE AMENDMENT ON HOME BUYERS

Real Estate Sector in India is one of the few sectors that have witnessed exponential growth in the last two decades. It has drawn in huge investments from the people who put in their hard earned life savings to unlock their dream homes. However, the most sought after Investment Avenue has seen a dip in its popularity because of stagnation. In the last four years, the performance of real estate sector was vapid in terms of growth in prices and sales. According to property consultant ANAROCK, there has been a decline in housing sales by 40 percent last year to 2,02,800 units in seven major cities from the average sales of 2013 and 2014.[1] An average of 3.3 lakh units were sold annually during 2013 and 2014 as compared to 2015-2016 where on an average of  only 2.7 lakh units were sold annually which clearly shows that there is a drop of 17 percent from the average sales of 2013-2014. Further, in Delhi-NCR the sales fell to 37,600 in 2017 from average annual sales of 1,16,250 units during 2013-2014. Also, Bengaluru, Chennai and Pune have witnessed a decline of 17, 45 and 29 percent in average sales of 2013-2014 over 2017 respectively.[2] The recent trend in residential market trend clearly indicates that 2013 and 2014 were the last years where things were promising for the real estate sector. Experts have opined that the real estate sector is actually going through transitional phase and things will sort out with time. Government acknowledging this problem has amended the Insolvency and Bankruptcy Code (IBC) 2016 and granted homebuyer a status of “Financial Creditor” as a welcome relief to the Home buyers.

In this article I have tried to explain how this amendment in the Insolvency and Bankruptcy code strengthens the position of homebuyers putting them on the same footing as any other stakeholder participating in the real estate project.

Under the code the creditors are categorized in two types: Financial or Operational. Financial creditors includes person who have lent money to the debtor against the payment of interest whereas Operational Creditors includes person who have established certain types of relationship with the debtor company such as the provision of goods and services, employment or government dues. Therefore prior to the amendment “Home buyers” were treated as an orphan meaning thereby, they were considered to be neither financial creditors nor operational creditors as they haven’t lent out money against the payment of interest nor were they operational creditors as that the code does not contemplate immovable property and refers to the provision of “goods and services”.  Therefore, the homebuyers were getting only limited reliefs/benefits as they were treated under a third class of creditors created by the Insolvency and Bankruptcy Board of India. Due to this, several real estate developers went on to become insolvent after having collected significant amount of money and the home buyers have to face inordinate delays in obtaining possession of the homes and thereby abusing the process of law.  To understand the situation better one should be aware of relation between RERA, 2016 and IBC 2016.

The Insolvency and Bankruptcy code was amended to cover the loopholes in the Insolvency and Bankruptcy Act along with the Real Estate (Regulation and Development Act), 2016. The amendment incorporates the key recommendations of the Insolvency Law reform Committee’s (“ILRC”) report. The amendment to the code was brought with a view to balance the interest of different stakeholders, particularly the Home buyers. This amendment treats the Home Buyer as financial creditors under the code. This amendment was made in cognizance of the fact that since, money is raised from homebuyers as a means to finance construction, and thus they should be treated as any other financial creditor. In the following paragraphs we will see how the stand of the Home buyers changed after the IBC amendment.

SITUATION PRIOR TO IBC AMENDMENT

Prior to the Insolvency and Bankruptcy Amendment, Home buyers were treated as an ‘unsecured creditors’ and they were not regarded as “financial creditors” or as “operational creditors”. Due to which, the homebuyers were not capable of initiating insolvency proceedings against a defaulting Builder or Real Estate developer. The only recourse available to the Home Buyers was that they could just get the balance proceeds subsequent to payment of insolvency costs, financial creditors, workmen and government dues on the event of builder/developer confronting liquidation. The Hon’ble Apex Court in the Unitech Residential Resorts case[3] took a strong stand against this situation and ordered Unitech residential group to refund the principal amount of Rs 17 crore to 39 respondents who had been waiting for their flats for over seven years. Similarly, in September, 2017, the Hon’ble Supreme Court of India asked Jaypee Associates to pay Rs 5 lakh each to 10 home buyers who got their flats with the delay of 5 years.

SITUATION POST IBC AMENDMENT

Now after this amendment, the Home Buyers are treated as “allottee” under a ‘real estate project’. The term “allottee” is defined under Real Estate (Regulation and Development) Act as “a person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent.”

According to IBC amendment, if an allottee raises sum under a real estate project then that sum will be considered to have an impact similar to the commercial impact of borrowing. Therefore, the sums paid by the Home Buyers to a builder will be considered as financial debt and homebuyers will be categorized as financial creditors. This helps the home buyer to file a petition to start insolvency proceedings against a defaulting builder company.  

HOW THIS IBC AMENDMENT PROVIDES RELIEF TO THE HOME BUYER

The amendment to the Insolvency and Bankruptcy code is helpful to the buyers facing hardships due to incomplete real estate projects. In India, around 20-30% of the projects face delay due to various reasons and the developer find themselves in a debt trap because of that delay. The delay in projects affect the Home Buyers as they invest a substantial portion of their savings to make a down payment for the property, pay an EMI on the loan and over and above that continue to pay rent in the current place of stay. This situation has now been changed by the new IBC amendment. The homebuyers after attaining the status of financial creditor under the code has the right to invoke Section 7 of the IBC (which allows financial creditors to file an application in NCLT (National Company Law Tribunal) for initiating corporate insolvency resolution (CIRP) against a defaulting company) against en errant developer. Also, the Home Buyer have  representation the committee of creditors through an authorized representative and they can expect fast tracking of pending court cases against leading real estate groups.

[1] Data provided under the heading “Housing sales down 40 percent in 2017 from 2013/14 levels: ANAROCK” published in “The Economic Times” on 18th March, 2018.

[2] Id.

[3] M/S Unitech Residential Resorts Ltd. v. Atul Gupta and Anr. CA 6044/2015.