Role of Insolvency and Bankruptcy Code,2016 vis-à-vis the Home-buyers and Developers.

• PRE-IBC SCENARIO WITH RESPECT TO HOME-BUYERS.
• INTRODUCTION OF HOME-BUYERS UNDER THE INSOLVENCY AND BANKRUPTCY REGIME.
• HOME-BUYERS NOT OPERATIONAL CREDITORS NOR FINANCIAL CREDITORS.
• A DIFFERENT AGREEMENT/ MEMORANDUM OF UNDERSTANDING BETWEEN THE HOME-BUYER AND DEVELOPER.
• ?THE CHITRA SHARMA CASE: MOTHER OF HOME-BUYERS PLIGHT.
• THE AMRAPALI FIASCO.
• THE REPORT OF INSOLVENCY LAW COMMITTEE (MARCH 2018).
• THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT) BILL, 2018.
• THE PIONEER DEBACLE.
• THE INSOLVENCY LAW COMMITTEE REPORT ON INSOLVENCY AND BANKRUPTCY BILL 2019.
• THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT) BILL,2019.
• CIRP SHOULD BE LIMITED TO THAT PARTICULAR PROJECT ONLY.
• CONCLUSION.

“A house is a home when it shelters the body and comforts the soul”. - Phillip Moffit

PRE- IBC SCENARIO WITH RESPECT TO HOME-BUYERS:

The aforementioned quote can be interpreted in a sense that, every individual has a dream to own a house. It is an unsaid tradition wherein every individual desire to own a home which will be his paramount asset. Over the decades the real estate sector has seen an extraordinary growth, based on the analysis carried out by IBEF (India Brand Equity Foundation, a trust founded by the Ministry of Commerce and Industry). 

The real estate sector in India is estimated to reach 1 Trillion US$ (US Dollar) industry by 2030, and by 2025 the real estate sector single-handedly will contribute 13 percent of the country’s GDP[1]. Considering the current scenario, the fact that every individual needs a house to live, the demand for residential spaces in every stratum of the society keeps increasing and to meet the demands of the individuals aiming to buy a house; there is supply from an entity to sell a house resulting in the residential projects contributing approximately to 80 to 85 percent of the real estate sector in India.

To achieve the dream of owning a house, an average home-buyer puts all his life savings into buying a home, however, his greatest fear is whether the house he is buying will be delivered on time or the quality he is paying for will be worth it or not. In certain situations, the home-buyers are also burdened with PRE-EMI Plan(the pre-EMI plan is the interest paid on the disbursed amount until the possession of the house) wherein which there are no tax benefits for Pre-EMI Scheme, as a home-buyer is entitled to tax rebate only after securing the possession of the house and once the EMI starts. Thus timely possession and the quality of the house are not the only factors of concern for an individual, as in most of the cases individual purchases a house by acquiring a loan from a financial institution or a bank and if the loan amount is already disbursed, the banks take interest from the home-buyers by various payment schemes.

There was a phase wherein which the home-buyers used to depend upon the whims and fancies of some errant developers for getting the possession of flats but however due to the key role played by the judiciary and the authorities in support of consumers along with the advent of social media awareness by means of technology, which led the home-buyers as consumers to approach the consumer redressal forum to secure their rights. Furthermore, access to material information and online networking gave a real-time hand-on knowledge of the rights available to the home-buyers and also encouraged them by adding a sense of vigor in consumer activism. 

The failure of offering possession of flats within the stipulated time as per various the agreements between the home-buyers and developers and also delay in projects gave rise to consumer activism. In order to receive relief from the projects that were constantly delayed, various projects their distressed homebuyers approached the consumer redressal forum for such delayed projects.

INTRODUCTION OF HOME-BUYERS UNDER THE INSOLVENCY AND BANKRUPTCY REGIME:

Since the introduction of the Insolvency and Bankruptcy Code, 2016, the code is been tested by various unexplored territories and therefore is getting stronger with every single encounter. In one such encounter, the code was introduced to the plight of home-buyers situation. There was a rising concern by the home-buyers who had invested their hard-earned life savings to buy a house, in most of the cases an individual purchase a house by acquiring a loan from a financial institution or a bank and if the loan amount is already disbursed, the banks take interest from the home-buyers by various payment schemes.

The following instances discuss the evolution of Insolvency and Bankruptcy Code,2016 with respect to the position of Home-buyers thereon:

HOME-BUYERS NOT OPERATIONAL CREDITORS NOR FINANCIAL CREDITORS:

The butterfly effect for the plight of Home-buyers was drawn closer to the newly introduced insolvency regime from the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd.[2], where the petitioner Col. Vinod Awasthy filed an application under section 9 of IBC, 2016 read with Rule 4 of IBC (Application and Adjudicating Authority)Rules, 2016 with a prayer to initiate CIRP against the respondent for the failure of handing over the possession of the house in the project named as “I-homes ”. However, the application was dismissed as the petitioner was not an operational creditor. In order to maintain an application in the tribunal as an operational creditor, the application must satisfy the requirements of section 5(20) and 5(21) of the code. An operational creditor is a person to whom an operational debt is owed by a person who renders service or supplies goods and hence, in this case, it was observed that the petitioner has neither rendered any service nor supplied any goods hence was not termed as an operational creditor and further under section 5(21) operational debt was confined in only four categories that are goods, services employment and government dues which does not include the debt owed by the respondent. And hence the appeal was dismissed by the hon’ble tribunal.

In Col. Vinod Awasthy Case, it was observed that a Home-buyer is not an Operational creditor moreover in the case of Pawan Kumar Dubey v. J.B.K Developers Private Limited[3], a question was raised whether the home-buyer is an operational creditor or a financial creditor it was well-defined that a homebuyer is nor an Operational Creditor nor a Financial Creditor. In this case, it was observed that the petitioner on account of delay in raising the construction of the said project namely “greens avenue project” sent various emails to the developer and visited the developer's office, wherein which it was agreed and decided by the applicant and developer that the allotment of the house will be canceled and the developer shall refund the amount with interest. In spite of the builder- buyer agreement the developer failed to refund the amount agreed and hence the petitioner had filed an application in the tribunal for not paying back the amount by the developer under Section 9 of the code. The application was dismissed by NCLAT on the grounds that the petitioner was a mere allottee and do not come under the meaning of operational creditor the learned adjudicating authority also observed that there was a variation in claim amount and allotment letter.

A DIFFERENT AGREEMENT/ MEMORANDUM OF UNDERSTANDING BETWEEN THE HOME-BUYER AND DEVELOPER:

In Nikhil Mehta and Sons (HUF) v. AMR Infrastructures Ltd.[4], the petitioner and the respondent had reached with a different agreement/memorandum of agreement for the purchase of 3 units being a residential flat, a shop, and office space in the projects namely “Kessel-1”, “One-Mall”, “One Home” respectively. The petitioner and the respondent had come up with a different agreement/ MoU where in which the petitioner will get systematic returns against the payment of a substantial portion of total sale amount considered under the 'Committed Return Plan'. The respondent initially honored the agreement however he failed to honor the agreement within a few months. The petitioner gave various reminders to the respondent, in spite of the repeated reminders the respondent failed to pay the committed returns, the petitioner filed an application under section 7 of the code read with Rule 4 and Rule 9(1) of the insolvency and Bankruptcy Rules 2016 as a Financial Creditor it was observed adjudicating authority of the NCLT, New Delhi Bench that “it is a pure and simple agreement of sale and purchase of a piece of property and has not acquired the status of financial debt as the transaction does not have consideration for the time value of money”.  However, NCLAT had a different opinion in the matter and considering the annual returns of the respondent it was noted that the amount paid by the petitioners was treated as “Investment” as well the amount was burrowed for a commercial purpose and hence the debt was treated as “Financial debt”. 

The major difference between the normal a home-buyers and this case was that:

1.    The agreement was different from other purchase agreements.

2.    It was more of a contract of investment, as the transaction involved the return of money.

3.    This case had a distinction from the regular home-buyers cause, this case had assured returns.

THE CHITRA SHARMA CASE: MOTHER OF HOME-BUYERS PLIGHT:

The real estate sector in India witnessed a golden year during the previous. In 2007, the real estate giant Jaypee Infratech Limited had planned to develop a township project of 32000 homes in Noida and Mirzapur. And based on the successful completion of famous projects, Jaypee Infratech promised the home-buyers that the flats will be delivered in 2011-2012. But it failed to deliver a major portion of flats for more than four years. Jaypee Infratech got a big blow in the first quarter of 2017 that, RBI has come up with 12 big loan defaulter list (which had Jaypee Infratech in its list with a default of approximately Rs. 8000 crores to its lenders) and RBI advised banks to initiate bankruptcy proceedings against such defaulters with immediate effect.

In August 2017, IDBI Bank Limited filled a petition against Jaypee Infratech Limited under Section 7 of the code in NCLT, Allahabad Bench for default of Rs. 526 Crore, the Hon’ble Adjudicating authority admitted the application.

The Hon’ble NCLT Bench admitted the application and an order of moratorium “period of calm” under the provisions Section 14 of the code was declared on 9 August 2017, which resulted in the prohibition of the institution of suits against the corporate debtor.

The Chitra Sharma Case[5]: The initiation of CIRP against Jaypee Infratech would leave the home-buyers with an uncertain future, hence in the wake of the protection of the situation of home-buyers, a writ petition was initiated under Article 32 of the Indian Constitution. This case was filed for the redressal of home-buyers having a claim of Rs. 15,000 Crores, which was phenomenally more than the banks, despite the amount being more than the banks were in a favorable position.

The primary contention of the writ petition was as follows:

1.  The majority of stakeholders of the Jaypee Infratech were the Home-buyers, and the initiation of CIRP against Jaypee Infratech ignores the vital Stakeholders. To initiate Insolvency proceedings under the Insolvency and Bankruptcy code a petitioner should fall under the category of either of the Three: a. Corporate debtor. b. Financial Creditor or c. Operational Creditor. There was no room for any other category.
2. As the Code could not provide any protection the home-buyers contended that the rights conferred upon them through the Consumer Protection Act,1986 and RERA,2016 could not be divested (used) considering the fact that when CIRP against the corporate debtor is initiated, Moratorium “Period of Calm” Under section 14 of the code is declared which results into the prohibition of an institution of suits against the corporate debtor. 
3. According to Section 238 of the code, the code has an overriding effect over all the other laws, furthermore, it was held by the Apex Court in case of Innovative Industries v. ICICI Bank, that when there is a conflict of laws between the code and other laws, the non-obstante clause contained under section 238 shall prevail. Thus, leaving the Home-buyers remediless.

In order tackle the situation of Home-buyers, while exercising the powers conferred to the Code under section 240, On 16th August 2017, IBBI amended the Regulations to insert Regulation 9a which included other creditors, and on 18th August 2017, IBBI released a press note stating that home-buyers can fill Form- F as other creditors because the home-buyers could not be treated at par with financial creditors nor operational creditors.

After the appointment of Interim-Resolution-Professional, submission for claims by creditors were called by way of following forms:

1. Form C: Financial Creditors.
2. Form B: Operational Creditors.
3. Form E: Workmen and Employees.
4. Form F: Other Creditors. (This form included the Home-buyers).

Based on claims received the IRP submitted the report of the on the formation of a committee of creditors before the Adjudicating Authority in the following basis:

37.3% in the case of Financial Institutions, 62.3% home-buyers, and 0.4% Fixed Deposit holders. (Source: JAL v. IDBI Bank Ltd. [6])

Upon considering the plight of the Home-buyers, on 04 September 2017, the CIRP proceedings against Jaypee Infratech were stayed by the Apex Court. Further, the copy of the proceedings was directed to the Office of Attorney General of India. The Learned Attorney General submitted that the order of stay would result in an unintentional situation such that the control of Jaypee Infratech would be restored to the management prior to CIRP. Such an unintentional situation would affect the rights of creditors and consumers.

Based on the submission of the Attorney General of India on 11 September 2017, the apex court modified the order which included that the management of the corporate debtor to be handed over to Interim Resolution Professional, and he shall make necessary provisions for the interest of the Home-buyers.

The concerns of the Home-buyers were resolved by the Second Amendment which came into force from (w.r.e.f) 06th June 2018, which brought the Home-buyers in the purview of financial creditors. As an immediate consequence of the amendment, the application filed under section 7 of the code by the Allottees of the residential real estate projects will be considered “having a commercial effect of burrowing”. 

THE AMRAPALI FIASCO[7]:

It was one of the finest verdicts taken by the hon’ble divisional bench of the supreme court, as the Executive failed miserably the Judiciary stepped in to fill in the responsibility of the Executive. 

The Amrapali group was one of the most prominent builders having numerous projects. The Amrapali group proposed to construct approximately 42,000 houses with a promise of world-class amenities. It was promised that the delivery of the house will be done in 36 months. Considering the promises made by the Amrapali group various home-buyer invested their life savings and some invested by obtaining loans from banks during the period of 2010-2014. However, the builder failed to deliver the houses in the stipulated time, and also the home-buyers who availed loans were paying EMI.

Owing to the issues faced few home-buyers approached National Consumer forum, by filing Consumer Complaint No.213 of 2017 under Consumer Protection Act, however, their hopes to get relief from the Consumer Forum turned into a nightmare when Bank of Baroda initiated a petition under section 7 of the Insolvency and Bankruptcy Code,2016 which triggered the initiation of Corporate-Insolvency-Resolution-Process (CIRP). Considering the provisions of Insolvency code as soon as an application is excepted by the NCLT, an order of moratorium “period of calm” under Section 14 of the code was declared the moratorium, which resulted in the prohibition of an institution of suits against the corporate debtor. 

Thus to secure the rights of the Home-buyers a petition was filled in the Supreme court under Article 32.

The supreme court upon hearing the plight of the home-buyers decided to take cognizance and had ordered a forensic report against all the entities under the umbrella of Amrapali group, however, the petition was challenged by the Amrapali group, the banks who financed Amrapali group, the authorities of Noida and Greater Noida.

Image source: Times of India. The image shows the amount of money was diverted by the Amrapali group.

The Home-buyers contended that :

1. The dues of the home-buyers should be treated at priority.
2. The authorities generous towards the builder and do anything against the builder.
3. The principle of public trust doctrine was attracted against the authorities as it was the duty of the authority to act fairly.
4. The banks were also negligent while disbursing the loan without due diligence of the development of projects, banks, and Amrapali group signed a mortgage deed with a condition that the amount will be released only after the rent and amount owed to authorities is timely paid, however without due diligence the banks released the payments.
5. As the land was leased from the authorities for the development of projects, the developer was responsible to pay premium and lease rent, in spite of the liability of paying rent the developer did not pay the rent.
6. RERA Registration made by the umbrella of Amrapali’s entities should be revoked.

The authorities Contended that :

1. As the lease deed is executed between the authorities and the Amrapali group, the authorities had the first charge over all the parties(Banks, home-buyers)
2. That public trust doctrine is not attracted as all the duties of the authorities were followed according to the provisions of law. (the decision to transfer lease after receipt of 10 percent premium was duly followed).
3. The authorities had been sending notices to the Amrapali group for payment of the remaining dues, the authorities did not take any extreme steps, as any further steps for not paying the dues would be demolishing the construction. 

The Banks Contended that:

1. All due diligence was followed while releasing the amount.
2. The deed performed and executed between the banks and the developer is not violating any terms and conditions, and all the terms have been followed according to the provisions.
3. The home-buyers doe not fall under the purview of secured creditors, and merely by signing an agreement between the builder a buyer does not create any right against the builder.

The Hon’ble divisional Bench of Supreme Court remarked :

1. The authorities failed to perform their duty in an unjust manner, and it was the duty of the authorities to execute the lease deed according to the terms and conditions and thus the authorities are attracted towards public trust doctrine, and considering the circumstance, the authorities are liable to answer the questions raised by home-buyers.
2. The land was acquired by the farmers by the authorities of the state government, it was the responsibility of the authorities to ensure that the builder act in accordance with the purpose of the land acquisition i.e the development of the project.
3. The authorities were negligent in their work for taking proper steps in the matter of the Amrapali group in spite of repeated violations by the Amrapali Group. The authorities not only failed to adhere and follow the terms of the lease but also permitted the Amrapali group to Sub-Lease the projects, in doing so the Amrapali group earned a huge amount.
4. The authorities had in collusion with banks which permitted the diversion of funds of home-buyers.
5. The Conditional NOC issued by the Authorities to the builder was that full premium and rent was supposed to be paid, however, no payment was done by the Amrapali group and hence no mortgage was created in favor of banks over the said projects.
6. Not only authorities but the banks were also negligent.
7. That considering the said circumstances the principle of “Fraud vitiates everything” is attracted and it is the responsibility of the court to save the Home-buyers from being cheated.
8. Amrapali group depended upon the principle of Force Majeure and the court is in the opinion that the principle of Force Majeure is not attracted in this situation and hence the provisions of RERA are violated by the Amrapali group.”

The Hon’ble divisional Bench of Supreme Court ordered that :

1. RERA registration of the Amrapali group was revoked.
2. Various Lease grants to the Amrapali group are revoked and the court receiver Shri R. Venkataramani shall be bestowed all the rights owned by the group.
3. The authorities and banks have no right to sell the homes of home-buyers or the land leased.
4. The right of the lessee shall vest upon the court receiver.
5. The NBCC is appointed to complete the projects and hand over the possession to the Home-buyers, the percentage of commission to NBCC will be 8 Percent.
6.  According to the forensic audits, a fraud was unearthed and various provisions of Indians laws were violated, ED and other authorities were directed to do the necessary investigation and submit the report.
7. Disciplinary action was directed against CA Anil Mittal for professional unlawful conduct.
8. All companies/ directors who acquired money by unlawful gains were directed to deposit money of Home-buyers.”

THE REPORT OF INSOLVENCY LAW COMMITTEE (MARCH 2018):

The insolvency law committee was set up on 16th November 2017 to make a report and make recommendations to the government against the crucial issues which required immediate attention, arising from the implementation of the Code. Considering the factors of ease of doing business in India, the report was made as a sincere attempt to boost sustainable growth in India.

The few key points of the report with respect to Home-buyers are as follows: 

1. The committee’s attention was drawn on the crucial issue of the Home-buyers, the plight of the home-buyers was such that multiple judgments categorized home-buyers neither Financial Creditor nor Operational Creditor, except for the judgments where the terms and conditions of the agreement were different.
2.  Furthermore, when IBBI issued a notification in August 2017 which also indicated that home-buyers neither Financial Creditors nor Operational Creditors.
3.  The non-inclusion of homebuyers as Financial Creditors nor Operational Creditors deprives:

• The right of home-buyers to initiate CIRP was observed in the Chitra Sharma Case.
• The right to be on the list of Committee of Creditors.
• The guarantee of receiving a share from the liquidation value.

1. To understand the plight of the home-buyers it was necessary for the committee to understand the real estate sector. The delay in under-construction projects was a common phenomenon. The committee also observed that the amount raised by the developers through the home-buyers is a significant amount for the construction of a project.
2.  Considering the unique nature of financing in real estate projects, the home-buyers should be treated as Financial creditors.
3. The committee concluded with a recommendation of including Home-buyers as Financial Creditors and inserting an explanation to section 5(8)(f) of the code. Accordingly, the Home-buyers will be a part of the Committee of Creditors and they will fall in the relevant category of the waterfall Mechanism that is the home-buyers will come under the category of clause (d) in the waterfall mechanism under section 53 of the code. 

It is essential to put up a point as a note that, 3 Members of the Committee, namely Shri Shardul Shroff, Shri S Sen, Shri B. Sriram dissented with the rest of the committee members against the proposed recommendations.

THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT) BILL, 2018:

Image Source PRS India

The bill No. 127 of 2018 was introduced on 23rd July 2018 by the then Minister of Finance and Corporate Affairs, Mr. Piyush Goyal was passed to amend the Insolvency and Bankruptcy Code, 2016 had a retrospective effect which came into effect from 06th June 2018.

The amendment was passed after considering the “Report of the insolvency law committee” headed by Shri. Inject Srinivas, which recommended that Home-buyers be treated as financial creditors in the wake of the unique nature of financing in real estate projects.

THE PIONEER DEBACLE[8]:

Pursuant to the recommendation made in the law committee report with respect to the status of Home-buyers as “Financial Creditors”, Amendments were made to the Insolvency and Bankruptcy Code, 2016, deemed Home-buyers with respect to residential projects as “Financial creditors”, such that they may initiate application against the developers under Section 7 of the code. As the home-buyers were termed “Financial Creditors” they were inevitably entitled to be represented in the Committee of creditors, through an authorized representative.

The amendment was a boon to the Home-buyers, however, it turned out to be a bane to the developers resulting in which a large Number of Writ Petitions (approximately 200 writ petitions) were filled in the apex court challenging the constitutional validity of the amendments made to the Code.

The real estate developers were represented by Dr. Abhishek Manu Sanghvi, according to Dr. Sanghvi the amendments made were based on few “BAD EGGS”, which jeopardized the entire developer’s situation.

Following points were discussed and decided in the case:

1. Rights of the legislature to experiment in economic matters: The legislature must be given free hand in deciding the economic matters. Apart from constitutional validity arising out of such cases, the legislative decision in economic matters must be accepted with respect.
2. Raison deter (most important reason) for the insolvency code amendment 2018: Considering the plight of homebuyers, insolvency law committee was formed, this committee observed key issue wherein which the delay of possession of the house was a common issue, and the amounts raised from homebuyers were contributed significantly in the construction.

• Hence it was important to clarify that the home-buyers were treated as Financial Creditors.

1. Whether the explanation added to section 5(8)(f) with respect to the allottee is explanatory in itself or has a wider scope?

• The explanation clears the fact that the home-buyers are to be regarded as Financial Creditors.
• It was noted that the home-buyers were included from the inception of the code under section 5(8)(f), it was a mere explanation that was added in 2018.

1. RERA v. IBC:

• The provisions of RERA (Under Section 88) are in addition to and not in derogation of any other existing laws.
• It was explained that when there is a conflict between RERA and IBC, the latter will prevail.RERA and IBC operate in a totally different sphere, the IBC focuses on rehabilitation of the corporate debtor in a sense the process of revival of the Company at default and RERA protects the interests of the home-buyers.

1. Remedies for Home-buyers:

• The remedies under RERA will be additional and not exclusive.
• The remedies under RERA, Consumer Protection and IBC will be concurrent.

1. The constitutionality of Home-buyers as Financial Creditors:

• The writ petitions were filled in the apex court against the amendment for the violation of Article 14, 19(1)(g) read with Article 19(6) or 300-A. However, the Three-Judge bench found that it was not infringing any of the provisions of the Constitution.

1.  It is to be noted that when an application is initiated against the real estate developers, it is also the duty of the developer to point out that :

• The home-buyer himself is in default, and the application is frivolous.
• The CIRP has initiated with fraudulent intents.
• The house is ready to be delivered to the home-buyer, but the home-buyer does not want to go ahead with the possession of the flat. 

As Conclusion, it was observed that: The amendment to the code does not infringe Article 14, Article 19(1)(g) read with Article 19(6) of the Constitution of India. It was observed by the Hon’ble supreme court that the provisions of RERA should be read harmoniously with the provisions of the Insolvency Code. Only in the event of a conflict between the statutes, the insolvency code will prevail. It was further observed that the remedies given to the home-buyers are hence concurrent remedies. Such home-buyers are in the position to avail remedies under RERA, Consumer protection as well as Insolvency Code. Section 5(8)(f) was always there in the code, it was just the explanation which was added for the purpose of clarity. 

THE INSOLVENCY LAW COMMITTEE REPORT ON INSOLVENCY AND BANKRUPTCY BILL 2019:

The Insolvency and Bankruptcy Code, 2016 is new legislation that is still developing. For the smooth functioning of the code, necessary steps have to be considered and taken which includes amendments to the code to attain the main objective of the goal.

The Insolvency and Bankruptcy Code, Second Amendment Bill 2019 introduced in the Lok Sabha on 12th December 2019. The bill was then referred to the standing committee on Finance on 23rd December 2019. The committee was headed by Shri Jayant Sinha as the chairperson.

It is essential to put up a point as a note that, 3 Members of the Committee, namely Shri T K Rangarajan, Shri Manish Tewari, Shri Rajeev Chandrashekhar dissented with the rest of the committee members against the proposed recommendations.

The most important point of the report with respect to Home-buyers was as follows:

• The bill proposed to amend Section 7 of the code to insert a provision which states that a minimum threshold of 10 percent or 100 Home-buyers of the total number of Homebuyers should meet to initiate the proceedings.

The committee considered all the points and views raised during the meeting and adopted this report on 03rd march 2020 and the report was submitted to the Lok Sabha on 06th March 2020.

THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT) BILL,2019:

Image Source PRS India

Considering the committee report the bill was passed in Lok Sabha on 06th March 2020 and in Rajya Sabha on 12th March 2020. Looking at the above situation it appears that the Amendment will give a Knockout Punch to the deprived Home-buyers and a huge loss to the Home-buyers situation.

At present, the Bill has received the Presidential Assent on 13th March 2020 and any fresh filling by any distressed Home-buyer will have to comply with the Insolvency and Bankruptcy Code (Second Amendment) Bill,2019.

Among other major amendments to amend Section 7 of the code to insert a provision which states that a minimum threshold of 10 percent or 100 Home-buyers of the total number of Homebuyers should meet to initiate the proceedings was passed.

However, the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Bill 2019 has been challenged before the Hon’ble Supreme Court vide Writ Petition W.P(C) No. 26 of 2020 [09]. The petition was filed by the Home-buyers in the Apex court as more than 1000 single home-buyers cases are pending in NCLT.

Considering the gravity of the situation the Supreme Court has Passed the Following order, vide Order Dated 13th January 2020.

"Issue notice. Status quo, as of today, with respect to the pending applications, shall be maintained in the meanwhile."

hence a partial relief was given to the Home-buyers by the Apex Court by issuing a notice to the government and stayed the amendment that inserted the provision of a minimum threshold.

CIRP SHOULD BE LIMITED TO THAT PARTICULAR PROJECT ONLY:

In the matter of Umang Realtech Pvt. Ltd.[10], if a CIRP is initiated against a particular project by the Home-buyers of that particular project, it should be confined to that project only and should not affect any other projects of the same real estate company. In each project, separate plans are approved by varied authorities and the parties to the other project are as well different. Hence all assets of the company should not be exhausted for equating the credits of home-buyers of one particular project in default and therefore the CIRP should be as per-project basis and any other Home-buyers, financial creditors or operational creditors should not file a claim in that particular Project.

So the Hon’ble NCLAT held that CIRP against a real estate company should be limited to that particular project only.

For Example,

If a particular developer has 2 ongoing Projects in Mumbai and Gurgaon, and a situation arises where the Project ABC of Gurgaon is facing issues with respect to the possession of Houses. In this situation, the Home-buyers of Project ABC will initiate CIRP proceedings only against their respective projects and no other project. (For Descriptive purpose only.)

CONCLUSION

Pending Cases :

Source PRS India

By the current scenario, post the IBC Second Amendment, 2019 it appears that the situation of Home-buyers has become more like Toothless Tiger. In the absence of a list of Home-buyers for any project in the form of public data, the threshold of 10 percent is quite difficult to achieve. As the bill will have a retrospective affect all the applications may become infructuous, though the decision is stayed by the Hon’ble Supreme Court the situation of the Home-buyers still persists. What a home-buyer actually wishes is to have a place called “HOME” for which he is struggling door to door with the burden of EMI to the bank for a home which he is yet to receive or is yet to be built.

Furthermore, in the wake of Covid-19, the ministry has suspended the provisions of Insolvency and Bankruptcy Code, 2016, which has not reduced but increased the problems of a Home-buyer.

Where do the Home-buyers fall in the waterfall mechanism?

The provisions of the Code give two routes to the creditors at the time of Corporate-Insolvency-Resolution-Process either to accept a resolution for the company to revive the company or liquidate the company(corporate person). However, if Corporate-Insolvency-Resolution-Process to take any steps within the prescribed time limit of 330 (120+60+90 maximum) days the company goes to liquidation.

Considering the waterfall Mechanism at the event of liquidation the amount received by the liquidation of the company will be disbursed according to the order of precedence as per the provisions of Section-53 of the Insolvency and Bankruptcy Code,2016 :

1.  The costs of IRP & Liquidation.
2. Workmen(Dues of the last 2years ) / secured creditors(Banks/NBFC.
3. Employees(Dues of the Last 1 Year).
4. Financial debts owed to unsecured creditors.
5. Government dues / secured creditors under SARFAESI.
6. Remaining debts and dues.
7. Preference shareholder.
8. Equity shareholder.

The IBC 2018 Amendment with respect to the status of home-buyers as creditors did not clarify that the Home-buyers are Secured or Unsecured creditors. So considering the above-said circumstances if at all a project goes into liquidation, the Home-buyer may not get the amount they have invested in the project.

Considering the November 2015 BLRC[11] report chaired by T.K. Vishwanathan, it was released in its report stating that the members of the committee of creditors have to be creditors both with the capability to access viability, as well as be willing to modify terms of existing liabilities in negotiations, with this reasoning, operational creditors have been left out of the committee of creditors since they were thought to be neither able to decide on matters regarding the insolvency of the entity nor willing to take risk of postponing payments for better future prospects of the company.

Hence including the Home-buyers in the committee of creditors, whose motive is to either acquire a home as promised or to get the money they lack viability and willingness to modify the terms of existing liability in negotiation which the banks or financial institutions possess, this will have a bad effect during the voting of the committee of creditors in case of restructuring of the Corporate Debtor.

References:

1.    Available at https://www.ibef.org/economy.aspx (last visited 25/03/2020).

2.    Col. Vinod Awasthy v. AMR Infrastructures Ltd.( Decision date 20.02.2017 – NCLAT)

3.    Pawan Kumar Dubey v. J.B.K Developers Private Limited(Decision date 03.08.2017-NCLAT)

4.    Nikhil Mehta and Sons (HUF) v. AMR Infrastructures Ltd.( Decision date 28.09.2018-NCLAT)

5.    Chitra Sharma And Ors v. Union of India, writ petition (civil) no 744 of 2017( Decision date 09/08/2018-SC)

6.    JAL v. IDBI Bank Ltd.(06.11.2019 -SC)

7.    Bikram Chatterji & Ors v. Union of India, (Supreme Court )W.P. (C) No.940/2017, (Decision date 23/07/2019)    

8.    Pioneer Urban Land and Infrastructure v. Union of India, (Supreme Court) W.P. (C)No. 43 of 2019 (Decision date 09/08/2019).

9.    Manish Kumar v. Union of India & Anr. (Supreme Court )W.P. (C) No. 26 of 2020 (Decision date 13.01.2020)

10. Flat Buyers Association Winter Hills 77 v. Umang Realtech Ltd. through IRP, (Decision date 04.02.2020-NCLAT)

11.The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, (2015), IBBI; https://ibbi.gov.in/BLRCReportVol1_04112015.pdf