Homebuyers and the IBC

Introduction

The Insolvency and Bankruptcy Code (IBC), 2016 was enacted to codify several statutes related to processes that involve the recovery of bad loans. The Code was enacted with the second objective of ensuring that the insolvency proceedings are completed speedily. For the realization of the same, the Code seeks to give the upper limit for a proceeding to be 330 days as per Section 12 of the IBC, which is inclusive of the extensions that are sought by either party to the proceeding. Considering the unpredictability of real estate projects and their unforeseen debts, the Supreme Court in a recent judgment recognized the rights of homebuyers to initiate insolvency proceedings against the real estate groups, which led to an amendment to the IBC to reflect the same.

This paper explores the position of the homebuyers under the IBC to claim for recovery of the installments paid to the real estate groups.

Why must Homebuyers be included under the IBC?

With the population growing in India, the real estate industry has been one of the major backbones to sustain the accommodation of the population. This is mainly because of the lack of space in cities that calls for new real estate projects including sky-scraping apartments. There are several legal compliances that a builder or real estate group must undertake to obtain the occupancy certificate for a project that allows the building to be certified as complete and safe for occupation . However, several real estate projects either take several years to hand possession or are declared bankrupt during the pendency of the project which leaves the homebuyers with almost no recourse to retrieve their money. A few reasons why real estate projects go into debt are because the real estate owners generally rely heavily on debt financing which makes the insolvency of the real estate project depend on the market fluctuations and interest rate fluctuations . Other outside factors such as ongoing litigations, and renewal of

Developments that led to the inclusion of homebuyers under the IBC.

The Supreme Court in the case of Chitra Sharma v. Union of India and Bikram Chatterji v. Union of India , homebuyers were given recognition as creditors who must be given a voice by the Committee of Creditors (CoC) while considering the debt recovery from the real estate developers. The decision of Chitra Sharma came in before the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 promulgated by the Government showing that the Indian judiciary was willing and open to include homebuyers in the list of creditors who may claim for recovery of dues from the insolvency proceedings. Post the amendment came the official inclusion of homebuyers under Section 5 of the IBC. Explanation (ii) to Section 5 of the IBC included the terms “allottee” and “real estate project” to the definition of a financial creditor and financial debt respectively. Thus, homebuyers can now go under the IBC to recover their dues against the real estate developers.

How this amendment helped the homebuyer.

The amendment mainly allowed homebuyers to seek compensation for the delays that were set out by real estate developers. Further, this meant that the homebuyers had another route to claim compensation, although in the form of dues under the IBC, apart from the Consumer Protection Act,1986 (“COPRA”), the Real Estate (Regulation and Development) Act, 2016 (“RERA”) , which also provide homebuyers for relief as per the provisions of the said statutes in the form of recovery for cancellation of agreement, or refund of money under the COPRA. However, the RERA allows the homebuyers to file a suit for claiming the money from the real estate developers and avail a RERA decree in that favor if their case is made out. The confusion under the same lies in whether such decree-holders can still be recognized as financial creditors under the IBC as well. In the case of Natwar Agrawal (HUF) v. Ms Sakash Developers & Builders Pvt. Ltd., laid down that an allottee who is a decree-holder under the RERA will continue to be considered a financial creditor under the IBC

Conclusion

As laid out above, the benefits of inclusion of homebuyers within the ambit of financial creditors serve as a better position and outweigh the cons of such inclusion. Thus, giving them equal powers with other financial creditors.

Homebuyers and the IBC

Introduction

Why must Homebuyers be included under the IBC?

Developments that led to the inclusion of homebuyers under the IBC.

How this amendment helped the homebuyer.

Conclusion

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