India: Realty Sector Reality Check Tempers Home Buyer News

Last Updated: 31 July 2018
Practice Guide by Sachin Gupta

With the coming into force of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, home buyers have finally been recognized as financial creditors, at par with others in the same category. However, a reality check shows that a wider perspective is needed.

After a lot of deliberation and confusion home buyers were neither classified as financial creditors nor operational creditors in the Insolvency and Bankruptcy Code, 2016 (IBC), as originally enacted. This was a cause of worry since it deprived them of: (1) the right to initiate the corporate insolvency resolution process (CIRP); (2) the right to be on the committee of creditors (CoC) and (3) the guarantee of receiving at least the liquidation value under the resolution plan.

Home buyers give large advances for their purchase and a delay in possession may thus have a huge prejudicial impact on them. The term "time value" has been interpreted to mean "compensation or the price paid for the length of time" for which money has been paid. Thus, the Insolvency Law Committee (ILC) deemed it prudent to clarify that money raised under a real estate project from a home buyer falls within the provisions of section 5(7) as a financial creditor. The Committee thus concluded that the current definition of 'financial debt' is sufficient to include the amounts raised from home buyers/allottee under a real estate project, and hence, they are to be treated as financial creditors under the Code. Consequently, in a CIRP, they would be part of the CoC and be represented in the manner specified in the ILC's report, and in the event of liquidation, they would fall within the relevant hierarchy of creditors in terms of section 53 of IBC.

The fate of home buyers ultimately depends on the outcome of the whole insolvency process. Once the CIRP is invoked, there could be resolution of the company and home buyers may get their homes or a refund of part of their investment as may be decided by the CoC, where they have due representation and voting rights. However, if no resolution plan can be finalized and approved, the developer may go into liquidation severely jeopardizing the interests of the home buyers who may get nothing as they would be ranked as unsecured creditors and would be lower in the waterfall established under section 53 of IBC.

An issue that remains is the interplay and conflict in the application of the Real Estate (Regulation and Development) Act, 2016 (RERA), and the IBC with respect to the applicability of the two enactments as far as rights of home buyers are concerned. RERA, which is aimed at maintaining transparency between buyers and developers at all levels, is believed to take a back seat to the IBC in situations relating to resolving a bankruptcy or distributing the sale proceeds of the assets of a company that could undergo liquidation.

RERA deals with sectoral laws, security and insurance to impart transparency and responsibility in the real estate sector while the IBC provides a framework for insolvency and subsequent liquidation of entities across sectors. Under section 238 of IBC the provisions of the IBC shall prevail in case of any overlaps or grey areas with any other statutory provisions. Likewise, section 89 of RERA provides that in case of inconsistencies between any other law and RERA, the provisions of RERA would prevail.

One must not forget that RERA and the IBC each have their own philosophy and set, defined objectives. Any issue relating to the determination of some rights of the buyer could be dealt with under RERA, while recovery proceedings could be treated under the provisions of the IBC. Depending on the objective and purpose to be met, the relevant law would be applicable in a particular situation.

Having said that, there remains a plethora of unanswered questions as to which set of laws, rules and jurisdiction arenas would have more applicability and relevance in terms of dealing with insolvency proceedings in the real estate sector.

As they say, the law of the land must prevail and assure justice. These are times when the Supreme Court, various authorities and legislative think-tanks will need to step forth and deal with the aftermath of such critical amendments and their possible impact. It is indeed impossible to ignore the plight of the home buyers, but at the same time assuring justice and protecting the interests of secured creditors and other stakeholders in case of the bankruptcy and insolvency of a corporate debtor is equally important. It remains to be seen whether the recent legislative developments will succeed in keeping the delicate balance between the said objectives.

Dhir & Dhir Associates is a leading full-service law firm in India. Sachin Gupta is a partner at the firm.

This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

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