To provide relief to home buyers stuck in incomplete real estate projects against which insolvency proceedings are currently on, the government on Wednesday approved an ordinance to bring about changes to the Insolvency and Bankruptcy code in which homebuyers may now been given the status of financial creditors, sources said.
This means that homebuyers will now be treated at par with banks and institutional creditors and will be given priority while recovering dues from bankrupt or insolvent real estate companies.
Special provisions for medium and small enterprises have also been planned, sources added.
These changes are based on the recommendations of a high-level law committee chaired by Injeti Srinivas, secretary in the ministry of corporate affairs. The committee had submitted its report ‘Report of the Insolvency Law Committee’ in the month of March.
The 14-member panel had recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Supreme Court in ongoing cases.
Home buyers should be treated as financial creditors which will allow them to equitably participate in an insolvency resolution process and be a part of the committee of creditors. Besides, the proposed resolution plan under the Insolvency and Bankruptcy Code (IBC) must comply with the provisions of the Real Estate (Regulation and Development) Act, 2016, the high-level panel had recommended to the government in its report.
"Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code," the panel had said in its report, adding the recommendation, once implemented, would provide relief for home buyers facing hardships due to incomplete real estate projects.
The report of The Insolvency Law Committee had concluded that the current definition of ‘financial debt’ is sufficient to include the amounts raised from home buyers/allottees under a real estate project, and hence, they are to be treated as financial creditors under the Code.
“The Committee’s attention was drawn to the significant confusion regarding the status of buyers of under-construction apartments (home buyers) as creditors under the Code. Multiple judgements have categorised them as neither fitting within the definition of ‘financial’ nor ‘operational’ creditors," the committee noted in its report.
"In one particular case, they have been classified as ‘financial creditors’ due to the assured return scheme in the contract, in which there was an arrangement wherein it was agreed that the seller of the apartments would pay ‘assured returns’ to the home buyers till possession of property was given. It was held that such a transaction was in the nature of a loan and constituted a ‘financial debt’ within the Code," the report said.
"A similar judgement was given in Anil Mahindroo & Anr v. Earth Organics Infrastructure. But it must be noted that these judgments were given considering the terms of the contracts between the home buyers and the seller and are fact specific. Further, the IBBI issued a claim form for 'creditors other than financial or operational creditors', which gave an indication that home buyers are neither financial nor operational creditors,” it had said.
The report had noted that non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors may be a cause for worry since it deprives them of, first, the right to initiate the corporate insolvency resolution process (CIRP), second, the right to be on the committee of creditors (CoC) and third, the guarantee of receiving at least the liquidation value under the resolution plan.
“Recent cases like Chitra Sharma v. Union of India and Bikram Chatterji v. Union of India have evidenced the stance of the Hon’ble Supreme Court in safeguarding the rights of home buyers under the Code due to their current disadvantageous position,” the report had said.
The Committee also agreed that the amounts raised under home buyer contracts is a significant amount, which contributes to the financing of construction of an asset in the future, the report notes.
After reviewing various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders, the committee notes that the agreement is for disbursement of money by the home buyer for the delivery of a building to be constructed in the future. The disbursement of money is made in relation to a future asset, and the contracts usually span a period of four to five years or more, the report had noted.
The Committee, therefore, deliberated that the amounts so raised are used as a means of financing the real estate project and are thus in effect a tool for raising finance, and on the failure of the project, money is repaid based on time value of money, it noted.