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What does Supertech’s insolvency proceeding mean for its 25,000 homebuyers?

Homebuyers should file their claims with the insolvency professional right away to ensure that their claim is recognised. A timely resolution, however, cannot be guaranteed.

One of the biggest challenges that lenders face in an insolvency resolution process is a time-bound insolvency resolution of a corporate debtor

One of the biggest challenges that lenders face in an insolvency resolution process is a time-bound insolvency resolution of a corporate debtor

The rights of homebuyers become critical when insolvency proceedings are initiated against a real estate developer. The Insolvency and Bankruptcy Code, 2016 (IBC) recognises ‘homebuyers’ as financial creditors and enables them to have representation on the committee of creditors (CoC).

By virtue of being a part of the CoC, homebuyers are entitled to participate in the decision-making process of the resolution of the corporate debtor in question (including approval of a resolution plan).

The admission of insolvency application against Supertech Limited (Supertech), one of the biggest real estate developers in the NCR region, has triggered concern amongst over 25,000 homebuyers who were awaiting possession of their home booked with the developer.

What’s next for Homebuyers?

The homebuyers should file their claims with the interim insolvency resolution professional (IRP) at the earliest. This would enable the homebuyers to ensure that their claim is registered and recognised by IRP, which would entitle them to participate in the insolvency resolution process.

Whether homebuyers can initiate proceedings against Supertech before any other court or tribunal post admission of the insolvency application

Once an application for initiation of the corporate insolvency resolution process is admitted by the adjudicating authority against the corporate debtor, a moratorium is triggered under the IBC. The moratorium is a period that prohibits inter alia, the institution of suits or continuation of proceedings against the corporate debtor. In other words, during a moratorium period, no judicial proceedings can be initiated against the corporate debtor before any court of law, tribunal, arbitration panel, or other authority. The moratorium continues to operate till the completion of the corporate insolvency resolution process.

Given the moratorium imposed by the NCLT, the homebuyers would not be able to institute any suit or file any proceedings before the courts, consumer courts, RERA, or any other tribunal against Supertech. The moratorium would continue to operate till the completion of the resolution process.

Challenges faced during the insolvency resolution process of real estate developers

One of the biggest challenges that lenders face in an insolvency resolution process is a time-bound insolvency resolution of a corporate debtor.

While IBC prescribes that the corporate insolvency resolution process shall be completed within a period of 330 days from the insolvency commencement date, cases under IBC have been dragged for more than two years. In the case of Jaypee Infratech Limited which involves around 20,000 homebuyers, the application for initiation of corporate insolvency resolution process was admitted on August 9, 2017, and the resolution plan approved by the CoC of Jaypee Infratech Limited is pending approval before the adjudicating authority.

Further, considering the dismal track record in the insolvency resolution process of real estate developers, the other challenge that CoC faces is to attract interested resolution applicants and implementation of the approved resolution plan.

Uncertainty regarding the status of homebuyers in the waterfall mechanism of IBC

In the event a resolution plan is not approved or implemented, liquidation of a corporate debtor is a last resort under IBC.

During the liquidation process, the proceeds are distributed as per the waterfall mechanism provided under the IBC.

In the waterfall mechanism, the secured financial creditors are ranked above the unsecured financial creditors and operational creditors. Therefore, the further categorisation of homebuyers being ‘secured financial creditors’ or ‘unsecured financial creditors’ is pivotal. The IBC is silent on this aspect and therefore, this issue has been left for the adjudicating authority to determine. If the homebuyers are classified as ‘secured financial creditors’ they would be able to participate with the other secured creditors (i.e., banks and other financial institutions) in the liquidation waterfall.

Mayank Mehta is Partner and Shivek Sharma is an Associate at Pioneer Legal.

Disclaimer: This article is meant for informational purposes only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Pioneer Legal does not intend to advertise its services through this article.
Mayank Mehta is Partner at Pioneer Legal.
Shivek Sharma is an Associate at Pioneer Legal.
first published: Mar 25, 2022 08:52 pm