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Insolvency rules amendment on stakeholder protection ‘cosmetic’, say homebuyers

The Insolvency and Bankruptcy Board of India (IBBI) has amended rules to mandate that any resolution plan for a company has to explicitly state how it has dealt with the interests of all stakeholders

Vandana Ramnani @vandanaramnani1

The Insolvency and Bankruptcy Board of India (IBBI) has amended rules to mandate that any resolution plan for a company has to explicitly state how it has dealt with the interests of all stakeholders. Insolvency experts have said that in case of real estate disputes, this will protect the rights of homebuyers who have invested their hard earned money in housing projects. However, homebuyers are unhappy and have termed it a “cosmetic” modification and say that this does not provide them “meaningful protection.”

The ministry of housing and urban affairs is also not satisfied with the amendments and has taken up the issue with the financial and corporate affairs ministries and has said that the rules should provide for more specific protection/cover to homebuyers who have invested their life savings in buying apartments from developers.

The IBBI and the Government have been non-committal on providing a clear provision in law that protects the interest of the home buyers in an insolvency situation. They amended the Insolvency Regulations in August this year introducing Form F, which clearly did not help them. Form F puts home buyers in the category of residuary creditors who do not have precedence over secured financial creditors (banks/financial institutions) in case of liquidation of the real estate company, allege homebuyers.

This amendment on October 5 has two issues. “Firstly, the requirement is to account for all stakeholders and not homebuyers in specific. Secondly, and most importantly, it only requires that the resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors. So a resolution plan would still be a valid and enforceable plan resolution even if it proposes for example that, given the context, the home buyers would have to take a haircut of 50 percent,” says Abhishek Dubey, a flat buyer and a lawyer based in Delhi.

This is different from what Supreme Court stated in the Jaypee Infratech case, where it directed that the resolution plan shall make all necessary provisions to protect the interest of the home buyers. “Given the mess that the country’s real estate companies are in, home buyers do not have the kind of protection that is necessary. Especially so, when the financers of these real estate projects are home buyers but are still classified as unsecured creditors,” he says.

The amendment is clearly not good enough, says Ramakant Rai is Counsel, Trilegal and is part of the corporate practice. He has represented Jaypee homebuyers.

“The statement does not help homebuyers much as it fails to provide any meaningful protection. The amendment to the rules should have created corresponding rights for stakeholders to necessarily include the modalities of construction, completion and handing over of the flats bought by buyers. It should have considered that the homebuyers have paid money in trust and therefore buyers as trustees have to be compensated first in the event of the company being declared bankrupt. This is an adhoc response to structural issues in the insolvency code,” he says.

“The Amendment to the Bankruptcy Rules expresses the intention of the government to protect the interest of homebuyers and is a step in the right direction. However, this alone is not going to help much as homebuyers need to be made part of the resolution process to ensure that the completion of pending real estate projects be the prime objective of any resolution plan. In case of liquidation, homebuyers claim with regard to their principal amount along with interest should be given top priority,” says Abhay Upadhyay, National Convenor, Fight For RERA.

Some insolvency experts are of the view that the recent amendment plugs a big gap in the IBC as while the plan sanctioned by NCLT is binding on stakeholders, including flat buyers there was nothing in the regulations that required the sponsor of the plan to provide a suitable treatment to them. “The amendment now makes it mandatory upon the sponsor to include in the plan how stakeholders would be treated without which a plan cannot be considered. This is a big leap forward. I can't imagine a plan being sanctioned that does not provide fair and equitable treatment to flat buyers,” they say.

Section 36 of IBC refers to assets held in trust for third party trustees. “The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:— (a) assets owned by a third party which are in possession of the corporate debtor, including— (i) assets held in trust for any third party; (ii) bailment contracts…”

If buyers are elevated to the position of financial creditors or secured creditors at par with banks, their assets are not fully protected but if the funds and properties held by the insolvent real estate company in trust for the third party consumers (flat buyers) should get the protection under section 36. In that case, these funds and properties cannot be taken away by the creditors (like banks) of the real estate company, say legal experts.

The Jaypee Infratech case involving almost 40,000 homebuyers was a unique case because other companies that were taken up under the Insolvency and Bankruptcy Code were business-to-business firms such as steel and power companies but Jaypee Infratech involved thousands of home buyers.
First Published on Oct 13, 2017 03:15 pm
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