Policy | SC verdict cheers homebuyers, but is it too early to join the party?

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S Murlidharan

The Supreme Court on August 9 rejected the challenge mounted by builders to the 2018 amendments to the Insolvency and Bankruptcy Code (IBC) that made homebuyers deemed financial creditors.

The media has hailed this development in superlative terms as if homebuyers are going to rub shoulders with secured creditors in the IBC resolution sweepstakes, especially in the matter of distribution of spoils. The truth is, they are not going to in the face of the following two hurdles:

1. The NCLAT in the Essar Steel matter had made secured, unsecured and operational creditors pari passu participants in the NCLT resolution process under the IBC, in keeping with the principle that the resolution process was vastly different from liquidation and therefore, the liquidation principle of ‘waterfall mechanism’ under which secured creditors ranked first in the order of priority of payments cannot hold sway in NCLT resolution process.  This welcome verdict, however, was short-lived as Parliament through a fresh IBC Amendment Bill, 2019, reiterated the waterfall principle, thus pouring cold water on hopes of operational creditors and by extension to and with implication for homebuyers as well.
2. In its August verdict, the SC batting for homebuyers has also heeded the plea of builders -- sift genuine homebuyers from charlatans. So, the NCLT will have to first examine the genuineness of a homebuyer before he is allowed to be on par with financial creditors. The second touchstone on which the NCLT will examine his application would be ‘delay’. If builders can explain away the delay as springing from homebuyers’ own non-cooperation or non-adherence to schedule of payment, obviously they cannot make a grievance out of their own shortcomings. Builders for good measure can also cite municipal or governmental non-cooperation as reason for not being able to deliver on time. Thus, contrary to the screaming headlines, it is not a ‘shoo-in’ for homebuyers into committee of creditors’ meetings participation, which in any case is not going to improve their lot.

They might, however, get to ride piggyback on the challenge to be mounted by operational creditors taking a cue from SC’s stinging observations against the recent 2019 IBC amendments.

The apex court while hearing the operational creditors challenging the recent IBC amendments negating the pari passu principle laid down by the NCLAT in the Essar Steel case, observed that if the waterfall principle continued to hold sway, secured creditors would leave nothing for others, including homebuyers, which incidentally squares with the experience thus far in the NCLT-resolved corporate NPA cases and that waterfall principle is an adjunct of liquidation proceedings which has no place in resuscitation proceedings under the IBC.

In other words, the SC minced no words in castigating the 2019 amendments insofar as they were meant to nullify the well-meaning pari passu principle laid down by the NCLAT.

While moving the IBC 2019 amendments, Finance Minister Nirmala Sitharaman had said the NCLAT in the Essar Steel case “was trying to treat secured creditors and operational creditors at par”, which “defeated the purpose and also the spirit” of the IBC.

The SC thinks otherwise and offers a huge ray of hope to homebuyers, too. But till then, they must not uncork the bubbly. There is no reason why homebuyers cannot impress upon Parliament and the SC to compel builders to put all their advances in an escrow account as against the mandate under RERA to put only 50 percent. This might not be a guarantee against playing ducks and drakes with homebuyers’ advances by builders, but would at least make them accountable to a bean counter -- the bank holding homebuyers’ money.

Meanwhile, homebuyers would do well to steer clear of self-financed houses and instead seek the certainty of ready-to-occupy flats. Cash and carry is the best safeguard against being duped or caught in the vortex of builder’s financial woes.

S Murlidharan is a chartered accountant and columnist. Views are personal.