The several instances of builders going bankrupt, leaving home-buyers stranded without homes or compensation, have prompted the courts to intervene to address the latter’s grievances. In the Jaypee Infratech case, for instance, the Supreme Court has asked the Resolution Professional (RP) to ensure home-buyers’ interests are taken care of. As a result, they now have a representative on the creditors’ committee. To be sure, the grievances of homebuyers need to be addressed, given many of them have invested a lifetime’s savings in these homes. Builders were a virtually unregulated lot before the Real Estate (Regulation and Development) Act came into force in 2016 and Real Estate Regulatory Authority (RERA) was set up subsequently. Unfortunately, thousands of homebuyers have been duped by builders, and it is understandable that the courts want to make sure they get their homes. However, even as they empathise with homebuyers, both the government and the courts need to ensure the regulations are not entirely skewed in their favour, and to the detriment of the banks and other financial creditors. In this context, the recent set of suggestions made by the ministry of housing and urban affairs to the ministry of corporate affairs are somewhat disconcerting. The housing ministry has suggested that the best way to protect the interests of homebuyers, left high and dry, is to recognise them as financial creditors. If that was not worrying enough, the housing ministry wants homebuyers to be not only treated as financial creditors but also as primary secured creditors. It has sought suitable amendments to the IBC (Insolvency and Bankruptcy Code) so that in the event of the assets being liquidated, homebuyers would have the first right—“above, all other secured creditors”.
Homebuyers are not financial creditors in the first place—consequently, giving them that status would be patently unfair to the real financial creditors. Also, amending the IBC to suit one set of stakeholders will set a precedent and it will be difficult thereafter to prevent other creditors—vendors, for instance—from claiming similar rights. Indeed, the courts will find it hard not to give them the right to also be designated as financial creditors. In the process, the rights of banks and other lenders will be diluted, with serious consequences; not only will their balance-sheets be badly hit, they could stop lending altogether. The housing ministry has observed that making homebuyers operational creditors would not serve any purpose as they would not be part of the creditors’ committee under Section 21 of the IBC. It also wants the IBC to be modified to ensure that the completion of a real estate project should be the goal of the “resolution plan”. In addition, it wants that homebuyers, like financial institutions, be paid interest on the principal amount in the event the assets are liquidated. It is surprising that in all these decades, no government felt homebuyers needed to be protected from unscrupulous builders with proper legislation.
While the efforts of the housing ministry are laudable, it is completely ignoring the rights and privileges of banks and financial institutions. In fact, the Supreme Court had done well to allow IDBI Bank to pursue insolvency proceedings against Jaypee Infratech, although homebuyers had asked for a stay. The best way out would be for homebuyers to agree to share the pain by taking haircuts. What is most important is a quick resolution of the problem; for instance, the projects could be sold to other developers who could complete them. Litigating endlessly will help neither the lenders nor the wannabe home-owners.