The ordinance on the Insolvency and Bankruptcy Code is set to recognise homebuyers as financial creditors in case their realty firm goes through insolvency proceedings, offering a ray of hope to several of them who feel their rights will finally be enshrined in the IBC.
However, homebuyers feel that they should be classified as ‘primary secured creditors’ so that they get priority to receive liquidation proceeds, even ahead of secured creditors such as banks.
“This is very positive news for homebuyers that they are now financial creditors and thus have legal standing under the IBC code in CoC meeting/resolution process. However, as banks are secured financial creditors, homebuyers may still not be fully protected as their claims will only be taken up after banks and other secured creditors in case of liquidation,” Abhay Upadhyay, national convenor of pan-India homebuyers group Fight For RERA said.
Since, a major part of their lives’ savings are stuck and real estate is the only industry where buyers give bulk of consideration money in advance, it would have been better if homebuyers were made primary secured creditors to give them preference over banks and other secured creditors, Upadhyay said.
Homebuyers have been asking for an amendment to the Section 53 of the IBC that stipulates the preference order to receive proceeds from liquidation. Homebuyers say under Section 53(1) (f) of the IBC, their claims would rank below those of workers of the stressed company, secured creditors, unsecured creditors and so on. In other words, they would be among the last to receive their dues.
Once homebuyers get the status of financial creditors, their representatives will be part of the CoC that approves an insolvency resolution plan, failing which a stressed firm goes for liquidation. Their voting rights will be proportionate to the value of their advances. They will be placed higher than non-financial unsecured creditors, legal experts said.
However, some analysts said granting any such status doesn’t address problems of homebuyers who will see a substantial erosion of their advances if their realty firm goes for liquidation. Their interest will be best served in keeping the firm afloat through a resolution plan and not pushing for liquidation. Also, such a move may prompt other stakeholders in a real estate project to also seek a similar status under the IBC, according to analysts. This will raise risk perceptions of a real estate project and discourage banks to lend to realty companies.
In several real estate projects, the amount of finance raised from home buyers exceeds the lending received from banks and financial institutions. “The government has now recognised that advances received from homebuyers are in effect for the purpose of raising of finance and has given them the much-deserved right at par with banks and financial institutions,” said Abhishek Dubey, a corporate lawyer.
“While classifying homebuyers as primary secured creditors in accordance with the recommendation made by the Ministry of Housing and Urban Affairs last year would have been ideal, nonetheless making homebuyers financial creditors is a step in the right direction,” Indreesh Kumar of the Noida Extension Flat Owners Welfare Association said.