The government is unlikely to rush in to amend the Insolvency and Bankruptcy Code 2016 just yet to make home-buyers primary secured creditors, ahead of banks, where a stressed real estate company goes for insolvency resolution or liquidation, said an official source. But it will first weigh inputs of all the relevant stakeholders, including the urban development ministry that has sought primacy to homeskbuyers over secured creditors, about various aspects of the law to make an informed decision, he added. When contacted, corporate affairs secretary Injeti Srinivas told FE: “The IBC is a new and progressive law.
Since it’s just a year old, some issues will come up for discussion, as some people may seek more clarification about certain things or make new interpretations of the law etc. The National Company Law Tribunal is also holding a colloquium in Goa from Monday. Many issues will be discussed there.” “Some answers to stakeholders’ queries may require a clarification, some may require a change in regulation and some may necessitate an amendment to the law. That’s the usual process. So everything has to be seen in a proper perspective,” he said.
Last month, in a letter to the corporate affairs secretary, housing and urban affairs secretary Durga Shankar Mishra suggested that home-buyers be recognised not just as secured creditors but even the primary ones among them so that their right to claim over distribution of assets would be above all other secured creditors in case of an insolvency resolution/liquidation. However, such a demand stoked fears that other stakeholders in a real estate project, such as contractors, could also seek similar concessions under the IBC. This will raise the risk perceptions of a real estate project and discourage banks to lend to realty companies.
Currently, secured creditors are placed third in the order of preference to share the proceeds, after meeting the cost of liquidation and workers’ dues. Since the original IBC didn’t envisage the role of home buyers in an insolvency resolution process, they didn’t fall into the category of neither financial nor operational creditors. However, coming to the relief of home buyers who have invested in projects of Jaypee Infratech, the Insolvency and Bankruptcy Board of India (IBBI) in August came up with a new form to enable them to submit their claims in case any resolution/liquidation is undertaken under the IBC. But how these buyers will be treated (financial or operational creditors) and where they stand in the order of preference are yet to be decided.
Noted insolvency expert Sumant Batra said categorising flat buyers as secured creditors would be contrary to the fundamental tenets of the insolvency law. “If flat buyers are given the option of refund, it may make revival (of a stressed company) impossible… and will thus lead to liquidation. If the law guarantees the completion of flats or delivery of promised goods to customers then it becomes a forced resolution.” In reality, a real estate entity would rarely go into liquidation as no one would benefit from it. Lenders will never be able sell the land held by a realty firm as that is approved by the government for specific use only.