How amended Insolvency and Bankruptcy Code will benefit homebuyers

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Published: May 24, 2018 4:48:53 PM

With the Union Cabinet’s amendment to the Insolvency and Bankruptcy Code, homebuyers will now be effectively treated as financial creditors.

Insolvency and Bankruptcy Code, IBC, homebuyer, real estate, banks, NCLT, This amendment will also bring more transparency into the overall funding of projects across the country.

Good news for homebuyers. With the Union Cabinet’s amendment to the Insolvency and Bankruptcy Code (IBC), they will now be effectively treated as financial creditors. This means that at the time of recovering dues from developers who have gone bankrupt, homebuyers will now be considered at par with banks and other institutional creditors, as against the earlier norm when banks and other creditors used to get preference over homebuyers.

Industry experts say that the recent amendment of Insolvency & Bankruptcy Code (IBC), 2016 has given the homebuyers a status of ‘financial creditors’. Under the code, different classes of creditors have different rights, privileges, and roles in the corporate insolvency resolution process (CIRP) and in the liquidation process. As per the code, financial creditor implies any person to whom a financial debt is owed. The financial creditors get priority status in bankruptcy proceedings.

Till now, “homebuyers were considered as ‘operational creditors’ and got paid only the residual value after financial creditors were paid in bankruptcy proceeding. The move will further strengthen the homebuyer’s rights. With the demand for residential real estate being stagnant for some time now, the combined effect of the Real Estate Regulatory Act (RERA) and the Cabinet ordinance on IBC amendment is a positive move in boosting the buyer confidence in the market,” says Surabhi Arora, Senior Associate Director, Research at Colliers International India.

Lately, many real estate giants are facing insolvency proceedings in various Company Law Tribunals under the new Insolvency & Bankruptcy Code (IBC), 2016. Several developers are facing court cases raised in recent times, thus leaving the homebuyers in absolute legal chaos. “Although this amendment will take some time to get implemented and may not give any immediate relief to the homebuyers struggling with delayed projects with developer’s non competence to complete the project, we believe, the amendment will support the real estate demand in the long term,” says Arora.

Anuj Puri, Chairman, ANAROCK Property Consultants, believes that this amendment will also bring more transparency into the overall funding of projects across the country. “With homebuyers now getting the opportunity to claim their dues from builders, there is an even stronger burden on developers to deliver on time. We will now see builders become more cautious while taking funds from financial institutions and banks, as they would now also be accountable to homebuyers as well as the financial institutions if their business goes belly-up,” he says.

However, it needs to be seen how the resolution mechanism for claiming the dues actually falls in place for the concerned homebuyers. In fact, to be truly relevant, the entire implementation process needs to be clarified to homebuyers. For instance, they need to know how exactly they will be represented in the creditors’ committee. In other words, whether the NCLT will appoint a resolution professional to represent their rights and interests.

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