Liquidation of assets of insolvent builders: Do homebuyers need separate legal action?

Published: April 20, 2018 12:38:39 PM

Under the Insolvency and Bankruptcy Code, the one affected the most are the genuine homebuyers of those real estate companies against whom Corporate Insolvency Resolution Process gets initiated.

Insolvency and Bankruptcy Code, I&B Code, Liquidation of assets of insolvent builders, real estate, home buyers, RERAThe report presented by the Insolvency Law Committee has brought some hope to the homebuyers.

Under the Insolvency and Bankruptcy (I&B) Code, the one affected the most are the genuine homebuyers of those real estate companies against whom Corporate Insolvency Resolution Process (CIRP) has been initiated. These homebuyers have given their earnings, taken the loan from financial institutions and are paying hefty interests just to have a home. However, if the CIRP is initiated, they are not even considered at the moment as a financial or operational creditor, although they are allowed to file their claim. Further, if the CIRP proceeding against these real estate companies fails and liquidation starts, then they are entitled to residue as per the waterfall mechanism under Section 53 of the Code.

Thankfully, the report presented by the Insolvency Law Committee has brought some hope to the homebuyers. If the recommendation of the Committee is accepted w.r.t categorization of homebuyers, then the homebuyers will not have to take any separate legal action in case of liquidation of assets of insolvent builders for the reason that the report has considered to include the homebuyers (purchasers of under-construction apartments) under the category of financial creditors. This is owing to the reason that “the amount raised under the contracts of homebuyers is in effect for the purpose of raising finance, and is a means of raising finance.” Therefore, such amount paid by a homebuyer will qualify as financial debt under Section 5(8)(f) of the Code.

The Report states that “a denial of the right of a class of creditors based on technicalities within a contract that such creditor may not have had the power to negotiate may not be aligned with the spirit of the Code”. An explanation to this effect has been proposed to be added in section 5(8)(f) of the Code as well.

By categorizing homebuyers as a financial creditor, such persons will be a part of the CoC and in the event of liquidation, they will fall within the relevant entry in the liquidation waterfall under section 53.

Since section 53 provides for the order in which the proceeds from the sale of the liquidation assets be distributed, the homebuyers now (being a financial creditor) will also find a place in the list of receivers as the insolvent builder goes into liquidation.

A home buyer has been enabled to initiate action against the insolvent builders under section 7 of the Code, which was not the case earlier. Moreover, in cases expected to be initiated by homebuyers, the resolution plans under the Code ought to be compliant with RERA (vis-à-vis section 30(2)(e) of the Code).

Be that as it may, one could argue that the amount which the liquidation process would fetch may not appropriately set off the satisfaction or economic value of owning the desired house especially at the time when the homebuyers have taken a consideration amount of loan from banks.

(By Manoj K Singh, Founding Partner, Singh & Associates)

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