Benefits for Homebuyers in IBC Ruling

Benefits for Homebuyers in IBC Ruling

Benefits for Homebuyers in IBC Ruling

Homebuyers embroiled in disputes over the one lakh plus stalled realty projects in India have, at long last, won some support from the government and the judiciary in their prolonged struggle against developers.

On the 9th of August, 2019, the Supreme Court of India upheld the validity of the amendments made to the Insolvency and Bankruptcy Code (IBC), by the government in 2018. These amendments, the constitutional legitimacy of which has recently been proven at the highest court of the country, gave homebuyers in the stalled realty projects the status of financial creditors.

The IBC Amendment of 2018

The new provisions introduced by the government have empowered homebuyers by reiterating that, like other creditors, they too can invoke bankruptcy proceedings against the developer in a stalled real-estate project, if the terms of their contract have not been met. Such bankruptcy proceedings may be initiated under the relevant Sections of the IBC.

Such homebuyers, whose investments are on the line due to the stalling of a real-estate project, may also seek representation on the Committee of Creditors. This committee votes on and sanctions resolution plans in cases involving bankruptcy.

The redressal offered under the amended IBC to homebuyers will be in addition to the avenues for remedy already available to them under the Real Estate (Regulation and Development) Act, 2016 and the Consumer Protection Act.

Arguments against the 2018 Amendment

Over two hundred developers working around the country had filed a number of petitions challenging this amendment. They contended that the measure to allow IBC Proceedings to be triggered for delays in delivery would be excessive and arbitrary, particularly as homebuyers already had recourse for their complaints under RERA.

The developers also argued that many of the real estate projects had allottees who were speculators, rather than genuine homebuyers. Such people might use the new IBC provisions to file frivolous and unsubstantiated lawsuits. These fears, however, were summarily dismissed by the Supreme Court, which posited that the authenticity of a plea would be decided on a case-by-case basis by the National Company Law Tribunal or NCLT.

Some of the stakeholders also raised concerns about the status of customers in a business vis-à-vis that of lenders, and whether the two could be made interchangeable. It was argued that putting homebuyers in the same position as financial creditors could set a problematic precedent for other industries. Customers of other types of businesses might then also seek the status of lenders.

However, the Supreme Court brushed these concerns aside, stating that the rights of homebuyers need to be upheld as they constitute a unique case in India.

The Status of Homebuyers in India

There are no other industries in India, the Supreme Court contended, where customers serve as the key providers of working capital. Homebuyers in India have to pay up either half of the selling price (or sometimes even the entirety of it) in advance, in order to book a property that, at the time of paying, may exist only on paper.

This latest ruling by the Supreme Court will play a crucial role in empowering homebuyers in the country, by giving them a greater say in the proceedings when lenders drag a developer to the insolvency court for unpaid debts. However, few expect this new provision to make the road towards justice any quicker for homebuyers.

One of the major concerns for homebuyers seeking redressal under the amended IBC is the fact that, while the Supreme Court has upheld their status as financial creditors, they will remain unsecured creditors under the new IBC regulations.

This means that, in the event of liquidation of the developer’s assets, homebuyers will rank below secured lenders within the ambit of the waterfall mechanism which determines their share in the liquidation process. Thus, the decisions of the secured lenders will prevail over those of homebuyers, should they have had higher exposure to the developer.

Conflicting Objectives in the Case of Insolvency

Another concern raised vis-à-vis the new amendments to the IBC was that creditors and homebuyers have inherently conflicting objectives when it comes to a real-estate project, particularly when it has been stalled.

Homebuyers will naturally want the project to be completed as soon as possible so that they can take ownership of their homes with minimal delay. On the other hand, creditors and lenders are less concerned with the completion of the project and more so with maximising their recoveries through the sale of assets.

Thus, a stalemate could be created if disagreements break out between the creditors and homebuyers at the negotiating table, while insolvency proceedings for the developer are underway. Such a stalemate would then be hard to break through due to the conflicting nature of both parties’ goals and interests.

Moreover, most large real-estate projects in the modern world comprise of a number of flats, and many homebuyers might have made the down-payment to book a property therein. Hence, reaching a consensus among such a large group of homebuyers may in and of itself be quite difficult, as all of them might have varying priorities and objectives during the insolvency proceedings.

Safeguards for Homebuyers and Developers

Critics of the new IBC amendment fear that all of these factors may make the process of arbitration and resolution in such cases even more cumbersome and time-consuming than it already is. With real-estate giants with stalled development projects queued up at the doorstep of the NCLT, many believe that the new amendments will only add one more roadblock on the path to speedy justice.

The Supreme Court, however, held the view that buying a home may require a large proportion of any person’s life-savings. Thus, when a real-estate project is stalled midway, all the homebuyers who have booked houses within that project lose a significant amount of money, with most of their savings getting stuck for years in that incomplete project. Many households in India are currently locked in legal battles with developers to recover their life-savings.

Hence, as judiciary like the government, the opinion of the amendments may be the only option for the deliverance of justice in such cases.

The Supreme Court also said that vacant posts in the regulatory agencies, appellate bodies, and insolvency benches must be filled within three months or less. Until such posts have been filled, homebuyers cannot file cases against developers or trigger insolvency proceedings for breach of contract.

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Post by Arnold Thomas

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