Buyers' Role Stands Strengthened As SC Upholds Amendments To Insolvency Code
Strengthening the homebuyers’ position against defaulting developers, the Supreme Court, on August 9, 2019, upheld amendments to the Insolvency and Bankruptcy Code (IBC), under which buyers get the status of financial creditors, if a builder were to go insolvent. The top court also ruled that the real estate law (RERA) should be read harmoniously with the amendments made in the IBC, but the Code would prevail, in case of a conflict.
On August 1, 2019, the Parliament approved the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, to 'strengthen' the role of homebuyers, when resolution plans of embattled real estate developers are worked out.
The amendments to seven sections of the code, gives the committee of creditors (CoC) of a defaulting company explicit authority over the distribution of proceeds, in the resolution process. It also states that the resolution plans for cases that reach the IBC, must be worked out within 330 days. Further, the resolution plan worked out by the CoC, would be binding on all authorities concerned, the central government said.
It must be noted that thousands of homebuyers, who have invested in various projects of insolvency-hit developers, which include high-profile cases of Japyee, Amrapali and Unitech, have failed to get much relief. After waiting for their homes for several years, these buyers' cases are now before the National Company Law Tribunal (NCLT) and the Supreme Court (SC). A more efficient insolvency code that clearly establishes their rights in the CoC ─ buyers are part of this ─ would mean that homebuyers would have a larger role in the resolution plan.
Real estate developers facing insolvency
Homebuyers in various Jaypee Infratech projects, moved court against IDBI Bank taking the developer to the NCLT to start insolvency proceedings. Several moved the SC, saying that insolvency proceedings against the developer in the NCLT, would thwart their attempts to find justice.
Chitra Sharma, who moved the apex court on behalf of about 32,000 affected buyers against Jaypee going insolvent, said, in her plea that under the Insolvency and Bankruptcy Code of 2016, flat buyers did not fall in the category of secured creditors and hence, they could get back their money, only if something was left after repaying the secured and operational creditors. Keeping in mind the interests of buyers, the SC stayed the insolvency proceedings against the real estate firm.
Similar fears drove homebuyers of various projects of the Amrapali Group to move the apex court, when Bank of Baroda moved the NCLT against the developer. The Amrapali Silicon City Flat Owners Welfare Society moved the SC against an order of the NCLT that admitted the bank's insolvency petition against Amrapali's Silicon City project, in Noida in Uttar Pradesh. The number of affected buyers, in this case, is estimated to be 42,000. The SC has now entrusted state-run NBCC, with the responsibility of completing the embattled developer’s stuck projects.
It was the corporate ministry itself, which recommend that real estate major Unitech LTd, be declared insolvent. The company’s bosses, Sanjay and Ajay Chandra, are in Tihar jail in a criminal case lodged against them in 2015, by 158 homebuyers of the company's two projects in Gurugram. Once again, buyers knocked at the doors of the top court seeking protection. The number of affected buyers, in this case, is estimated to be 16,000. The SC again stayed the insolvency proceedings against Unitech.
The need for homebuyers to approach the SC was felt, owing to the fact that the Insolvency and Bankruptcy Code (IBC), 2016, placed consumers right at the end of the queue, when it comes to distribution of assets, if a company is liquidated - a fault that now stands corrected. Homebuyers were designated as 'financial creditors', under the code in June 2018.
Allaying fears of homebuyers further, finance minister Nirmala Sitharaman has said that resolutions plans would be worked out, in such a way that cash-strapped companies are able to sail through and liquidation should not be the priority.
While homebuyers are now at par with financial creditors and can exercise their right, in selecting the resolution professional, they were earlier placed right at the bottom of the list in the CoC. Under the earlier code, there are eight levels of distribution, in case a builder goes bankrupt and his assets are liquidated, to compensate the stakeholders.
First to be compensated are resolution professionals and administrators.
The second in line are financial creditors.
Third to be compensated would be the workmen.
Following them at number four, are employees who are not workmen.
Fifth in line are unsecured financial creditors.
The government will get its dues after that, at number six.
The remaining money would be used to compensate equity shareholders.
Homebuyers were placed at number eight.