Protection of Homebuyers under the Insolvency and Bankruptcy code

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The NDA Government has focused highly on the “Ease of doing business” in India. This concept essentially involves that the foreign companies have been incentivised to invest and do business in India following the legal setup which has been made very Pro-Business. One of the essential steps taken under this exercise is the passing of Insolvency and Bankruptcy Code in the year 2016.

About the Insolvency and Bankruptcy Code

This code applies to a company registered under the Companies Act 1956, a Limited liability partnership, Partnership firms and Individuals.[i] Under the Insolvency and Bankruptcy Code, any financial creditor or an operational creditor can initiate corporate insolvency process against a corporate debtor when the corporate debtor commits a default in repayment of debts.[ii] Default involves non repayment of debt when it has become due and payable.

Hence, when any financial or operational creditor is not honoured duly, he can initiate the insolvency proceedings against the corporate debtor. One important entity left out under these heads is the Homebuyers. Owing to the rampant urbanization, the Central government passed the Real Estate (Regulation and Development) Act 2016 to regulate the relationship between the Promoters and the Homebuyers and hold the promoters accountable and liable in cases of default by clothing them with certain duties and responsibilities. But can the Homebuyers resort to the Insolvency and Bankruptcy Code and initiate the insolvency proceedings against the promoters when he commits a default? This was a much debated question. 

Procedure under the Insolvency and Bankruptcy Code

When the adjudicating authority i.e.  National Company Law Tribunal receives an application under section 7 of the Code by the financial creditors and under section 8 by the operational creditor for initiating insolvency proceedings and it duly accepts it, then it will issue a moratorium under section 13(1) (a) of the code which means all the pending suits before the corporate debtor will be stayed and no fresh suits can be filed against it. The authority will also appoint the Interim resolution professional under section 13(1) (c) of the code that will form the committee of creditors under section 18(c) of the code which shall constitute of only the financial creditors as given under section 21(2) of the code. The committee shall either approve the resolution plan or may opt for insolvency of the company by a voting share of 75% under section 21(8) of the code. Over insolvency, the disbursement of money is made in the following order of priority namely Cost of Insolvency resolution process, Workmen Dues, Secured Creditors, Unsecured Creditors, Government Dues, Preference Share holders and Equity Shareholders as prescribed under section 53 of the code. The entire process of Insolvency has to be completed within a period of 180 days as given section 12(1) of the code which may be in certain cases, be extended by further 90 days as prescribed under Section 12(3) of the code.

Types of Creditors under the Insolvency and Bankruptcy Code

Primarily, we need to know who is a financial creditor and who is an operational creditor. Insolvency and Bankruptcy Code defines Financial Creditor under section 5(7) to be a person to whom financial debt is owed and it defines operational creditor under section 5(20)  to be person to whom operational debt is owed. Financial debt is defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money[iii]and operational debt is defined as “claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;[iv]

It is very clear from the manner in which the definitions are phrased that the homebuyers fall under none of the category. Neither do they lend money to promoters for its time value neither the amount for which default has happened is on account of any goods or services supplied by the homebuyers. The amount lent is strictly for the purpose of construction of the house.

Can a homebuyers be called an operational creditor under the Insolvency and Bankruptcy Code?

In the case of Mukesh Kumar and anr v. AMR Infrastructures Ltd.[v], the question before the NCLT Bench, New Delhi was Whether the Homebuyers fall under the category of Operational Creditors? The Hon’ble Court held that the definition of operational debt strictly includes three categories namely debt arising out of goods or services supplied or employment or government dues only. The term “Operational Debt” is not defined as “any debt other than financial debt.” Hence, giving effect to the legislative intent; the homebuyers are not operational creditors and can’t initiate corporate insolvency process against the promoters.

Can a homebuyers be called a financial creditor under the Insolvency and Bankruptcy Code?

In the case of Nikhil Mehta and Sons v. AMR Infrastructures[vi], the question before the NCLT Bench, New Delhi was whether the Homebuyers can be regarded as financial creditors? To this, the Hon’ble Court answered that the money lent by the Homebuyers is not against the consideration for time value of money and hence, they are not financial creditors but the same judgement was reversed by the appellate authority carving out the exception on the factual matrix of the case that there was an MoU between the promoters and Homebuyers wherein the Homebuyers had to pay substantial portion of consideration upfront at the time of execution of MoU and the promoters had to pay committed returns on monthly basis to the homebuyers. Quoting the homebuyers as investors in this case, the Hon’ble Court considered them to be financial creditors.

Hence, it is very clear that Insolvency and Bankruptcy Code provided no hope to the homebuyers to claim relief as creditors against the promoters to initiate insolvency against the promoters for default. In the  event that resolution plan is approved the  project may be completed and homes may  be provided to the homebuyers but in the event that the corporate person liquidates, then the homebuyers being the unsecured creditors stand low in the order of priority and may recover very minimal of their investments.

Provisional Remedy to homebuyers by amending the Insolvency Resolution Process for Corporate Persons regulations

Owing to this hue and cry among the Homebuyers, they being left remediless under the Insolvency and Bankruptcy Code, the Insolvency and Bankruptcy  Board of India vide Notification dated August 16, 2017 amended the Insolvency Resolution Process for Corporate Persons regulations and added regulation 9A  which read “A person claiming to be a creditor, other than those covered under regulations 7, 8, or 9, shall submit proof of its claim to the interim resolution professional or resolution professional in person, by post or by electronic means in Form F of the Schedule.”[vii]

This means that a creditor neither being a financial or an operational creditor could submit its claim to the resolution professional under form F along with necessary proofs. But this doesn’t solve the issue here. This amendment merely provides that the claims of home buyers would be considered but they do not get the place in the committee of creditors who get to decide the fate of the corporate debtor by a voting of 75%. It is essential to note that the majority of funding for a promoter is the money lent by the homebuyers and they got no say in what happens to the promoters.

Supreme Court on the position of Homebuyers

Owing to such pity situation of the homebuyers, in the case of Chitra Sharma v. Union of India popularly known as the Jaypee Infratech case, the appellant approached the Hon’ble Supreme Court vide a Writ petition.[viii] The appellant claimed that the respondent Jaypee Infratech promised to build 32,000 flats out of which only 6,500 flats are ready for possession and they are extending the completion date unilaterally. Moreover, the homebuyers have no remedy under the consumer protection act owing to the moratorium issued in the Corporate Insolvency Resolution Process by the National Company Law Tribunal. Also, there is no remedy other than Filing of Form F under the amended Insolvency Resolution Process for Corporate Persons regulations. Hence, homebuyers who have invested hard earned money over years in such project are completely left remediless. This is a violation of article 14 of the Indian constitution. But the Hon’ble Supreme court firstly stayed the insolvency proceedings and then, vacated the stay by giving remedy to the homebuyers in the form that the homebuyers will be represented by two representatives in the committee of creditors and their interest would be duly considered and represented.

In the case of Bikram Chatterji v. Union of India[ix] also, the Hon’ble Supreme Court gave relief to the homebuyers by allowing two experts to represent the interest of homebuyers in the committee of creditors. It also issued notice to the central government, Insolvency and Bankruptcy Board of India and other stakeholders to carve out suitable remedy for the homebuyers. It also asked the promoters to come up with the plan for completion of pending project.

Insolvency Law Committee recommendations

It is pertinent to note that with all the progress made so far in remedying the homebuyers, a report of the Insolvency Law Committee was published on 26th March 2018. In this report, the Insolvency Law Committee recommended that the Insolvency and Bankruptcy Code should be amended to include the “allottees” as the financial creditors. It gave three reasons for this recommendation namely that deprives them of, first, the right to initiate the corporate insolvency resolution process (“CIRP”), second, the right to be on the committee of creditors (“CoC”) and third, the guarantee of receiving at least the liquidation value under the resolution plan.”[x]

Amendment to the Insolvency and Bankruptcy code to include homebuyers

It is worth to be noted that this recommendation was very well considered by the Central Government. It vide promulgation of an ordinance on 6th June 2018 incorporated under the Insolvency and Bankruptcy Code, an explanation to clause (f) of sub section (8) of Section 5 which reads “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing;” Sub section 8 of Section 5 of  the code defines a financial debt and Clause F of sub section 8 includes amount raised by any sale or purchase agreement having the effect of commercial borrowing.

The preamble of the ordinance specifically reasoned that the need was felt that the interest of various stakeholders especially the homebuyers must be balanced. The ordinance has become an act now and hence, the homebuyers have been duly remedied by an amendment to the Insolvency and Bankruptcy Code by including them within the purview of financial creditors. 


Frequently Asked Questions:

  1. What remedy can a homebuyers have against the promoter if he doesn’t timely deliver the house?

A homebuyers can approach the Real Estate Regulatory Authority under the Real Estate (Regulation and Development) Act 2016 or he can go to the consumer court or he can initiate insolvency proceedings under the Insolvency and Bankruptcy code.

  1. Can a homebuyers initiate a corporate insolvency resolution process?

Yes. After the amendment, a homebuyers can initiate insolvency proceedings under the Insolvency and Bankruptcy code.

  1. Is there any guarantee that if a homebuyers initiates an insolvency process, he will get his home delivered?

If the committee of creditors agree to the resolution plan, then a homebuyers can get his home delivered.

  1. Is homebuyers a creditor of the promoter?

A homebuyers is a financial creditor of the promoter.

  1. Can Insolvency and Bankruptcy Code help the homebuyers?

Yes. The Homebuyers will get his home delivered if resolution plan is approved. If it is not approved, then also the homebuyers will get a large portion of their investments back from the promoters.

[References]

[i] Insolvency  and Bankruptcy Code 2016, s 2

[ii] Insolvency  and Bankruptcy Code 2016, s 6

[iii] Insolvency  and Bankruptcy Code 2016, s 5(8)

[iv] Insolvency  and Bankruptcy Code 2016, s 5(21)

[v] Mukesh Kumar and anr v AMR Infrastructures Ltd. [2017] 515 SCC Online [NCLT]

[vi] Nikhil Mehta and Sons v AMR Infrastructures [2017] 377 SCC Online [NCLAT]  

[vii] Insolvency Resolution Process for Corporate Persons (Amendment) Regulations 2017 (IBBI)  IBBI/2017-18/GN/REG013, s. 3

[viii] Chitra Sharma v Union of India [2017] SC WP(C) 744

[ix] Bikram  Chatterji v Union of India [2017] SC WP(C) 940

[x] Ministry of Corporate Affairs, Report of the Insolvency Law Committee (March 2018) para 1.2