Advantage homebuyers

After receiving the long-sought protection under RERA for on-going or new projects, homebuyers got a boost in securing their investments when projects get stalled or developers go bust. On May 23, the Government approved additional changes to the Insolvency and Bankruptcy Code (IBC) 2016 through an ordinance giving homebuyers a stronger say in the resolution plan for developers. The move spread cheer among the buyers and has been hailed all across the real estate sector.

The ordinance to amend the IBC proposes to bring homebuyers on a par with financial creditors, which will ensure they get their homes or dues when a developer becomes insolvent. They will also get representation on the committee of creditors and the advance given by them to the builder will be considered credit.

Until now, homebuyers were treated as unsecured creditors who came after secured and institutional creditors in the list of priority for recovery of dues.

The move is likely to impact the claims of homebuyers positively in pending court cases against leading real estate groups such as Jaypee Infratech, Supertech and Amrapali.

Punit Dutt Tyagi
executive partner, Lakshmikumaran & Sridharan Attorneys

“The decision to include homebuyers under the ambit of financial creditors…will be received with a cheer.”

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The changes were based on suggestions made by a 14-member insolvency law committee to the Ministry of Corporate Affairs, chaired by Secretary Injeti Srinivas who made a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and deciding their future along with lenders.

Besides, the committee had suggested that only those who contributed to defaults of the company or are otherwise undesirable should be ineligible from bidding for stressed assets under the Code. For withdrawal of resolution application in exception circumstances, the panel has suggested that in such cases, there should be approval from the Committee of Creditors (CoC) with 90 per cent of voting share.

Ramesh Nair
CEO & Country Head, JLL India

“Previously, if any realty firm went through bankruptcy, the priority of recovering dues from the project was first given to financial creditors…Homebuyers were widely regarded as merely consumers and did not specifically fall under the liquidation claim waterfall”.

“In order to facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow one year time to obtain necessary statutory clearances from Central, state and other authorities or such time as specified in the relevant law, whichever is later,” the committee said.

This is the second amendment carried out in the Code. In January, the IBC was amended to prevent unscrupulous persons from misusing the law. Wilful defaulters and those whose accounts have been classified as non-performing assets, among others, are barred from bidding for stressed assets.

Samir Jasuja
Founder & CEO, PropEquity

“This announcement will go in a long way to renew homebuyers’ faith in the legal system and getting them equal footing vis-à-vis lenders to get their money back”.

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Ankur Dhawan
Chief Investment Officer, PropTiger.com

“If the developer is being liquidated, homebuyers should have first right to recover their dues as most of them have taken home loans which they have to repay irrespective of home being delivered or not”.

Hailed by developers and homebuyers alike, the move will further bolster buyers’ faith in the real estate industry thereby raising prospects of increased business for the former. But there are also those who say that the amendment in IBC having put them peri passu with other creditors, there is a likelihood of them losing the sympathy of the apex court as was witnessed recently during proceedings in Jaypee case. Their contention is that though the Code was discriminatory to them, the apex court was treating them on top priority and giving them sympathetic hearing. That may no longer be the case, they fear. Such voices, however, are rather few. Legal experts and stakeholders in the sector are largely giving thumbs up to the Government’s move.

Punit Dutt Tyagi, executive partner at law firm Lakshmikumaran & Sridharan Attorneys, was quoted in media reports as saying, “The decision to include homebuyers under the ambit of financial creditors…will be received with a cheer. Several developers have misappropriated funds of homebuyers, whose position in the resulting insolvency proceedings has been the topic of speculation for a while now. The decision to end this uncertainty is a step in the right direction”. He said that banks, however, may not like the development as their dominant position in the insolvency proceedings stands threatened.

Ramesh Nair, CEO & Country Head, JLL India, said, “This is great news for homebuyers. Previously, if any realty firm went through bankruptcy, the priority of recovering dues from the project was first given to financial creditors such as banks and institutions, followed by operational creditors such as vendors and employees. Homebuyers were widely regarded as merely consumers and did not specifically fall under the liquidation claim waterfall, placing them at a disadvantageous position and exposing them to significant risk upon investment in under-construction projects.”

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Praveen Jain
Vice-Chairman, Naredco

“The buyers shall not be left in lurch and shall not lose their lifetime’s hard-earned money and shall have some guarantee or something to fall back upon”.

Pankaj Bajaj
President, Credai NCR

“RERA protects the money of buyers in an ongoing concern and now the buyer’s investment is protected even in the case of insolvency…This will instil a sense of confidence among buyers of under- construction property”.

After the latest amendment, he said, “If you are a homebuyer in a project that has been stalled by insolvency, you will be granted equal rights with other creditors such as banks and institutional lenders, making it easier for you to recover your money.” The move will infuse confidence in the homebuyers to invest their money as it gives them priority in the recovery of dues if the realty firm in which they have invested their hard-earned money goes bust, added Nair.

Samir Jasuja, Founder and CEO at PropEquity said, “Our latest Q1 study shows that there are still 5,95,074 units of unsold stock in the top nine cities in India. We expect more developers to file for bankruptcy if they are not able to clear their unsold inventory.  This announcement will go in a long way to renew homebuyers’ faith in the legal system and getting them equal footing vis-à-vis lenders to get their money back”.

According to Ankur Dhawan, Chief Investment Officer, PropTiger.com, the inclusion of homebuyers as financial creditors is a right move by the Government as “unlike lenders who conduct financial due diligence and were provided mechanism to control builder cash-flows, homebuyers trusted developer with their hard earned money in the hope of getting their dream home without any such rights”. If the developer is being liquidated, he said, homebuyers should have first right to recover their dues as most of them have taken home loans which they have to repay irrespective of home being delivered or not.

Naredco Vice-Chairman Parveen Jain is of the opinion that this is a welcome move by the Government which gives a solid right to the buyers to act as financial creditors in case of insolvency and the buyers shall not be left helpless in case of non-delivery or delay in projects. “The buyers shall not be left in lurch and shall not lose their lifetime’s hard-earned money in the above mentioned situations and shall have some guarantee or something to fall back upon as the case may be accordingly if the buyers are treated as financial creditors”, said Jain.

Pankaj Bajaj, President, Credai NCR called it a good move for the protection of the money of homebuyers. RERA, he said, protects the money of buyers in an ongoing concern and now the buyer’s investment is protected even in the case of insolvency. This will instil a sense of confidence among buyers of under- construction property, he added. However, Bajaj said, for continued flow of institutional and bank credit to the real estate sector, “the system must uphold the superiority of a bank mortgage over any other claim otherwise banks may become hesitant in lending to this sector”.

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