Home >Money >Calculators >Will homebuyers really benefit if they are financial creditors?

When you buy an apartment, you pay a bunch of costs— land and construction being the biggest two. But you also pay up for a prime location such as park or ocean facing, for a club membership, car parking, for a modular kitchen, furnishing, and that Italian marble floor. You pay for the external and internal development charges and taxes (earlier it was service tax now it is goods and services tax or GST), that go to government agencies. The list goes on, but don’t forget the more than 25% profit margin that the builder blends into the price.

When you bought that flat, you paid all these costs, but the question now is: what will you get back in case the company goes for liquidation? We need to answer this question because the cabinet has approved changes in the Insolvency and Bankruptcy Code (IBC), 2016 and put homebuyers at par with bank and financial creditors, in case the bankruptcy process is invoked against a real estate company. But will this really help homebuyers? The answer is not that clear.

What’s the background?

When the IBC was enacted, the code did not include homebuyers of under-construction projects as creditors under any category. But when the corporate insolvency resolution process (CIRP) was initiated against Jaypee Infratech, its beleaguered homebuyers created a lot of hue and cry.

With more than 25,000 vocal well-off Indians protesting the streets and very visible on TV channels, an amendment was carried out in the code on 16 August 2017, asking homebuyers of various under-construction projects of Jaypee Infratech to file their claims as creditors. But their rank in the hierarchy of creditors was lower than that of financial and operational creditors. A separate claim form—Form F—was issued, which was earlier not available under the code.

What happened next?

But this was a band-aid solution. The loud middle India distress with truant builders lead to the government forming a 14-member committee to review the code. The report that was released in March 2018 recommended the inclusion of homebuyers as financial creditors and be a part of the committee of creditors. On 23 May 2018, the cabinet approved this through an ordinance to amend the Act. The draft of the ordinance is not yet public and is yet to be signed by the president.

Do homebuyers benefit?

It depends on what happens after bankruptcy is invoked. There are at least three possible outcomes. One, the builder finds the money and settles. Two, another firm buys out the defaulting builder and owners get their flats. Three, the builder goes for liquidation.

It is the last scenario that will hurt the homebuyers were they to be a financial creditor of such a builder. The creditors will get the value of the land and other assets after the expenses related to liquidation process get adjusted. And if the builder had inflated the cost of the land, the valuation today may be much lower than what was paid by the home owner. You will also not get paid back the ocean view premium you paid or for those glossy Italian marble floors.

Besides, “liquidation really doesn’t help. It takes a very long time, then there are lot of expenses that go into it, and getting the right bidder or price is always doubtful," said Jehangir Gai, a Mumbai-based consumer activist.

In fact, homebuyers of Jaypee Infratech urged the Supreme Court to not liquidate the company as it would ruin the future of thousands of homebuyers. They wanted bids from other developers to complete projects with binding commitment with the Supreme Court.

So, don’t pop the bubbly just yet if you are stuck with an unfinished project.

Susan Thomas, assistant professor, Indira Gandhi Institute of Development Research, and member, Bankruptcy Law Reforms Committee says homebuyers as financial creditors is not a good idea

Susan Thomas
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Susan Thomas

Is it okay to include home buyers as financial creditors?

No, it is not a good idea. At the first instance, they are consumers of real estate services who should look to RERA for redress. Like the IBC, the RERA is a new Act that pays proper attention to the fact that real estate is a state subject, with state-level regulators who can fine-tune redress to suit local nuances. It is a shame that we don’t use the right avenues, when they already exist. We appear to like start things, and then ignore the need to build institutions for implementation. Very often, rather than focusing on developing existing institutions, we just set up another one.

But RERA is mired in politics and bureaucracy?

RERA has a couple of years head start on IBC. We should give the IBC as much time to see how it will withstand the pulls and pushes of politics. These effects are already starting to show. This law was created with the mandate of increasing the ease of doing business and yet some of the rules and regulations, that have arisen around it, appear contrary to this mandate. It is probably the youngest law to be facing the prospects of amendments of the core principles so soon.

Do homebuyers understand what will happen if the firm goes for liquidation?

The homebuyers purchased contracts and hold agreements with real estate firms that are currently in the IBC spotlight, which were created in a very different legal environment. I suspect that even the lawyers, who have better experience with contract enforcement, will struggle to understand how the rights and liabilities of homebuyers from that regime are affected when the firm is taken to the IBC. In fact, liquidation under IBC itself is unchartered territory so far. Unlike the insolvency resolution process which has a structured process, liquidation is more fluid. I am not sure that any of us really understands what the range of possible outcomes are for a firm under liquidation, be it a real estate firm or not.

Vikram Jethwani, home buyer, Jaypee Infratech project, Noida says it is a good move but they will lose a lot.

Vikram Jethwani
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Vikram Jethwani

Having invested our lifetime savings, and later realizing that it is all in trouble comes as a massive shock that impacts the well-being of the entire family.

Recognition as a creditor is indeed a great move, but builders should not be given an easy opportunity to file insolvency. In the end, we, the home buyers, will lose a huge amount of our hard-earned money. On top of it, it will take several years, to get a fraction of our sum invested.

Rashesh Shah Chairman and CEO, Edelweiss Group says creditors will be above buyers.

Rashesh Shah
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Rashesh Shah

Homebuyers are being brought on par with the financial creditors and will be part of the decision-making process when matters reach insolvency stages. The logic is that most homebuyers are financial creditors because they give an advance to the developers and fund the cost of the project in return for a house. But financial creditors will have to be kept above operational creditors, else banks won’t give credit to projects.

Jehangir Gai, Mumbai-based consumer activistsays consumer court is the best option.

Jehangir Gai
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Jehangir Gai

As far as Maharashtra is concerned, the recommendations are not in favour of homebuyers. Under the Maharashtra Ownership of Flat Act, homebuyers have the first right over land and buildings, so making them at par with others is not in their favour. Besides, liquidation doesn’t really help. It takes a long time, there are a lot expenses, and getting the right bidder or price is doubtful. For buyers, going to a consumer court is the best option.

Kayezad E. Adajania contributed to the story

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