BackOpinion | Homebuyers as creditors does not make sense
There are still lacunae due to which the overall interest of homebuyers is not protected
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After much deliberations in June 2018 by way of ordinance, an amendment was made in the Insolvency and Bankruptcy Code 2016 (I&B Code 2016) wherein apart from other changes, homebuyers were recognised as financial creditors. In simple terms, homebuyers got a seat in the Committee of Creditors formed under the I&B Code 2016.
The effect of which is that homebuyers will have a say in approval or rejection of the resolution plan submitted by any resolution applicant or to restrict the decision of the committee of creditors to go for the liquidation of the corporate debtor.
A single homebuyer can proceed with filing an application under Section 7 of I&B Code 2016 against the developer. The advantage of such filing will be that even though the developer might proceed with settling the matter with one such homebuyer or few such home-buyers, it will not be possible for a developer to every time settle with the homebuyer filing an application. Instead, this has come as a threat for those developers who are till date somehow been saved from the Corporate Insolvency Resolution Process (CIRP). The developers/real estate companies are now more cautious in their approach and will try to complete the projects within the timelines given or as early as possible if the timelines have expired.
The amendment has also given a benefit to the class of creditors, including homebuyers, to be represented through qualified resolution professionals or authorised representatives. Instead of individually attending the committee of creditors’ meeting, homebuyers can represent their interest through the authorised representative so appointed. Otherwise, attending the meeting of the committee of creditors each time to vote will be a difficult thing, especially for those homebuyers who are not in the state/city where the meeting is convened.
To use the amendment effectively, homebuyers need to represent their interests individually (or through an authorised representative) but each of the homebuyers will be required to give his/her consent or dissent as voting share in the committee of creditors is calculated on the individual voting right. It will not be the case that even if some of the homebuyers have not voted, a majority decision of other homebuyers can be considered as the decision of those who have not acted upon and the authorised representative can represent the interest of all the homebuyers, including those who have not given instructions. In such a case, the authorised representative will be able to represent or act upon instructions of only those who have given instructions.
For example, in a meeting of creditors, suppose the instructions to vote in favour of the resolution proposed by a resolution professional has been received by the authorised representative appointed on behalf of only 15 homebuyers out of 60. Then, in the meeting, the voting shares of only 15 homebuyers will be counted and not shares of all 60 homebuyers.
It will not be out of place to mention that the benefit of the amendment will be less effective in those cases where the voting share of homebuyers in a committee of creditors of any corporate debtor is less than 35%. The reason being, in two major decisions—passing of a resolution plan and for taking a decision regarding the liquidation process—the committee of creditors needs a vote of not less than 66% of the voting share of the financial creditors. This means that if the voting share of homebuyers in the committee of creditors is less than 35%, then their consent or dissent will not make any difference in these two major decisions. However, under the I&B Code, they have written to approach the appellate tribunal in case the adjudicating authority also approves the resolutions passed by the committee of creditors.
However, there is relief for those homebuyers who want the flat and not the money as they can stall the process of liquidation as despite been given the status of financial creditors, in case of liquidation, the homebuyers will fall under clause (d) of Section 53 (waterfall mechanism) i.e. financial debts to unsecured creditors. The amendment has brought no change with regard to the situation of homebuyers in case of liquidation except to the extent that prior to the amendment they were falling in the residue category, but since now they have been classified as the financial creditor they will fall under clause (d). The amendment has not clarified whether homebuyers will be classified as secured or unsecured creditors. So, if one goes with the definition of a secured creditor, homebuyers will fall under the category of unsecured creditor. Therefore, the amendment is a relief for those who want the flat and not money, as now they can stall the process of liquidation.
The amendment has given some relief to homebuyers though not completely as there are still lacunae due to which the overall interest of homebuyers is not protected.
Daizy Chawla is senior partner, Singh & Associates, a law firm
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