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Opinion | Homebuyers must be cautious when approaching NCLT

Homebuyers or other allottees of a real estate project can invoke IBC to initiate CIRP

Over the last decade, we have witnessed an enormous increase in the ordeal faced by homebuyers at the hands of developers. Till a couple of years ago, homebuyers had only one option, which was to approach the consumer courts to complain against the developers and request a refund of their investment and demand compensation. But in most cases the agreements executed by the developers were one-sided, favouring the developers and providing for arbitration which was costly and time-consuming. Moreover, the consumer courts are over-burdened and homebuyers or allottees had to wait for a longer period to get refund or compensation after multiple levels of litigation involving appeals and revisions even at the Supreme Court (SC) stage.

But the enactment of the Insolvency and Bankruptcy Code, 2016, (IBC) and Real Estate (Regulation and Development) Act, 2016, (Rera) gave homebuyers more options for redressal of their grievances. Homebuyers and other allottees of a real estate project can now demand a refund of their investment, together with interest for any delay in handing over the possession.

The government also made an amendment to the definition of “financial debt" in the IBC that allows homebuyers or other allottees of a real estate project to invoke IBC for the commencement of corporate insolvency resolution process (CIRP) against the erring developer company. This put homebuyers at par with secured financial creditors. As a result, the National Company Law Tribunal (NCLT) suddenly became a favourite destination for homebuyers in case of default or delay in handing over possession.

Under IBC, an interim resolution professional or resolution professional invites claims from different categories of creditors including homebuyers. The voting shares of the class of creditor in the category of homebuyers are in proportion to the debts which are computed by including 8% interest per annum. Homebuyers are categorized as a separate class and have their say in the committee of creditors (CoC ). This provides an efficient mechanism for buyers in a real estate project to raise disputes if need be.

In cases where the developer has siphoned funds collected from the homebuyers and the project requires huge investments for completion, and there is a larger number of claimants seeking a refund from the developer or corporate debtor, the CIRP fails to find a resolution. In such cases, the developer typically has huge debt and liability and the resolution applicant does not file an expression of interest. Consequently, the developer has to go into liquidation, which is again a time-consuming process.

We have come across instances where the claims of the genuine homebuyers and plot owners have been rejected by the resolution professional inter alia, on the grounds of non-production of evidence.

Given the large number of claims, time constraints, inexperience and non-cooperation of developers, it is doubtful whether the claims of homebuyers would be fairly and expeditiously adjudicated by the resolution professional.

Recently the NCLT Delhi appointed an independent commissioner who is a retired district judge in order to adjudicate the claims of homebuyers which were rejected by the resolution professional. This defeats the purpose of including homebuyers in the category of secured financial creditor for speedy justice. The developers do not maintain a proper statement of account and documents which makes the adjudication of claims complicated. There are frequent challenges to the decisions of the resolution professional or CoC before the NCLT, which has resulted in the failure of CIRP.

In some of the cases, the default can also be committed by the allottee or can be attributable to the allottee due to delay in paying the instalments.The IBC has put huge pressure on the developer and at times the erring allottee abuses the process of law by pressurizing the developer to enter into an unrealistic settlement under the threat of initiating CIRP.

However, there was a batch of writ petitions filed before the SC challenging the capability of the amendment made to Section 5(8) of the IBC by inserting explanation to include allottees of an estate project as financial creditors. The SC was pleased to issue the notice in the batch of petitions and stayed the further proceedings pending before the NCLT during the pendency of the writ petition before the SC. The SC will examine the requirement of the amendment and will consider whether the initiation of CIRP in such circumstances would erode the net worth of the developer company and whether it would be against the very object of the IBC, which was enacted for the maximization of value of the corporate debtor.

Till the SC takes a view on the issue, homebuyers and allottees will have to be cautious when approaching NCLT under the IBC. At present, the IBC does not appear to be doing substantial and speedy justice for homebuyer or allottees, even though they are categorized as secured financial creditors.

Vijay K. Singh is senior partner, Singh & Associates.

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