BackShould IBC keep entertaining complaints of individual buyers?
Developers are now claiming that buyers are taking undue advantage of the law, which they want amendedThe time-bound nature of the insolvency process provides a limited window for developers to reach settlements with claimants, failing which the interim resolution professional takes over
PremiumCases related to insolvency proceedings by homebuyers against developers have been on the rise ever since buyers were granted the status of financial creditors status under the Insolvency and Bankruptcy Code (IBC). Developers are now claiming that buyers are taking undue advantage of the law, which they want amended. Their main demand is that instead of just one homebuyer, at least two-thirds of allottees of a real estate project should be required to trigger IBC proceedings against a promoter. Other demands include making Rera the sole adjudicator. Ashwini Kumar Sharma asked experts if such demands are viable.
High number of complainants can prevent misuse of IBC
Bishwajit Dubey, partner, Cyril Amarchand Mangaldas
The demand of developers that they should not be made subject to IBC and should only be regulated by Rera has no legal or factual basis. Rera’s objective is to regulate real estate projects, primarily to bring in transparency and to protect the rights of the homebuyers, while IBC’s aim is to revive stressed assets or companies. One cannot be a substitute to the other.
IBC comes into play only when a real estate company defaults in payments to its creditors, while Rera continues to be in operation throughout. If an existing developer is unable to complete a project, and IBC is triggered, a new resolution applicant may come in to complete the unfinished project and also meet its obligations towards lenders. Rera does not have any mechanism to deal with such a situation.
To check the risk of IBC being misused by a single aggrieved homebuyer (in the process jeopardizing the interests of other stakeholders), IBC could be amended to increase the threshold for triggering corporate insolvency resolution process under IBC for real estate companies by specifying a minimum number of homebuyers.
Reference to Rera first and follow up with IBC can work
Shubham Jain, senior vice-president and group head, Corporate Ratings
Classifying homebuyers as financial creditors in insolvency procedures addresses their concerns substantially and provides them with an additional forum to seek relief. However, it also increases the default risk for developers, especially for those having delayed legacy projects.
The time-bound nature of the insolvency process provides a limited window for developers to reach settlements with claimants, failing which the interim resolution professional takes over. Even a single buyer in a project pursuing such a remedy could put the company at risk of a default on loan obligations, irrespective of its liquidity position, and this exposes the law to a possible misuse. An effective solution to this involves the stipulation of a minimum number of homebuyers, either in terms of absolute numbers or the value of their claims, relative to the total outstanding debt on a project, for the initiation of insolvency proceedings.
Moreover, IBC doesn’t focus on timely project completion. Referring cases to Rera and following up with IBC if the issue remains unresolved could be a solution.
Amendments to IBC will dilute its ambit over the sector
Kunal Arora, joint partner, Lakshmikumaran and Shridharan Attorneys
With the inclusion of homebuyers as financial creditors, the National Company Law Tribunal (NCLT) has received a flurry of complaints. This has resulted in significant operational stress for developers as any buyer claiming an amount exceeding ₹1 lakh is eligible to initiate an insolvency proceeding. In August, the Supreme Court also upheld the constitutional validity of including buyers as financial creditors. However, in some cases, IBC has indeed been misused by certain buyers to coerce developers to selectively recover their dues.
The government is thus exploring amendments to prevent abuse of IBC, including increasing of the threshold of buyers to invoke the Code. In view of this development, certain developers have demanded that the complaints be registered with Rera first. However, this may not yield results as the SC verdict has clarified that IBC will prevail over Rera in case of a conflict. Such a move is also likely to dilute the ambit of IBC for the sector as it will indefinitely delay the initiation of insolvency proceedings depriving homebuyers of the remedy available to them under IBC.
Homebuyers need multiple options for redressal
S. Saroja, director, consumer advisory and outreach, Citizen Consumer and Civic Action Group
There is no need to amend IBC. In most cases, homebuyers go to such extremes only after years of conversation with the promoters and things don’t head anywhere. They would have invested their lifetime savings in buying the house, taken a loan, paid the EMIs while paying rent, and above all, undergone the trauma of not knowing the fate of their investment. After years of struggle to get possession of the house and literally at the end of their tether, to be granted the status of financial creditors under IBC is seen as an important avenue available for redress.
Where is the need for a majority to initiate proceedings? Do people always come together to buy apartments in a project? Each individual invests his own money to buy a house and, therefore, every individual should have the right to invoke insolvency proceedings under IBC.
How many proceedings initiated by individuals so far have been found to be frivolous? Data should be made public before any further discussions. While Rera is definitely a Godsend, it can’t be the only option. Buyers need multiple redressal options.
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