Developers resent buyers filing cases under IBC
4 min read 25 Nov 2019, 11:41 AM ISTDevelopers have asked for amendments to IBC so that a single homebuyer can’t move NCLT against a developer; homebuyers call request unnecessaryMany insolvency cases have been filed under IBC until now, but few have seen successful resolution
PremiumEver since homebuyers were given the status of financial creditors under the Insolvency and Bankruptcy Code (IBC), a lot of them have moved the National Company Law Tribunal (NCLT) against the developers of stalled and delayed projects. “Since June 2018 (after getting the financial creditor status), a total 1,821 cases have been filed by homebuyers against builders under the code," said minister of state for corporate affairs Anurag Singh Thakur last week, in Parliament.
The issue is not going down well with the developers who are alleging that the law is being misused by some homebuyers and the frequency of such cases, they claim, is causing delay in the construction and delivery of projects. They are now demanding an amendment to IBC.
Homebuyers as creditors
When the Insolvency and Bankruptcy Code (IBC), 2016 was enacted, the ambit of who constitutes financial and operational creditors under IBC and who can initiate insolvency proceedings against a defaulting company did not include homebuyers. But when cases were filed against developers by financial institutions, it became clear that categories of creditors such as homebuyers of under-construction projects are not classified in the straight-jacket formula under IBC.
After a huge hue and cry, IBC was amended to give homebuyers the right as financial creditors. This eventually gave them the right to initiate insolvency proceedings, be part of the approval process of resolution plans or compel liquidation of a company, if required. According to IBC, a financial creditor having a claim of more than ₹1 lakh can drag a company to the National Company Law Tribunal (NCLT). Once they were given the status of creditors, many homebuyers approached NCLT to recover their money invested in stalled or delayed projects.
What developers want
Developers’ lobbies such as the Confederation of Real Estate Developers Association of India (Credai) recently wrote a letter to the Prime Minister’s Office, requesting amendments to IBC. Credai believes the insolvency law is being implemented wrongly and steps should be taken to stop its misuse. Developers have demanded that the consent of two-thirds of allottees of a project be required to trigger IBC proceedings against a promoter.
Developers also want that the cases should first go to the Real Estate (Regulation and Development) Act (RERA), 2016, and then to NCLT. “Reference to NCLT by a homebuyer should go through RERA, whose primary concern is completion of projects and ensuring the interest of larger body of customers and stakeholders. There should also be a change in NCLT law and a single homebuyer should not be allowed to initiate insolvency proceeding against a project," said Vijay Jindal, chairman, Credai Ghaziabad.
Homebuyers’ plea
Homebuyer groups, however, have rejected developers’ contention and have said that they are unnecessarily creating a ruckus. The Forum for People Collective Efforts, a homebuyers’ group, has written a letter to the PM’s office, requesting it to not consider the developers’ plea. In the letter, the forum stated, “Ideally, the matter should have been put to rest after the judgment of Hon’ble Supreme Court, but sadly and unfortunately, the real estate developers have preferred otherwise. Having failed legally these builders are now mounting pressure on government to amend IBC to suit their interest by either completely barring homebuyers from approaching NCLT or insert the requirement of a minimum threshold of number of homebuyers who need to come together for approaching NCLT. This suggestion of builders is not only illogical and illegal but also regressive."
Homebuyer groups further said that if the developers start functioning in the right way, they would not face such cases. “The main reason behind such demands of the builders is because they are not inclined to mend their ways and wish to continue with their unethical, illegal and wrong practices to cheat and dupe home-buyers," said the letter sent to the PMO.
Status of cases
Many insolvency cases have been filed under IBC till now, but few have seen successful resolution. According to CARE Ratings, a credit ratings company, “A total of 2,542 cases were admitted into Corporate Insolvency Resolution Process (CIRP) till the end of September 2019. Out of these, 59% of the cases are still in the resolution process. 586 have ended into liquidation (i.e. 23% of the total cases admitted). 6% of the total cases have ended in approval of resolution plans. 41% of the overall cases belong to the manufacturing sector, followed by the real estate (20%), construction (11%) and trading sectors (10%)."
Once a case is filed, an interim resolution professional (IRP) is appointed to take charge of the defaulting company. The IRP’s task is to take steps to revive the company and raise funds to continue operations. Until now, there is hardly any case related to a real estate company where the IRP has successfully charted a resolution plan.
It remains to be seen whether the wheel turns in favour of the homebuyers or developers.
