Injeti Srinivas.
Injeti Srinivas.

Now, a small group of home buyers can't seek bankruptcy proceedings against a defaulting real estate company

  • Earlier this year, the Supreme Court ruled that the home buyers’ rights will remain at par with the lenders making them financial creditors
  • The apex court has upheld the ability of home buyers to take real estate developers into bankruptcy proceedings

To avoid misuse of the insolvency proceedings by some home buyers who are seeking action against well-run real estate companies, government may bring in minimum threshold of home buyers which will be required to start such bankruptcy proceedings.

“A lot of representations have come that a single home buyer who could be a speculative home buyer also is trying to dislocate an otherwise well-operating real estate company. In Mumbai, a lot of such cases have been admitted and half the cause list comprises of real estate companies. These have to be looked at in a very innovative manner. We may have to look at some threshold such as 5% which is there for class action or a threshold of one fifth of home buyers which have for mismanagement in operation. We may have to find some measures to check abuse," corporate affairs secretary Injeti Srinivas said on Tuesday at the third annual day function of the Insolvency and Bankruptcy Board of India.

Earlier this year, the Supreme Court (SC) ruled that the home buyers’ rights will remain at par with the lenders making them financial creditors. The apex court has upheld the ability of home buyers to take real estate developers into bankruptcy proceedings. A three judge bench headed by Justice Rohinton F Nariman said that once a home buyer establishes default before a bankruptcy court, the onus is on the builders to prove that the consumer does not wish to take possession of their house to avoid proceedings.

Srinivas said the government is in the process of operationalising personal insolvency in phases which may take a year to become fully functional. “The Bankruptcy Process for personal guarantor to corporate debtor is almost finalized. The next is “fresh start" process through which relief will be given to very small borrowers who are not in a position to repay the debt. This will be rolled out in next four to six months time. Then insolvency process for proprietorship, partnership and other matters will be taken up subsequently," he added.

The bankruptcy process for very small defaulters will be a non-adjudicating process, Srinivas said. “It will be a total online system to prove veracity of the application and assets of the person among other things,’ he added.

Srinivas said the framework for cross border insolvency based on UNCITRAL Model Law is ready and will be taken up by the Parliament during the upcoming winter session. Cross-border insolvency is one where the defaulting company has assets in more than one country or where some of the creditors of the company are not from the country where the insolvency proceeding is taking place. Government is also readying a framework for group insolvency, Srinivas said.

The corporate affairs secretary said the government is very keen to develop a marketplace for stressed assets so that maximum competition and participation of the foreign investors also possible. This will lead to realization of maximum value for assets and we may get the best people to run these companies," he added.

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