Home Buyers under IBC

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 to provide a legal framework for the resolution of insolvency and bankruptcy cases in India. While the IBC was primarily designed to address the concerns of lenders and creditors, it also provides some relief to home buyers who have invested in under-construction projects that have been delayed or abandoned by developers. In this article, we will discuss the home buyers under IBC.

What is IBC?

The Insolvency and Bankruptcy Code, 2016 (IBC) has been a game-changer for the Indian economy, providing a much-needed framework for the resolution of distressed assets. One of the key beneficiaries of the IBC has been home buyers, who were earlier left with little recourse in case of delays or non-delivery of their homes by developers. With the IBC, home buyers now have a stronger legal standing and greater protection for their rights.

The IBC also provides for the creation of a Real Estate Regulatory Authority (RERA), which acts as a watchdog for the sector. RERA has been established to protect the interests of home buyers and to ensure that developers adhere to the norms and regulations laid down by the authority. RERA also provides for the creation of a Real Estate Appellate Tribunal (REAT), which adjudicates disputes between home buyers and developers.

Background of home buyers

The real estate sector in India has been plagued by several issues, including delays in project completion, diversion of funds by developers, and the lack of transparency in the sector. These issues have left many home buyers in a precarious situation, with their investments stuck in unfinished projects. In response to these concerns, the IBC has been amended to provide some relief to home buyers.

Home Buyers under IBC

The inclusion of home buyers as financial creditors has had a significant impact on the real estate sector. Developers are now more careful about fulfilling their obligations to home buyers, as they know that any delay or default can lead to insolvency proceedings being initiated against them. This has led to greater transparency and accountability in the sector and has made developers more accountable to their customers.

Under the IBC, home buyers are entitled to be a part of the creditors’ committee and have a say in the resolution process. This gives them greater control over the process and ensures that their interests are protected. The IBC also provides for the creation of a resolution plan, which is a comprehensive plan for the revival of a distressed company. The resolution plan must be approved by the creditors’ committee, including the home buyers, and must be under the provisions of the IBC.

The IBC has also introduced the concept of a home buyers’ trust, which is a fund created out of the sale of assets of the defaulting developer. The trust is used to complete the construction of the homes of the home buyers who have filed claims under the IBC. This ensures that the home buyers are not left high and dry in case of insolvency proceedings against the developer.

Rights and Remedies of Home Buyers under IBC

The rights and remedies of Home Buyers under IBC are as follows-

• Financial Creditors: Home buyers who have invested in under-construction projects are now considered financial creditors under the IBC. This means that they have the same rights and powers as other financial creditors, including banks and financial institutions.
• Initiation of Corporate Insolvency Resolution Process (CIRP): Home buyers can initiate the CIRP against a defaulting developer by applying with the National Company Law Tribunal (NCLT). If the application is admitted, a resolution professional will be appointed to take charge of the developer’s assets and liabilities and work towards the resolution of the insolvency.
• Committee of Creditors (CoC): Home buyers who have invested in under-construction projects can also participate in the CoC, which is responsible for approving or rejecting the resolution plan proposed by the resolution professional.
• Priority in Distribution of Assets: Home buyers are classified as unsecured creditors under the IBC. However, the Insolvency and Bankruptcy Board of India (IBBI) has clarified that home buyers have priority over other unsecured creditors in the distribution of assets in case of liquidation.
• Operational Creditor: Home buyers who have taken possession of their properties can also file a claim as an operational creditor in case of a default by the developer.

Challenges of implementation of IBC

There have been some challenges in the implementation of the IBC for home buyers. One of the major challenges has been the delay in the resolution process. Insolvency proceedings can take a long time to be completed, which can further delay the delivery of homes to the home buyers. This can cause financial and emotional distress to home buyers, who may have already invested a significant amount of their savings in the purchase of the home.

Another challenge has been the lack of clarity on the rights of home buyers in case of a conflict with other creditors. There have been instances where the interests of home buyers have been subordinated to those of other creditors, leading to an unfavorable outcome for the home buyers.

Implications for Home Buyers

The IBC provides some relief to home buyers who have invested in under-construction projects. However, it is important to note that the resolution process can take a long time, and there is no guarantee that the home buyer will recover their full investment. In addition, the home buyer may also have to bear the costs of legal fees and other expenses associated with the resolution process.

Amendment to the Act 2020

However, under the 2020 Amendment Act (which replaced the 2019 IBC Ordinance), section 7 of the IBC was amended, inter alia, to the effect that an application to initiate a resolution process is to be made jointly by at least 100 allottees or 10% of the total number of allottees in within the said project, whichever value is lower. The 2020 Amendment Act clarified that matters already filed by individual homebuyers, but not yet accepted by a judicial authority before the commencement of the 2020 Amendment Act, will be dismissed unless adjusted to meet the minimum threshold requirement as stated above within 30 days from the beginning of the 2020 amendment to the law.

Analysis

While giving the homebuyer status as a financial/operating lender is a big step in protecting the rights of homebuyers, an appropriate balance must be struck to avoid a situation where developers are taken advantage of by one or more homebuyers while ensuring that the complaint of one or several homebuyers has not caused undue delay or hindrance in the development of the project, especially considering that homebuyers have other remedies under RERA and the Consumer Protection Act, 1986.

Final words

The IBC has provided some relief to home buyers who have invested in under-construction projects that have been delayed or abandoned by developers. Home buyers now have the same rights and powers as other financial creditors and can initiate the CIRP against a defaulting developer. While the IBC provides some remedies to home buyers, it is important for them to exercise caution while investing in real estate projects and to undertake proper due diligence before investing.