Podcast | IBC Amendment: Homebuyers get a seat at the table

A new change that could benefit homebuyers has been made to the IBC, or Insolvency and Bankruptcy Code. This change allows homebuyers to be treated as financial creditors.

The central govt has been pretty keen on the Insolvency and Bankruptcy Code. Many experts and analysts have termed it a game changer. This is one law that has instilled a new fear of the long arm of the law in real estate promoters. They now fear of losing their company. As a consequence of the IBC, banks have recovered monies of around Rs 83,000 crore from defaulting promoters. That’s over 12 billion dollars!

The same fear is now palpable in the eyes of real estate developers. Ok, that was a bit dramatic but it does summarise the situation with some accuracy.

When we say the IBC allows financial institutions to treat homebuyers as financial creditors, what we mean is this: Until now, a home buyer was considered an unsecured creditor. This means his payments to the builder were graded at a lower level than that of banks. In case of insolvency, the lending bank and other institutional creditors would first recover their money via the sale of assets of the builder. If anything remained, the buyer would have got his money back.

This scenario is playing out currently in the case filed against Jaypee Infratech by home buyers which is now being heard by the Supreme Court.

On August 09 2017, the Allahabad bench of the National Company Law Tribunal, or NCLT, admitted a plea by IDBI Bank to begin insolvency proceedings against Jaypee Infratech for defaulting on a Rs 526.11 crore loan.

The NCLT asked homebuyers who purchased flats from Jaypee Infratech to file their claims by August 24, for a refund of their money in case a revival of the company failed. According to Section 13 of the IBC, a buyer who has taken a home loan to pay Jaypee Group has the right to file a claim with the IRP. Media reports claimed JayPee handed over only 5,500 flats out of the proposed 32,000 flats and 3,000 plots across 800 acres along the Noida-Greater Noida Expressway. It has 305 towers, of which 250 are incomplete. Jaypee Infratech is among the 12 big corporate loan defaulters identified by the Reserve Bank through its internal advisory committee in June 2017 for the insolvency & bankruptcy code.

In September, the Supreme Court issued a stay order on the insolvency proceedings against Jaypee following petitions by various associations of homebuyers who went to court as they stood to lose their apartments without any compensation. This stay was revoked by the SC, which also directed the IRP to take over management of the company and submit an interim resolution plan that took into account the interests of homebuyers. The court also directed Jaiprakash Associates, Jaypee Infratech’s holding company, to deposit Rs2,000 crores with the court to protect the interests of homebuyers. Out of this, only Rs750 crore have been deposited till May 17^th this year. The case will be heard again in July.

Now, let’s take a couple of minutes to examine how this amendment came about.

In March of this year, a 14-member Insolvency Law Committee suggested that home buyers be treated as financial creditors, which will allow them to equitably participate in an insolvency resolution process. The panel has also suggested relaxations for Micro, Small and Medium Enterprises (MSMEs) under the IBC. This would provide relief to homebuyers stuck in incomplete real estate projects against which insolvency proceedings are underway.

“The Committee’s attention was drawn to the significant confusion regarding the status of buyers of under-construction apartments (home buyers) as creditors under the Code. Multiple judgements have categorised them as neither fitting within the definition of ‘financial’ nor ‘operational’ creditors," the committee said in its report.

Two things stand out from the committee’s report. First, the Committee agreed that the amounts raised under home buyer contracts is a significant amount, which contributes to the financing of construction of an asset in the future.

Second, the report also noted that not including home buyers within the definition of ‘financial’ or ‘operational’ creditors was a cause for worry because it deprived them of three rights. The right to initiate the corporate insolvency resolution process (CIRP); the right to be on the committee of creditors (CoC); and the guarantee of receiving at least the liquidation value under the resolution plan.

So what conclusion did the committee arrive at? The committee reviewed various financial terms of agreements between home buyers and builders as well as the manner of utilisation of the disbursements made by home buyers to the builders. It noted that the agreement is for disbursement of money by the home buyer for the delivery of a building to be constructed in the future. The disbursement of money is made in relation to a future asset, and the contracts usually span a period of four to five years or more, the report said. The Insolvency Law Committee thn=en said that the amounts raised in such a manner are used as a means of financing the real estate project and are thus, in effect, a tool for raising finance. Therefore, on the failure of the project, money is repaid based on time value of money.

So now that we know the story behind the change, here’s what the new amendment in the IBC means. Until now, homebuyers were treated as unsecured creditors who came after secured and institutional creditors in terms of priority for recovery of dues. Once the ordinance receives approval from President Kovind, homebuyers will be considered on par with banks and institutional creditors and given priority while recovering dues from bankrupt or insolvent real estate companies.

However, analysts claim the biggest beneficiary, long-term, will be the real estate sector. Thanks to the amendment and to RERA, buyers will now be confident about recovering their money even if the builder fails. Many fence sitters, who were wary about buying their own houses, may now come to feel it is safe to put their money into real estate.

Other analysts say the changes in the code will also help micro, small and medium enterprises by allowing their promoters to submit their resolution plan in insolvency cases. Small and medium firms are key to India’s jobs growth.