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Breather For Builders As Govt Extends Suspension Of IBC Till Dec 2020

Breather For Builders As Govt Extends Suspension Of IBC Till Dec 2020

Breather For Builders As Govt Extends Suspension Of IBC Till Dec 2020
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Offering a breather to the Coronavirus-hit business community in India, the government, on September 24, 2020, extended the suspension of the Insolvency and Bankruptcy Code (IBC) for another three months. This means that companies, including real estate developers, cannot be dragged into insolvency for defaults on credit liabilities between March 25, 2020 and December 24, 2020. Defaults committed prior to March 25, 2020, will not be covered under this nine-month grace period.

In June 2020, the Corporate Affairs Ministry announced the move to suspend key provisions of the Code, to offer support to businesses at a time when the economy was being battered under the impact of the Coronavirus-induced phased lockdowns.

However, to enable itself to extend this suspension of the Code for a period of up to one year, the centre has now promulgated an ordinance, to make changes in the IBC. With this, the government has suspended Section 7, Section 9 and Section 10 of the IBC. While Section 7 and Section 9 empower financial creditors and operational creditors to initiate insolvency proceedings against a defaulting company, Section 10 provides the same right to a corporate. The government has also inserted a new section, Section 10A, to empower itself to extend the period of suspension by up to one year.  

Impact on builders and homebuyers

While the move would offer some cushion to the cash-starved builder community in India that has been at the receiving end of a demand slowdown for over half a decade now, it will curtail the legal remedies available to homebuyers against defaulting developers.

According to Real Insight: Q2 2020, a quarterly analysis of India’s key housing markets by PropTiger.com, housing sales in the April-June period of 2020 dipped by 79% over the same period last year. As against 92,764 units in the same period in 2019, only 19,038 units were sold during April-June 2020.  As of June 30, 2020, developers also had an unsold inventory of 7,38,335 units across these markets. The government latest measure would provide cash-hit developers a limited time window, to improve performance, to avoid bankruptcy.

It would, on the other hand, curtail the rights that homebuyers enjoy under the insolvency law. Through changes in the Code in 2018 and by insertion of Section 7 in it, the government brought homebuyers at a par with other creditors in insolvency proceedings against a builder. This meant that buyers could initiate insolvency proceedings against a builder, just like banks or contractors. In August 2020, the Supreme Court also upheld the constitutional validity of the amendments in the Code, saying that the RERA and the IBC should work in harmony, to safeguard the interests of homebuyers in India.

However, the government has limited the legal remedies available to homebuyers under the IBC, as well as the RERA, through various measures announced in the backdrop of the COVID-19 situation.

In May 2020, the government allowed builders to cite the force majeure clause for project delays. As the Real Estate (Regulation and Development) Act (RERA) states that builders can use the benefits of this clause for up to one year, developers will be able to use this route to avoid paying any penalty to homebuyers for any project delays till May 2021.

Offering similar relief to homebuyers, the government launched a six-month home loan moratorium for borrowers. Even though non-payment of EMIs during this period will not be categorised as defaults, the borrower will end up paying additional interest, for availing of the relief offered under the moratorium period.

You may like to read: Should You Opt For The Home Loan EMI Moratorium?

 

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SC Upholds Changes in IBC; Homebuyers Are Now Financial Creditors

Homebuyers now have the same privileges as financial institutions, in insolvency proceedings against real estate developers, with the Supreme Court (SC) on August 9, 2019, upholding the amendments in the Insolvency and Bankruptcy Code (IBC) that grants buyers the status of financial creditors. Before the Insolvency and Bankruptcy Code (Amendment) Bill, 2019, was passed in Parliament, buyers were placed right at the bottom of the committee of creditors (CoC), when the resolution plans for sick developers were to be worked out.

Giving its verdict, while disposing of a batch of over 180 petitions filed by various builders, the top court also said the Real Estate (Regulation and Development) Act, 2016, should be interpreted in harmony with the Code. However, in case of a conflict, the Code should prevail. While asking the centre to take corrective measures, the SC also said only genuine homebuyers can invoke insolvency proceedings against developers.

Fixing the mismatch

Before it became evident that strict punishment would be inflicted on them under the provisions of the real estate law, real estate developers used every trick in their books to raise money from buyers. This was certainly the best possible way to collect funds — banks would do a great deal of ‘due diligence’ before they grant a loan, for which they would charge a high rate of interest. Non-banking finance companies seemed warmer. However, the rate of interest on the loan that NBFCs charge, is higher. To entice buyers into investing in real estate projects, developers promised them assured returns (small players are still seen doing it). In the commercial real estate segment, buyers were often promised assured returns of up to 12 per cent. More frequent were instances of sudden stopping of these payments by developers.

To curb this menace, the union cabinet, in February 2018, approved the Unregulated Deposit Schemes and Chit Funds (Amendment) Bill, 2018. When the Bill becomes an Act, cash-seeking developers of all sizes, will have to register with a designated authority.

In a move that would further tighten the noose around unscrupulous builders who promise assured returns to buyers and stop payments midway, the National Company Law Appellate Tribunal (NCLAT) has ruled that assured returns promised by a developer to a buyer through a proper agreement, is financial debt and the latter can file for an insolvency resolution under the Insolvency and Bankruptcy Code (IBC), in case the former fails to honour the agreement. Buyers can also move insolvency tribunals, in case builders take a lump-sum amount from them and fail to give possession or pay the money within a time frame. In case a buyer went by a builder’s verbal promise and did not document the pact, he would not be eligible to claim relief. In short, proper documentation is the key here.

Last Updated: Fri Oct 02 2020

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