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SC Upholds Changes in IBC; Homebuyers Are Now Financial Creditors

SC Upholds Changes in IBC; Homebuyers Are Now Financial Creditors

SC Upholds Changes in IBC; Homebuyers Are Now Financial Creditors
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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: Tue Aug 13 2019

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