Homebuyers Are Now Financial Creditors
Homebuyers will now be recognised as “financial creditors” under the insolvency law, with President Ram Nath Kovind giving his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, on June 6. The ordinance was approved by the Cabinet on May 23.
"The ordinance provides significant relief to homebuyers by recognising their status as financial creditors. This would give them due representation in the Committee of Creditors (CoC), and make them an integral part of the decision-making process," a government release said.
Buyers would be able to invoke Section 7 of the Code against errant developers. Section 7 allows financial creditors to file application seeking insolvency resolution process. While the Code would be progressive, experts are of the view that the changed rules would apply on current cases where a resolution plan is being out. The move will help homebuyers who have invested in various projects of insolvency-hit Amrapali, Jaypee and Unitech.
The move also means elimination of fly-by-night developers.
“Some developers have very little resources of their own. They use the homebuyer’s money to develop, invest in land banks and then get caught in debt trap. The homebuyer is the worst sufferer. He has a triple whammy… the real estate industry would eventually have to formalise itself where sound and structured developers would remain and fly-by-night operators would be eliminated,” said Union Minister Arun Jaitley, who is on a break owing to heath issues.
In the line of priority
In the list of creditors that are divided into eight categories, homebuyers were earlier placed at the bottom, if a company were to be liquidated. In simple terms, if a real estate developer goes bankrupt and his assets are sold to compensate the creditors, homebuyers would have been the last to stake their claims.
Under the previous Code, it would only be after settling claims of resolution professionals & administrators (1), financial creditors (2), workmen (3), employees (4), unsecured financial creditors (5), the government (6) and equity shareholders (7) that homebuyers could stake their claim on whatever was left of the liquidation of assets of a developer. Since the Code did not guarantee much security to them, buyers dealing with insolvency-hit developers have been knocking at the doors of the judicial system to get justice.
After receiving criticism from across quarters, including the Supreme Court, the government set up a 14-member panel to review the code and make it homebuyer-friendly.
After the change in the Code, homebuyers will enjoy the same position as banks if a builder were to go insolvent, shuffle financial institutions might not find agreeable. Their new dominant position would enable buyers to ensure banks do not guard only their interest while deciding on a resolution plan for an insolvent developer.
While lauding the government move, rating agency India Rating pointed out at the ramifications.
“This can negatively impact the lenders since the recovery proceeding will now have another layer of distribution, which was not factored in at the time of origination of loan to the developer. This will effectively increase the realized haircuts for the financiers,” the agency said.
Since banks would have to share the proceeds equally with buyers, developers will find it even harder to secure loans for building projects in future, say experts.