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17 Sep 2018

Home Buyers and IBC

By: Anshu Pratap Singh
 Corporate & Commercial   Add a comment

The status of the Home buyers under Insolvency and Bankruptcy Code (IBC) has been puzzling adjudicating authorities. The question was brought to forefront in public interest writ petition filed before Supreme Court[1] seeking relief for home buyers in Jaypee insolvency matter[2].  Apex Court initially granted stay and later directed that resolution plan should protect the interest of home buyers.

IBC provides for only two types of the creditors i.e. Operational Creditors and Financial Creditors who can approach NCLT in the event of default on debt. NCLT in different cases tried to classify the Homebuyers in either of the categories. Operational Creditor is defined as a person to whom an operational debt, a claim in respect of the provision of goods and services including employment or government dues, is owed. The definition of Operational Debt does not consider immovable property. In Col. Vinod Awasthy case[3], NCLT rejected the argument of treating home buyers as Operational Creditor on the ground that dues of Home buyers are not falling under the four categories prescribed under the definition of operational debt.

Financial Creditor has been defined as any person to whom a financial debt, a debt disbursed against the consideration for the time value of money, is owed. It also includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing. In Nikhil Mehta case[4], the developer had contract with the Home buyers to pay “monthly committed returns” to them until handing over of the unit. In this context NCLAT was of the view that amount disbursed by the home buyers was “against the consideration of the time value of the money” and “the Respondent-Corporate Debtor raised the amount by way of sale – purchase agreement, having a commercial effect of borrowing.” NCLAT decided that home buyers were a financial creditor in such situation. In several other cases, home buyers were not considered as financial creditor because of absence of any assured returns[5]. Thus, the approach towards the classification of Home buyers as either of the creditor was to classify them on basis of the facts of the case.  

In the above background Insolvency law committee (ILC) investigated the issue of non-inclusion of home buyers within either the definition of ‘financial’ or ‘operational’ creditors. The Report of ILC observes that in few instances the amount paid to the developer by homebuyers was surpassing the loan extended by financial institutions[6]. However, the non-inclusion in either category deprived home buyers of any right to initiate the corporate insolvency resolution process (“CIRP”), and any relief of receiving at least the liquidation value under the resolution plan. The Report underscored that amounts raised under home buyer contracts is a significant amount, which contributes to the financing of construction of an asset in the future, therefore, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8).

This puzzling status of home buyers has been resolved by the recent amendment ordinance (Ordinance) to IBC[7]. The Home buyers have been classified as financial creditors under the Ordinance along the lines suggested by the Insolvency Law Committee.  The IBC second amendment bill, affirming the changes brought in by the Ordinance, was passed and assented in August 2018[8].

As a result of the new-found status of financial creditor, the home buyers can now initiate a corporate insolvency resolution process against the corporate debtor under Section 7 of IBC and form part of the committee of the creditors (CoC).  Liquidation value due to dissenting Home buyers, who do not agree to the resolution plan approved by the CoC, will be paid before any recoveries are made by the assenting financial creditors.

 

[1] Chitra Sharma & Ors. Vs Union of India & Ors , Writ Petition(s)(Civil) No(s).744/2017

[2] IDBI Bank Limited Vs Jaypee Infratech Limited, CP(IB)- 77/ALD/2017

[3] Col. Vinod Awasthy Vs AMR Infrastructure Limited, NCLT-Principal Bench, CP No. (IB)-10 (PB)/2017 dated February 20, 2017

[4] Nikhil Mehta and Sons  Vs AMR Infrastructure Ltd, NCLAT- New Delhi, Company Appeal (AT) (Insolvency) No. 07 of 2017 dated July 21, 2017.

[5] Rajendra Kumar Saxena Vs M/s Earth Gracis Buidcon Private limited, NCLT-Principal Bench, CP No. (IB)-448 (PB)/2017 dated February 20, 2017

[6]See The Report of Insolvency Law Committee, March 2018 available at  http:// www.mca.gov.in / Ministry/ pdf/ ILRReport2603_03042018. Pdf, last accessed on September 12, 2018

[7] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 w.e.f. June 6, 2018

[8] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f June 6, 2018

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