In a recent judgment by the Supreme Court bench of Justices R F Nariman, Sanjiv Khanna and Surya Kant held that the inclusion of ‘home buyer’ in the definition of financial creditor does not violate Article 14 and 19(1)(g) of the Constitution and rejected the argument that such inclusion is ‘arbitrary, unreasonable, excessive and disproportionate.
The court differentiated the home buyer from an operational creditor on many counts. The Supreme Court further held that in default before a bankruptcy court, the onus is on the builders to prove that the buyer does not wish to take possession of their house to avoid proceedings.
In a follow-up matter, as reported in Times of India in the first case after the Insolvency and Bankruptcy Code was amended and later upheld by the Supreme Court to give home-buyers the status of a financial creditor, the National Company Law Tribunal has initiated insolvency proceedings against Umang Realtech. Similar orders are being passed against Today Homes and Raheja.
Whilst analyzing the practical aspect of the IBC process, the question before us is whether it is Practical for a ‘home buyer’ to invoke IBC. The entire process of IBC stands on the premise that the corporate debtor should be given a new lease of life through a resolution plan approved by a committee of creditors (COC). The COC is constituted with weightage in terms of debt owed to financial creditors (financial, operational, statutory, etc) who eventually decide the fate of a resolution plan.
The resolution plan can be approved by 66% majority of creditors having a say in the COC. Undoubtedly, with clearance by Supreme Court, the home buyer gets his say at the same footing as that of financial creditors who is generally agreeable to take a haircut on their exposure. Doesn’t this necessarily mean that the home buyer on day one itself by invoking IBC should be ready to take a haircut on the investment made by him?
The recent resolutions plans as approved by NCLT in many matters like Essar steel, Ruchi soya, Bhushan steel have got a financial creditor close to around 40% of their loan with interest. Assuming that the Homebuyer agreement has a clause where he will be able to levy interest on this investment for a delay of 2,3 years might increase his demand from Rs. 100 to say Rs. 130. However, the moment Home Buyer gets a haircut close to 50% on his demand the money he is going to get is somewhere around Rs. 65 percent provided the resolution plan is approved by the committee of creditors within a year max and there is some interested suitor who is able to buy that project without another round of litigation.
Keeping in mind the situation of a developer and his outstanding payment positions it is very likely that this hair cut might increase as high as 75% only resulting in a minuscule recovery to the home buyers. We also should not forget that IBC is a costly process so far the advertisements, meetings, etc are concerned with the ultimate burden falling on the builder who has a financial crunch to pay even for the IBC process and might be shared by COC including the home buyer.
So what are the other options available with a home buyer when the builders are happily spending time in jail and are unable to comply with the orders passed by National Commission considering the home buyer as a consumer? Does it make sense to go to RERA whose constitutional validity is still under challenge and the order passed by RERA are also not taken seriously by builders? These questions remain unanswered even after the Homebuyer being given the right as a financial creditor by the supreme court.
On one side there is hardly any chance to get the home & on another side, you have those paper orders or decrees which are difficult to enforce. The model adopted by Supreme Court in the Amarpali case by appointing NBCC seems better model provided the home buyers get the right to choose an agency like NBCC.
If the law is really concerned for the interest of home buyer by giving them priority over other stakeholders Is not it better than home buyers is given the right to constitute a committee/association like RWA even before the completion of a project (generally operated nowadays in the form of WhatsApp group) separate from COC where the home buyers committee or RWA is given some special relaxations & is given right to appoint third party builder like NBCC to complete the project by pooling resources rather than spending time in resolution plan under IBC where the taking over of the project by any good builder (when all are in financial difficulties) is next to zero.
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The views expressed above are personal in nature having no bearing whatsoever in the matters referred in the article.
