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Insolvency and Bankruptcy Code: A failure for Homebuyers

In India, Real estate is one of the few industries that has grown at an exponential rate during the last two decades. However, it has lost its popularity due to stagnation and mediocre performance in terms of prices and sales. The Government recognized the issue and hence passed the Insolvency and Bankruptcy (Amendment) Code of 2018 to include real estate buyers as Financial creditors,as opposed to being classified as other creditors and receiving no rights or advantages. However, it is still unclear whether this amendment has improved the condition of homebuyers.

Many people, including Advocate Aishwarya Sinha, who filed the petition in Supreme court in favor of the homebuyers, believed that the job to help homebuyers was not executed properly even though theInsolvency And Bankruptcy Code was largely amended to help the real estate owners.

This article will briefly analyze the two amendments of 2018 and 2019 to the Insolvency and Bankruptcy Code and why the bankruptcy law failed the homebuyers in India.

Insolvency and Bankruptcy Code, 2016

Under the Insolvency and Bankruptcy code, 2016, homebuyers were at a disadvantageous position with respect to insolvency proceedings since they were not considered as financial or operational creditors. This problem could be seen in many cases one of which was Chitra Sharma's case, in which she represented 32,000 affected buyers in an appeal to the Supreme Court against the bankruptcy of Jaypee Infratech Ltdand said in her statement that under the Insolvency and Bankruptcy Code of 2016, flat buyers did not fall in the category of secured creditors and hence, they could get back their money only if something was left after repaying the secured and operational creditors.

Homebuyers were neither allowed to initiate the Corporate Insolvency Resolution Process (CIRP)against a defaulting builder or Real estate developer nor were they allowed to be a part of the Committee of Creditors. A guarantee of receipt of liquidation value under the Resolution Plan also wasn't given to them. Homebuyers had the only option of approaching the courts for requisite reliefs. This proves that before the bankruptcy law had failed to protect the homebuyers in cases where the real estate developers became insolvent.

2018 Amendment in Insolvency and Bankruptcy Code

The 2018 amendment gave a ray of hope to the homebuyers in India in the sense that they were to be included under 'Financial Creditors' which gave them the right to initiate Corporate Insolvency Resolution Plan in NCLAT against an errant developer as given under section 7 of the code. The constitutional validity of such inclusion of the allottees in Financial creditors was upheld by the Supreme Court of India in the case of Pioneer Urban Land and Infrastructure Limited v Union of India. Additionally, now homebuyers are also included in the Committee of Creditors and such inclusion is beneficial to the homebuyers as they can now participate in the decision-making aspects, determine the Corporate Insolvency.

Resolution Plan and approve or reject the Resolution Plan

However, the 2018 amendment, though introduced to improve homebuyer's situation, who have invested in various projects of insolvency-hit developers, failed to actually bring about any change as thousands of homebuyers have failed to get much relief even after being included as financial creditors. Moreover, the Amendment does not clarify whether the real estate owners would come under secured or unsecured financial creditors thereby their position in the order of priority is uncertain.

Advocate Aishwarya Sinha said in an interview that the amendment only elevated home buyers to participate in the Committee of Creditors meeting but it never factored in a situation where the Committee of Creditors fails. If such a situation occurs, according to section 53 homebuyers would be unsecured creditors, who are at the bottom of the pecking order. The definition of secured creditors has not been amended to include homebuyers in it.

2019 Amendment in Insolvency and Bankruptcy Code- Bane or Boon?

The Insolvency and Bankruptcy (Amendment) Code, 2019 and subsequent rulings in the apex court, amended section 7 of the code to include three provisions. The second and third provisos deal with rights of allottees to initiate the insolvency process as financial creditors against a developer under the Code.

The second provision stated that at least 100 homebuyers or 10% of allottees of the same real estate project, whichever is lesser,must jointly file an application for insolvency proceedings against an erring real estate developer. Such a provision limits the avenue for redressal available to aggrieved homebuyers and also defeats the purpose of including homebuyers as financial creditors under Insolvency and Bankruptcy Code.

Such a limit on real estate owners is unconstitutional and discriminatory as it violates Article 14 of the Indian Constitution as challenged in a Writ petition titled Manish Kumar v Union of India. This amendment has impaired the rights of the allottees to approach the Tribunal individually and independently unlike other financial and operational creditors, if the required threshold is not met. Even those petitions that are pending before the NCLAT have to comply with these thresholds.

It also brings about practical and consequential difficulties, like for instance, some of the allottees of a project may be inclined to pursue different legal routes, thus making it difficult for the allottees who want to proceed under the code to meet the minimum requirement of 10% or 100 allottees and hence rendering them remediless under the Code. Such anomalies will arise because of this amendment and will require redressal by the Court or the Legislature.

In addition, the amendment fails to notify whether the required strength of 100 or 10% of the total number of allottees is mandated to be required only at the initial stage of proceedings or it needs to be maintained all through the proceedings.

The third provision with respect to homebuyers stated that where applications by allottees had been filed before the Ordinance and had not been admitted by the NCLT, these applications would have to be modified to comply with the requirements of the second provision within 30 days of the commencement of the Ordinance. Such a provision would lead to chaos and would be unfair to those who couldn't comply with the second provision within 30 days.

Majority of the Resolution Plans not approved

According to the data from the Insolvency and Bankruptcy Board of India only eight Resolution Plans have been approved for real estate sector despite the fact that almost 205 cases had been admitted until March 2021 five years after the Insolvency and Bankruptcy code was notified. This equates to a 4% success rate, making it the second worst-performing sector after computer and related activities. Thus, the amendment has failed to create Resolution plans that are beneficial for homebuyers.

The endeavour to include home buyers under the purview of financial Creditor is appreciated as it provides relief to the allottees; however, it was half-way through and not a foolproof plan for the homebuyers in the long run.

Individual homebuyers are barred from seeking relief under the Insolvency and Bankruptcy Code due to the 2019 amendment that imposed a minimum threshold limit for applying to commence insolvency proceedings against a defaulting real estate. From a practical view, an individual's right is abridged because it is difficult for everyone to apply to the authorities for the same reasons.

Though real estate buyers have the option of seeking another form of legal remedy, section 238 of the Insolvency and Bankruptcy Code,2016 stipulates that the Code takes precedence over all other laws and hence proceedings before any other authority would come to a standstill.

The principal goal of the Code, which is to safeguard creditors' interests against defaulting debtors, is now nullified by the 2019 amendment. The legislature has overviewed the anomalies and hardships faced by the real estate allottees by promulgating the amendment. Such flickering enactments by the legislature dissuades applicants or litigants to seek remedies under the Code, which was created for their benefit.

Written By: Shashwata Sahu, Advocate, LLM, KIIT School of Law

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