NOW HOMEBUYERS CAN GET RELIEF UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016.

Insolvency and Bankruptcy Code, 2016 (IBC) was amended through the (Amendment) Ordinance, 2018 after the decision of the Hon’ble Supreme Court of India in Jaypee Infratech case, considering the ordinance, now home buyers and allottees under the Real Estate Regulation and Development Act, 2016 (RERA) got the status of financial creditors under IBC.

The amendment is as follows:-

‘In clause (8), in sub-clause (f), the following Explanation shall be inserted, namely:—

Explanation.—For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016;’;

Accordingly homebuyers and allottees will able to invoke Section 7 of IBC to file an application in NCLT for initiating corporate insolvency resolution process against a defaulting builder/Company. Therefore, the amendment made through the Ordinance inter alia brings IBC much closer with Section 18 of RERA which gives the allottees the right to demand:

1. Refund of the entire amount paid by the allottees including interest at prescribed rates.
2. Interest to be claimed for any delayed possession.

That in Nikhil Mehta vs. AMR Infrastructure Ltd. the NCLAT has cleared the issues that how Applicants would be covered by the expression ‘Financial Creditor’ and the expression ‘Financial Debt’ within the meaning of term used in Section 7 and Section 5 (7) & (8) of the IBC and default in the payment of “Assured Returns” payable by the developer would be sufficient to satisfy the requirement of Section 7 R/w Section 5 (7) and (8) of the IBC.

The definitions in this context are described as below:

7. “Financial Creditor” means any person to whom a financial debt is owed and includes a person to whom such debts has been legally assigned or transferred to;
8. “Financial Debt” means a debt along with interest if any, which is disbursed against the consideration for the time value of money and include-
9. Money borrowed against the payment of interest.
10. Any amount raised by acceptance under any acceptance credit facility or its dematerialized equivalent;
11. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.
12. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed.
13. Receivables sold or discounted other than any receivables sold on non- recourse basis;
14. Any amount raised under any other transaction including any forward sale or purchase agreement, having the commercial effect of a borrowing ;
15. Any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculation the value of any derivative transaction, only the market value of such transaction shall be taken into account.
16. Any counter- indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution.
17. The amount of any liability in respect of any of the guarantee or indemnity or any of the items referred to in sub-clause (a) to (h) of this clause;

That those buyers/allottes who has entered into agreement for ‘assured return’ plan and the developer had borrowed the amount for the commercial purpose of financing its real estate development activities and equated the Allotment Debt with a loan which arose out of a transaction having the commercial effect of borrowing, therefore enabling the homebuyers, who are entitled to get assured return from the builder/developer till the actual delivery of possession of the said property, to directly approach the adjudicating authority for commencement of CIRP against the builder.

However, this criteria has been left out by the Ordinance; though the introduction into the definition uses the words that the financing from the allotteee must have the effect of commercial borrowing. The Ordinance does not stop at introduction of flat-buyers into the definition of flat-buyers but also provides for appointment of an authorised representative who may represent the flat-buyers at the CoC. This is far-sighted as this would avoid CoC meetings to become confusing and impossible to manage. However, priorities of banks and flat-buyers have now become the same in order of payment.

This amendment will now allow Homebuyers to approach the NCLT for recognizing the refund as the financial debt and failure to comply as the default under IBC. This amendment has brought much required changes in the most successful law of this decade.

By

Karan Nagpal, Advocate