- IT’s Input
- Highlights of Insolvency and Bankruptcy Code (Amendment) Act, 2019
- How does RERA protect homebuyers?
- What was the condition before IBC (Amendment) Act, 2019?
- What is Committee of Creditors (COC)?
- Is IBC amendment 2019 is a duplication of RERA?
- Problems faced by the Homebuyer
- Defence for Real estate company
- RERA vs IBC
- Challenges and Suggestion
- Other Challenges
[RSTV The Big Picture] Safeguarding Home Buyers Through IBC
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- Recently, the Supreme Court upheld amendments to the Insolvency and Bankruptcy Code (IBC), giving status of financial creditors to homebuyers.
- The judgement came on a pleas filed by builders who have argued that remedies to homebuyers were available under the Real Estate (Regulation and Development) Act (RERA), 2016 and the amendments to IBC only enables duplication.
- The court said the RERA act which regulates the real estate sector should be read harmoniously with the amendments made in the IBC and in case of conflict the code will prevail.
- This means that an aggrieved homebuyer has the option to seek relief under three laws—RERA, Consumer Protection Act and IBC.
- Insolvency is a situation in which an individual or organization cannot pay off its bills and debts.
Highlights of Insolvency and Bankruptcy Code (Amendment) Act, 2019
Time-limit for resolution process:
- The IBC states that the insolvency resolution process must be completed within 180 days, extendable by a period of up to 90 days. As per act, the resolution process must be completed within 330 days.
- This change is important as many of the resolution cases need more time and if it crosses 330 days, then the company will be liquefied.
Supremacy to financial creditors
- As per act, the operational creditors will receive an amount not less than the liquidation value of their debt or the amount that would have been received if the amount had been distributed in accordance with the order of priorities of the Code, whichever is higher.
- The act gives the supremacy to financial creditors over operational creditors.
- Moreover, the financial creditors who do not vote in favour of the resolution plan will also receive an amount that is not less than the liquidation value of their debt.
Allowing corporate restructuring
- The amendment also allowed resolution plan to include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger to enable the market to come up with dynamic resolution plans.
- Previously for this purpose they used to go the judiciary and now it is clearly stated if they want to go in for a particular framework they can.
Initiation of resolution process
- As per the IBC, the NCLT must determine the existence of default within 14 days of receiving a resolution application. Based on its finding, NCLT may accept or reject the application.
- However, the act states that in case the NCLT does not find the existence of default and has not passed an order within 14 days, it must record its reasons in writing.
Representative of financial creditors:
- The Code specifies that when the debt is owed to a class of creditors beyond a specified number, the financial creditors will be represented on the committee of creditors by an authorised representative. These representatives will vote on behalf of the financial creditors.
- The act states that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent.
- Hence, the act has provided unsecured creditors a level playing field, through the voting framework.
How does RERA protect homebuyers?
- RERA offers protection to homebuyers by imposing duties on promoters and consists of preventive and penal provisions.
- Every promoter shall register his project with RERA and 75% of the amount realised shall be deposited in a separate account and withdrawal from the account shall be in proportion to the degree of project completion, among others. Failure to comply entails penalty.
- On failure to give possession of the apartment, the homebuyer is given the choice to withdraw from the project and the promoter shall be liable to repay the amount received.
- In case of non-withdrawal, promoter shall pay interest for every month of delay till the date of handing over the possession.
What was the condition before IBC (Amendment) Act, 2019?
- In August 2017, one of the bank took an InfraTech company into insolvency. This cause panic in home buyer as whether there right would be protected or not under IBC Act 2016.
- Before the IBC (Amendment) Act, 2019, if a bank takes a builder/real estate company into insolvency, the first priority in giving money back was given to the bank over home buyers.
- This is because the IBC act gives the supremacy to financial creditors over operational creditors and Banks are considered as financial creditors.
- After being petitions filed by home buyers, the supreme court gave order to government to take steps in order to protect the rights of home buyers.
- Hence, government, in July 2018, amended the IBC 2016 act. It made three major provisions (related to homebuyers):
- The homebuyers will be considered as Financial Creditors.
- The homebuyers will be part of the Committee of Creditors (COC).
- Since the homebuyers can range from few to very large, homebuyers can have their representatives in COC, which will vote on behalf of the financial creditors. The voting rights will be considered on the 60% of the total value of project paid to the builder.
What is Committee of Creditors (COC)?
- Committee of Creditors is a committee consisting of the financial creditors of the Corporate Debtor.
- This Committee eventually forms the decision making body of the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP).
- It can be considered like a board of directors a company who approves/ rejects the Resolution Plan (RP), decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP etc.
Is IBC amendment 2019 is a duplication of RERA?
- It cannot be considered the duplication, as under RERA, banks and financial institutions have the capabilities to unlawfully seize the whole proceedings of the recovery of the money from defaulting company. In this scenario, the homebuyers had to wait forever and might not get their money.
- Moreover, RERA is not so much dealing with creditors at large.
Problems faced by the Homebuyer
- In a subvention scheme, the homebuyer pays 10-20% of the price of the apartment at the time of purchase. The balance is paid by a bank to the developer as a loan. While the project is under construction, the developer pays the interest on the loan to the bank. The buyer’s EMIs begin only after he/she gets possession.
- However, many homebuyers/investors were not paid in the Subvention schemes as builder are not paying the EMI for subvention plan. Hence, in this condition, the EMI has to be paid by buyer instead of builder.
- After the IBC amendments, the homebuyer could have their say in the COC and can get their money back speedily.
Defence for Real estate company
The real estate company can defence themselves against a bank/homebuyer taking the company into insolvency. The company can make argument such as
- The homebuyers did not pay all the installments.
- The homebuyer is a speculative investor (The investor buys the financial instrument to make profit from market price changes).
RERA vs IBC
- From the buyer’s perspective, it is better to opt for resolution process under RERA than to go for liquidation under IBC, as under liquidation, he/she may or may not get their due.
- Under RERA, a builder cannot transfer money from one project to another project. Hence, the builder has to keep most of the money in an escrow account devoted to the project for which he has raised money.
Challenges and Suggestion
- Earlier, people used to give petitions to local authority, collectors etc. to get many of their grievance readdressed. This became difficult due to high workload and hence people started to going judicial courts. Then, consumer courts came in and subsequently they also got overloaded.
- Moreover, National Consumer Disputes Redressal commission, made under Consumer Protection Act, give the hearing dates at the interval of one/two years.
- Under RERA, there are only one RERA for most of the states (larger states may have 2 or 3 RERA authorities). However, it is not enough as each state have nearly 30 to 60 districts.
- Even under IBC or National Company Law Tribunal (NCLT), it is difficult for a buyer or even for a group of buyers to run around courts to get justice as there
- Hence, in absence of local authorities, a common man can only go to the consumer courts or RERA authority or NCLT for grievance Redressal which are not time efficient.
- Administrative management has to be streamlined.
- The local authorities have to be empowered by creating more local posts such as creating additional collectors for the real estate matter, additional collector town and country planning district officers etc.
- Some of the businessman, after gaining money from some other business, enters into real estate business without even knowing how to manage it.
- Reals estate developers have to maintain professionalism.
- RERA has the provisions for registration of real estate project as well as Real Estate Agent to aiming for maintaining uniformity, and professionalism. However, this needs to be enforced and developed must adopt these concepts of professionalism.
- As per a recent report, there are more than 14 lakh units of real estate which are delayed more than from 2 years to 22 years. Though RERA is in place since three years, there has not been a successful resolution in resolving the delayed real estate project.
- The supreme court in its recent judgement, after seeing the low number of RERA authority in each state, suggested that every state should appoint the RERA appellate authority and adjudicating officers soon.
- Moreover, the court also suggests that NLCT and NCLTE members should be appointed to manage the pendency of cases.
- In the new IBC code, there are provisions to take over the stalled projects in which new investors can invest to complete the project. However, until the government interventions (such as government land dues piling on the builders) does not happen at state level, it will be very difficult to have this projects completed.
- The easy availability of money (such as from Non-bank financial institution) for real estate sector for home buyers is another challenge which needs to be resolved.
- The homebuyers or investors should desist from speculative investment in real estate.
- Some Real Estate Regulators does not have adequate capacities.
- Under IBC, many projects (55%) are liquidated rather than having a resolution plan. In other words, more than 50% of real estate cases have chances of liquidation.
- Out of the more than 2000 case referred to National Company Law Tribunal (NCLT), more than 850 cases are related to the real estate which shows the significance of real estate sector.
- As far as the miseries of homebuyers are concerned, the IBC (amendment) act 2019 can be considered as a major battel won for homebuyers. However, many other steps need to be taken on ground in order to give money to homebuyers.
- The government has to restructured a governance framework for resolving the homebuyer’s problems, approachable to a common man. The government also has to go beyond the court interventions.
- In nutshell, it is the government’s responsibility to make simplified structure for resolving the grievances of the homebuyers.