Real estate test for the new insolvency code

The recently introduced Insolvency and Bankruptcy Code, 2016 (IBC), has been put to a real test with the admission of corporate insolvency resolution proceedings (CIRP) against Jaypee Infratech for defaulting on a loan from IDBI Bank.

The IBC aims to remove the bottlenecks and expedite the CIRP, with a paradigm shift from “debtor in possession” to “creditor in possession”. Caught between the conflicting interests of the debtor and creditors are a large number of home buyers, who are trying to identify their rights under the IBC. Classifying home buyers as “financial creditors” or “operational creditors” is important, as these creditors have varied rights both before and post CIRP.

Few home buyers have tried to invoke the IBC’s provisions against the errant builders. In Nikhil Mehta & Sons (HUF) & Ors v M/s AMR Infrastructure Ltd, the flat buyers sought to initiate CIRP under section 7 of the IBC as financial creditors. The National Company Law Tribunal (NCLT) dismissed their application, holding that the flat purchasers would not come under the category of financial creditor and arrears on “assured returns” would not fall under the definition of a “financial debt”.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Rahul Sud is an of counsel. Satish Anand Sharma is a senior associate and a qualified resolution professional.