Realty sector reality check tempers home buyer news

With the coming into force of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, home buyers have finally been recognized as financial creditors, at par with others in the same category. However, a reality check shows that a wider perspective is needed.

After a lot of deliberation and confusion home buyers were neither classified as financial creditors nor operational creditors in the Insolvency and Bankruptcy Code, 2016 (IBC), as originally enacted. This was a cause of worry since it deprived them of: (1) the right to initiate the corporate insolvency resolution process (CIRP); (2) the right to be on the committee of creditors (CoC) and (3) the guarantee of receiving at least the liquidation value under the resolution plan.

Home buyers give large advances for their purchase and a delay in possession may thus have a huge prejudicial impact on them. The term “time value” has been interpreted to mean “compensation or the price paid for the length of time” for which money has been paid. Thus, the Insolvency Law Committee concluded that the definition of “financial debt” under section 5(8) of the IBC was sufficient to include the amounts raised from home buyers/allottees under a real estate project, and hence they were to be treated as financial creditors under section 5(7) of the IBC. Consequently, in a CIRP, they would be part of the CoC and be represented in the manner specified in the report, and in the event of liquidation, they would fall within the relevant hierarchy of creditors in terms of section 53 of IBC.

Dhir & Dhir Associates is a leading full-service law firm in India. Sachin Gupta is a partner at the firm.