Real estate is backbone of the economy of any country. It is the largest asset class owned by people of any country. It is one of the biggest sectors getting credits from the financial institutions. Investment in under construction housing is one of the biggest investments of Indian middle class. However, unfortunately numerous projects of real estate have started faltering leaving lakhs of home buyers in the lurch. There appears to be no solution in sight to give relief to the home buyers whose life savings have been squandered by the unscrupulous real estate developers.
In case of a leading real estate developer, a bench of Justices Arun Mishra and UU Lalit said that they cannot believe the justification given by developer for alleged diversion of funds of over Rs 3,500 crore. The real estate firm “cheated everybody including home buyers, banks and authorities and indulged in cartelization to prevent the Debt Recovery Tribunal from auctioning its unencumbered properties”, it said, “The limit of your fraud touched the sky.”
What sort of insolvency resolution process we can expect when, in the account books of unscrupulous real estate firms, the limit of fraud has touched the sky?
Insolvency Resolution Process in Real Estate:
Under Insolvency and Bankruptcy Code, the home buyer is treated as a financial creditor. However, his credit is unsecured. Most of the time he is also a debtor of a home loan, on which he is paying EMI, even when the real estate firms are not doing the construction activity. The home buyer group is unorganized, and is not able to put up any proposal in the insolvency resolution process. This article is an attempt to assist home buyers in the insolvency resolution process so that they can take some steps to safeguard their interest.
Information memorandum prepared by the resolution professional under Regulation 36 of the Insolvency Process Regulation is the most important document of any resolution process. As per sub-regulation (2), the information memorandum should contain the following details;
(i) Assets and liabilities with such description, as on the insolvency commencement date, as are generally necessary for ascertaining their values.
Explanation: ‘Description’ includes the details such as date of acquisition, cost of acquisition, remaining useful life, identification number, depreciation charged, book value, and any other relevant details.]
(b) the latest annual financial statements;
(c) audited financial statements of the corporate debtor for the last two financial years and provisional financial statements for the current financial year made up to a date not earlier than fourteen days from the date of the application;
(d) a list of creditors containing the names of creditors, the amounts claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims;
(e) particulars of a debt due from or to the corporate debtor with respect to related parties;
(f) details of guarantees that have been given in relation to the debts of the corporate debtor by other persons, specifying which of the guarantors is a related party;
(g) the names and addresses of the members or partners holding at least one per cent stake in the corporate debtor along with the size of stake;
(h) details of all material litigation and an ongoing investigation or proceeding initiated by Government and statutory authorities;
(i) the number of workers and employees and liabilities of the corporate debtor towards them;
(l) other information, which the resolution professional deems relevant to the committee.
Further the Resolution Professional is required to find fair and liquidation value of the corporate debtor, and needs to identify preferential and other transactions.
The resolution professionals do not get enough support from the corporate debtors. Most of the times, latest annual financial statements have not been prepared and filed. Further, information about statutory liabilities/investigations etc. are not provided to resolution professional readily by the management. Further, a resolution professional is required to create such document within a period of 2 weeks. Due to these shortcomings, proper information memorandum cannot be created and such information memorandum do not inspire confidence in other persons to file resolution proposals. Thus, most of the resolution process fails for lack of proper information memorandum.
It is suggested that information memorandum must provide all the information available, and at the same time it must clearly state the information which was not provided by the management. Further, there must be continuous updation of information memorandum. As and when new information comes to the knowledge of the resolution professional, it must be placed in the information memorandum. Further, the resolution professional must act in a pro-active way to find information from various authorities like development authorities, tax authorities, RERA, local authorities, banks etc. Unless information memorandum inspire confidence in the business community, no person would like to put up a resolution plan for consideration.
What can home buyers do in such a situation? Home buyers are financial creditors and hence members of Committee of Creditors. Regulation 36(3) of the resolution process regulation provides that,
“A member of the committee may request the resolution professional for further information of the nature described in this Regulation and the resolution professional shall provide such information to all members within reasonable time if such information has a bearing on the resolution plan.”
Thus, home-buyers being a member of the committee can ask resolution professional for further information over and above what has been provided in the information memorandum. This is a great tool. If the information memorandum is providing correct or complete information about the corporate debtor, or not providing information about the liabilities on the land, project etc.; such information can be specifically requested by a home buyer as member of the committee. If the home buyers take pro-active approach, through this method standard of information memorandum can easily be improved upon and right businesses can be attracted in the resolution process to put up resolution plans.
In every resolution process, home buyers as a group is most important part of committee of creditors. However, they are disorganized, and lacks legal acumen generally available to promoters or financial institutions. Further, though all money in the project has been given by them, and everybody is surviving on home buyer’s money; it is said that they have no net worth! Home buyers must understand that criteria for prospective resolution applicants are made by committee of creditors under Section 25 of the Insolvency and Bankruptcy Code. Evaluation matrix shall also be approved by them. Home buyers must ensure that eligibility criteria and evaluation matrix must be made in the form which ensures completion of the project such that home buyers can get their home.
Regulation 37 of the Insolvency Resolution Regulation gives the widest possible amplitude to the resolution process. The regulation reads as,
“37. Resolution plan.
A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following:-
(a) transfer of all or part of the assets of the corporate debtor to one or more persons;
(b) sale of all or part of the assets whether subject to any security interest or not;
(c) the substantial acquisition of shares of the corporate debtor, or the merger or
consolidation of the corporate debtor with one or more persons;
(ca) cancellation or delisting of any shares of the corporate debtor, if applicable;
(d) satisfaction or modification of any security interest;
(e) curing or waiving of any breach of the terms of any debt due from the corporate debtor;
(f) reduction in the amount payable to the creditors;
(g) extension of a maturity date or a change in interest rate or other terms of a debt due
from the corporate debtor;
(h) amendment of the constitutional documents of the corporate debtor;
(i) issuance of securities of the corporate debtor, for cash, property, securities, or in
exchange for claims or interests, or other appropriate purpose;
(j) change in portfolio of goods or services produced or rendered by the corporate debtor;
(k) change in technology used by the corporate debtor; and
(l) obtaining necessary approvals from the Central and State Governments and other
Thus, committee of creditor is a very powerful body and home buyers can negotiate claims of other financial creditors in the committee of creditors and may convince them to take a hair cut on their credit.
Generally, the books of corporate debtor is fudged, and owing to various statutory unknown liabilities, no persons shall be interested in taking over the corporate debtors. However, the committee of creditor is empowered to accept a resolution plan which consists of transfer of any asset of the corporate debtor. In real estate projects, generally the land and partly constructed structure is the only assets available with the corporate debtor. If home-buyers want, they can negotiate a resolution plan with any reputed builder or construction company to take over the land and partly constructed structure of the corporate debtor; finish the construction and offer the flats to the home-buyers. Home buyers can also make a co-operative housing society which can take over the land and joint venture agreement can be developed with prospective resolution applicants.
Numerous home buyers are suffering due to unscrupulous developers. In many cases even insolvency process has started by the home buyers cannot develop a comprehensive strategy due to lack of knowledge or cohesion. However, everything is not lost. Still, there is hope. Every judicial and government authority is willing to help home buyers. But the beginning has to be made by the home buyers themselves. If they decide to move, they can still get a home of their dreams.
(The author is Managing Partner of Rajesh Kumar and Associates, Advocates. He can be contacted on firstname.lastname@example.org)