A couple of years back, the only option available to home buyers was to approach consumer court to proceed against the developer. The enactment of Insolvency and Bankruptcy Code (IBC) in 2016 strengthened the position of homebuyers by expanding the options for redressal of grievances. Initially, when IBC came into force there was no clarity regarding the position of homebuyers as there is no straight jacket method for classification of creditors under IBC. After immense hullaballoo, IBC was amended to bring home buyers on the same pedestal with financial creditors. A three judge’s bench of Apex Court while adjudicating upon the matter of Pioneer Urban Land and Infrastructure Limited vs. Union of India, sustained the validity of the Insolvency and Bankruptcy Code (“IBC”) Amendment 2019 wherein home buyers were brought under the ambit of financial creditors. Bringing home buyers in the arena of financial creditor now signals that even home buyers can initiate CIRP against the corporate debtor under Section 7 of IBC.
Ever since the status of financial creditors has been designated to home buyers, cases pertaining to insolvency against developers has risen. Out of nearly 2200 insolvency petitions admitted so far, more than 500 have been against the real estate companies. Even a single home buyer can dislocate a project irrespective of its liquidity position and this engendered concerns involving abuse of law. There have been instances where a single homebuyer has dragged a well performing real estate company into insolvency proceeding in order to claim his refund. Owing to the expeditious nature of the Code, there is a short time frame to strike an amicable settlement with the homebuyers.
Developers allege that the powers prescribed under IBC are not being cautiously exercised by the home buyers and those who have an axe to grind are using the law to their advantage. The realty developers are requesting amendment in the law and their demands are two-fold. Firstly, that at least 2/3rd of the allottees of a real estate project should be required to trigger proceedings under Section 7 of the IBC. It is being argued that a single homebuyer should not be allowed to shake the whole project consisting of thousands of homebuyers as this is leading to delay in the completion of project. Secondly, that RERA should be the sole authority and complaints should go to RERA before NCLT.
The homebuyers on the other hand contend that amending the law would be unjust. They take such extreme steps only if negotiations and conversation with the developers turns out fruitless. One should not forget that they invested their hard earned money, lifetime savings, taken loan, paid EMIs along with paying the rent and above all, went through the trauma of not knowing the fate of their investment. Henceforth, the status of financial creditor is a crucial avenue. The demand concerning registration of complaint under RERA, is rebutted by the fact that RERA and IBC are two separate legislations with separate objectives. RERA was enacted with a view to regulate real estate projects and enhance transparency, whereas IBC focuses on revival of stressed companies and maximizing the value of assets. IBC is attracted, on occurrence of default by the developer, while RERA continues to be in operation throughout. Apart from this, the Apex Court has already made the position clear that IBC will prevail over RERA due to its non- obstante clause mentioned under Section 238 therefore, such an amendment if made will not yield desired results.
Pertinently, with a view to preventing misuse of provisions, the government is now reckoning over setting a minimum threshold in a way that the number of homebuyers necessary to file an insolvency case must not be less than 100 or they must collectively account for at least five per cent of the outstanding debt of the real estate company, whichever is lower. The Companies Act of 2013 already stipulates a limit of 5 (five) per cent for commencing class action suits and a limit of twenty per cent of shareholding in cases of oppression and mismanagement by minority shareholders. The Corporate Affair Minister Mr. Injeti Srinivas said that these provisions will act as a guiding torch.
Conclusion: Homebuyers are often manipulated by the developers and therefore, categorizing them as Financial Creditors has certainly empowered them. However, it has also augmented the chances of misuse of IBC. Developers ought to be penalized for delay in completion of project but IBC is not the ultimate and efficient solution to it. The Apex Court in the case of Pioneer Urban has already opined that the Adjudicating Authority should not consider the cases filed by buyer who is trying to get his money back from the falling market. Therefore, The Code should be amended to set some threshold. However, till the time no constructive decision is taken pertaining to this issue, the homebuyers shall be prudent while approaching the Adjudicating Authority.