Insolvency and Bankruptcy Code: A failure for Homebuyers
In India, Real estate is one of the few industries that has grown at an
exponential rate during the last two decades. However, it has lost its
popularity due to stagnation and mediocre performance in terms of prices and
sales. The Government recognized the issue and hence passed the Insolvency and
Bankruptcy (Amendment) Code of 2018 to include real estate buyers as Financial
creditors,as opposed to being classified as other creditors and receiving no
rights or advantages. However, it is still unclear whether this amendment has
improved the condition of homebuyers.
Many people, including Advocate Aishwarya
Sinha, who filed the petition in Supreme court in favor of the homebuyers,
believed that the job to help homebuyers was not executed properly even though
theInsolvency And Bankruptcy Code was largely amended to help the real estate
This article will briefly analyze the two amendments of 2018 and 2019 to the
Insolvency and Bankruptcy Code and why the bankruptcy law failed the homebuyers
Insolvency and Bankruptcy Code, 2016Under the Insolvency and Bankruptcy code, 2016, homebuyers were at a
disadvantageous position with respect to insolvency proceedings since they were
not considered as financial or operational creditors. This problem could be seen
in many cases one of which was Chitra Sharma's case, in which she represented
32,000 affected buyers in an appeal to the Supreme Court against the bankruptcy
of Jaypee Infratech Ltdand said in her statement that under the Insolvency and
Bankruptcy Code of 2016, flat buyers did not fall in the category of secured
creditors and hence, they could get back their money only if something was left
after repaying the secured and operational creditors.
Homebuyers were neither
allowed to initiate the Corporate Insolvency Resolution Process (CIRP)against a
defaulting builder or Real estate developer nor were they allowed to be a part of
the Committee of Creditors. A guarantee of receipt of liquidation value under
the Resolution Plan also wasn't given to them. Homebuyers had the only option of
approaching the courts for requisite reliefs. This proves that before the
bankruptcy law had failed to protect the homebuyers in cases where the real
estate developers became insolvent.
2018 Amendment in Insolvency and Bankruptcy CodeThe 2018 amendment gave a ray of hope to the homebuyers in India in the sense
that they were to be included under 'Financial Creditors' which gave them the
right to initiate Corporate Insolvency Resolution Plan in NCLAT against an
errant developer as given under section 7 of the code. The constitutional
validity of such inclusion of the allottees in Financial creditors was upheld by
the Supreme Court of India in the case of Pioneer Urban Land and Infrastructure
Limited v Union of India. Additionally, now homebuyers are also included in the
Committee of Creditors and such inclusion is beneficial to the homebuyers as
they can now participate in the decision-making aspects, determine the Corporate
Resolution Plan and approve or reject the Resolution PlanHowever, the 2018 amendment, though introduced to improve homebuyer's situation,
who have invested in various projects of insolvency-hit developers, failed to
actually bring about any change as thousands of homebuyers have failed to get
much relief even after being included as financial creditors. Moreover, the
Amendment does not clarify whether the real estate owners would come under
secured or unsecured financial creditors thereby their position in the order of
priority is uncertain.
Advocate Aishwarya Sinha said in an interview that the
amendment only elevated home buyers to participate in the Committee of Creditors
meeting but it never factored in a situation where the Committee of Creditors
fails. If such a situation occurs, according to section 53 homebuyers would be
unsecured creditors, who are at the bottom of the pecking order. The definition
of secured creditors has not been amended to include homebuyers in it.
2019 Amendment in Insolvency and Bankruptcy Code- Bane or Boon?The Insolvency and Bankruptcy (Amendment) Code, 2019 and subsequent rulings in
the apex court, amended section 7 of the code to include three provisions. The
second and third provisos deal with rights of allottees to initiate the
insolvency process as financial creditors against a developer under the Code.
second provision stated that at least 100 homebuyers or 10% of allottees of the
same real estate project, whichever is lesser,must jointly file an application
for insolvency proceedings against an erring real estate developer. Such a
provision limits the avenue for redressal available to aggrieved homebuyers and
also defeats the purpose of including homebuyers as financial creditors under
Insolvency and Bankruptcy Code.
Such a limit on real estate owners is unconstitutional and discriminatory as it
violates Article 14 of the Indian Constitution as challenged in a Writ petition
titled Manish Kumar v Union of
India. This amendment has impaired the rights of the allottees to approach the
Tribunal individually and independently unlike other financial and operational
creditors, if the required threshold is not met. Even those petitions that are
pending before the NCLAT have to comply with these thresholds.
It also brings about practical and consequential difficulties, like for
instance, some of the allottees of a project may be inclined to pursue different
legal routes, thus making it difficult for the allottees who want to proceed
under the code to meet the minimum requirement of 10% or 100 allottees and hence
rendering them remediless under the Code. Such anomalies will arise because of
this amendment and will require redressal by the Court or the Legislature.
addition, the amendment fails to notify whether the required strength of 100 or
10% of the total number of allottees is mandated to be required only at the
initial stage of proceedings or it needs to be maintained all through the
The third provision with respect to homebuyers stated that where applications by
allottees had been filed before the Ordinance and had not been admitted by the
NCLT, these applications would have to be modified to comply with the
requirements of the second provision within 30 days of the commencement of the
Ordinance. Such a provision would lead to chaos and would be unfair to those who
couldn't comply with the second provision within 30 days.
Majority of the Resolution Plans not approvedAccording to the data from the Insolvency and Bankruptcy Board of India only
eight Resolution Plans have been approved for real estate sector despite the
fact that almost 205 cases had been admitted until March 2021 five years after
the Insolvency and Bankruptcy code was notified. This equates to a 4% success
rate, making it the second worst-performing sector after computer and related
activities. Thus, the amendment has failed to create Resolution plans that are
beneficial for homebuyers.
The endeavour to include home buyers under the purview of financial Creditor is
appreciated as it provides relief to the allottees; however, it was half-way
through and not a foolproof plan for the homebuyers in the long run.
Individual homebuyers are barred from seeking relief under the Insolvency and
Bankruptcy Code due to the 2019 amendment that imposed a minimum threshold limit
for applying to commence insolvency proceedings against a defaulting real
estate. From a practical view, an individual's right is abridged because it is
difficult for everyone to apply to the authorities for the same reasons.
real estate buyers have the option of seeking another form of legal remedy,
section 238 of the Insolvency and Bankruptcy Code,2016 stipulates that the Code
takes precedence over all other laws and hence proceedings before any other
authority would come to a standstill.
The principal goal of the Code, which is to safeguard creditors' interests
against defaulting debtors, is now nullified by the 2019 amendment. The
legislature has overviewed the anomalies and hardships faced by the real estate
allottees by promulgating the amendment. Such flickering enactments by the
legislature dissuades applicants or litigants to seek remedies under the Code,
which was created for their benefit.
Written By: Shashwata Sahu, Advocate,
LLM, KIIT School of Law
Law Article in India
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