On June 6, the Insolvency and Bankruptcy Code, 2016 (IBC) was amended through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance). Following the ordinance, home buyers and allottees under the Real Estate (Regulations and Development) Act, 2016 (RERA) got the status of financial creditors under IBC (pursuant to the amendment to the definition of financial debt).
This will enable the home buyers and other allottees (refers to buyers and long-term lessees under real estate projects) to be able to invoke Section 7 of IBC (which allows financial creditor(s) (either individually or jointly) to file an application in NCLT for initiating corporate insolvency resolution process against a defaulting company) against defaulting promoters. Further, they have representation in the committee of creditors through an authorised representative (the authorised representative being a resolution professional appointed by the National Company Law Tribunal, as per the stated process).
The amendments made by the Ordinance inter alia brings IBC in closer sync with Section 18 of RERA which gives the allottees the right to demand i) refund of the entire amount paid by the allottees (together with interest at prescribed rates), and ii) interest to be claimed for any delayed possession.
Secured financial creditor vs financial creditor
Suppliers, customers, contractors etc. are generally operational creditors and mostly operational creditors are unsecured. While banks and lenders are generally financial creditors and can be secured financial creditors or unsecured financial creditors. Under IBC the difference between secured financial creditors and unsecured financial creditors mostly has an implication on the priority of payments upon liquidation.
The ordinance has sought to bring a sense of security and protection to the allottees. Now, however, the question which needs to be addressed is whether the allottees can be treated as a secured creditor given the fact that they have similar rights under RERA and that their payments are now recognised as financial debt under IBC or will they be treated as an unsecured financial creditor who stands much below in line (as compared to secured financial creditors) when it comes to distribution of the proceeds recovered upon liquidation of a company. For this we may examine certain provisions of RERA.
As per section 11 (4) (h) of RERA, mortgage cannot be created over units in respect of which agreement to sell has been executed by the promoters/developers and even if such mortgage is created the same shall not affect the right and interest of the concerned allottee. Also, as per the second proviso of section 8 of RERA, in case of revocation of registration of a real estate project under RERA, the association of allottees have the first right of refusal for carrying out the remaining development work. While the provisions of RERA as mentioned above read with the definition of ‘Security Interest’ under IBC is wide enough to ensure that allottees are treated as secured creditors, the interpretation may still be debatable.
Clarifications are needed –
It would also be interesting to note how the same is interpreted in different circumstances, i.e., depending on the stage of construction, whether agreement to sell is executed or not and if only allotment letters were given by the promoter/developer who would be a corporate debtor, whether an association of the allottees have been formed or not.
Additionally, in cases where a single larger project of the corporate debtor has various association of persons for separate buildings or phases registered with RERA or if there if only one representative shall be allowed or different representatives shall be permitted for each phase registered under RERA, remains unclear.