Security of Home Buyers and other Allottees under IBC

On 6^th June 2018, the Insolvency and Bankruptcy Code, 2016 (“IBC”) was amended vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”). Pursuant to 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[1] to be able to invoke Section 7 of IBC against defaulting promoters and also have representation in the committee of creditors through an authorised representative (the authorised representative being a resolution professional appointed by the NCLT, as per the stated process).

The amendments made by the Ordinance inter alia  brings IBC in closer sync with Section 18 of RERA which affords a right to allottees 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.

Are allottees secured financial creditors…?                                 

The Ordinance has in our view inter-alia 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. 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 vide enough to ensure that allottees are treated as secured creditors, the interpretation may still be debatable.

…Certain other clarifications also needed on

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 whether only one representative shall be allowed or different representatives shall be permitted for each phase registered under RERA remains unclear.

…Other financial creditors have to be more conscious of the rights of the allottees

The amendments under IBC vide the Ordinance read with the above provisions of RERA may place the allottees in a better position than other financial creditors to the extent that the mortgage held by secured financial creditors shall be subject to the rights of the allottees.

This may consequently have an effect on other financial creditors who will now have to be more conscious about the rights of the allottees during the process under IBC and ensure that the rights of allottees are taken care of from a larger perspective.

…A viewpoint from financial institutions who fund home buyers

Another interesting aspect would be to see how the banks and financial institutions who fund the allottees for purchase of units react to this. There may be instances where the loans are being repaid by the allottees on time, however,  one needs also to examine it from the another aspect- wherein the loans are under default and such financial institutions want to step in as allottees by invoking their rights.

In conclusion….

While the Ordinance has secured the home buyers and allottees under IBC as financial creditors, the most pertinent issue, which will play out in time is whether the home buyers/ allottees would be treated as secured financial creditors.