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The Home Buyer Saga and the IBC Ordinance

June 8, 2018

In a major relief to home buyers, the President promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance), on June 6, 2018. With the aim of balancing "the interests of various stakeholders in the Code, especially interests of home buyers," the Ordinance makes changes to several provisions of the Code in light of the report of the Insolvency Law Committee, which recommended that home buyers be recognized as financial creditors considering the peculiar nature of real estate projects and the treatment accorded to home buyers by the Supreme Court in the Jaypee Infratech case.

 

The Ordinance amends section 5(8) of the Insolvency and Bankruptcy Code, 2016 (Code), and provides that the amount raised from an allottee under a real estate project would be deemed to be an amount having the commercial effect of a borrowing, thereby making it a financial debt. A related change could be seen in the provision relating to the committee of creditors, which comprises of the financial creditors of a corporate debtor; with this amendment, the committee shall see an authorized representative of the home buyers, which representative shall be appointed by the adjudicating authority under the Code upon an application made in this behalf by the concerned interim resolution professional. The authorized representative shall have the right to vote on behalf of each represented financial creditor.[1] He/she is mandated to circulate the agenda and minutes of the meeting of the committee to each represented financial creditor, and to act in accordance with the instructions of the latter.[2]

 

Indeed, the recognition of home buyers as financial creditors is a positive step towards ensuring that they, too, have the right to initiate the corporate insolvency resolution process in respect of their corporate debtor without depending on other creditors for this purpose.[3] Moreover, their representation through an authorized representative in a body which undertakes crucial decisions for its corporate debtor would ensure that these stakeholders have a strong voice to highlight their concerns. That said, one may consider the notes to clauses in the Insolvency and Bankruptcy Bill, 2015, which explain that the idea of restricting the committee of creditors to financial creditors alone is to ensure that, at the critical stage of resolution, the commercial viability of the corporate debtor is assessed by entities which possess the necessary business acumen for the purpose of undertaking crucial tasks such as evaluating the resolution plans presented by resolution applicants. Now that the term "financial debt" has been expanded, thereby including home buyers within the ambit of "financial creditors," the committee shall see the representation, albeit an indirect one, of persons who do not have such capability. This may have some impact in the way the decisions would be taken by the committee, although the extent of the same is something one may get to witness only in due course.

 

[1] The Code, section 21(6A).

[2] Ibid, section 25A.

[3] See the Code, section 7(1).

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