Real Estate Investment: What homebuyers should know about new Insolvency Code

real estate investment, Insolvency Code, homebuyers, Bankruptcy Code, The National Company Law Appellate Tribunal, NCLAT

The previous year may have been taxing on real estate developers across the country, with a number of them announcing their insolvency. The scenario presented a huge revelation for several to-be homebuyers, who took it as an indicator to step back from their plans to buy a home, in the event things go unexpectedly wrong for them. Wrong in the sense that for most homebuyers, a bankable developer is one who is solvent, and can give others the assurance of not going with the former’s investment in tow. However, homebuyers today can experience a much more financially secure scenario. The Bankruptcy Code as of now has seen some amendments, and being aware of them may come handy for you.

The reason the amendments to the Insolvency and Bankruptcy code 2016 are all the more crucial is because the initial reception by the homebuyers towards the code was positive. However, as more news about Jaypee Infratech came to the fore, homebuyers came to understand that they do not have any recognition as creditors in case a developer’s assets are liquidated in order to pay off his debts.

This damaged the faith that many homebuyers had in the Bankruptcy code. Soon, confidence in the developers started dwindling, as more and more homebuyers started yearning for more sensible provisions to be added, including recognising them as creditors securing their rights to get the share of the liquidation proceedings.

Amidst the situation of dissent and uproar, the Bankruptcy Code was introduced with a set of key provisions, which offer significant relief to the beleaguered minds of homebuyers. Here are the ones which homebuyers should know:

Homebuyers are duly recognized as creditors

The Insolvency and Bankruptcy Board of India went ahead to mandate that any resolution plan for the insolvent company must categorically also include plans for safeguarding the interests of all the stakeholders, and not just banks and financial institutions that lent money to the troubled company in question.

The amendment sought remedy for the situation for the homebuyers categorizing them as ‘Other Creditors’. The resolution plan now has specific instructions about how to protect the interest of all the stakeholders.

Better representation for homebuyers

Post the amendment, Form F was incorporated in the resolution process. While the “Other Creditors” still do not enjoy as much flexibility as the financial creditors, the form is meant for the stakeholders exclusively, allowing them to individually file claims with the Insolvency Resolution Professional.

What’s even better news for the homebuyers is that the creditor’s committee is now supposedly figuring out how the stakeholders and their interests can be better incorporated into the resolution plan. The National Company Law Appellate Tribunal (NCLAT) has also taken the decision to decide on the final resolution plan, and the Tribunal has opted to notify all the stakeholders including the homebuyers before clearing the plan, such that the latter can raise any objections they have in that period.

Homebuyers still not allowed to initiate a resolution process

Despite the fact that homebuyers have been recognised as ‘Other Creditors’ eligible for claiming refunds under the insolvency process, they still cannot initiate the resolution process and this right remains reserved for the financial creditors that means banks and financial institutions.

The amendments still allow discrimination between the financial creditors, and the homebuyers or stakeholders.

Heavy penalties in case of violations

The entire process of rehashing the Insolvency Code, the amendments as such, Finance Minister Arun Jaitley has confessed about the entire process, labelling it as a ‘learning process’. A major provision introduced is that if any part of the Code, which is not articulated, is violated, then a fine ranging from Rs 1 lakh to Rs 2 crore can be levied depending on the gravity and magnitude of the indiscretion. This introduces a degree of fairplay to the process.

Room for further amendments 

While these amendments certainly improve the scenario with respect to the homebuyer, there is plenty of room for improvement over this. The government has further stressed that given the relatively new structure granted to the insolvency and bankruptcy proceedings, there will be plenty grounds to make amendments to the same. The Insolvency Board has been vested with enough jurisdiction over such matters to consider amendments as required.

These amendments are credited to be in the interest of homebuyers. The process has been fine-tuned than before, wherever necessary, but the real-time implications for the homebuyers, in all of this, are yet to be tested on the ground.