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FundingIBCInsolvency & Bankruptcy CodeInvestmentHome Buyers Recognition Under the Insolvency and Bankruptcy Code (Second Amendment), 2018

July 7, 2019by GLC & Partners

The Insolvency and bankruptcy Code (Amendment) Amendment, 2018 has been brought into force on 6th June 2018, which has been regarded as one of the most prominent and substantive amendment to the code till now.

This amendment seeks out to remove the loopholes which ought to reduce the efficiency of the Code and also to ease the working of IBC. The Amendment has shown the government’s efforts to curb the ambiguities in the code.

The new amendment includes amendments which are clarificatory, curative and substantive in nature.

Inclusion of Homebuyers in the Category of Financial Creditors

Insertion of explanation under clause (f) of section 5 (8), i.e. definition of “financial debt”, so as to include amount paid by allottees as deemed to be having commercial effect of borrowing and thus includible in the definition of “financial debt”.

The amendment borrows definitions of allottees and real estate projects from the Real Estate (Regulation and Development) Act, 2016.

Given that the number of homebuyers for a corporate debtor may be in tens of thousands, it would be interesting to see the role of bankers/financial institutions with regard to the role of the home buyers in deciding the fate of the corporate debtor in the resolution phase.

Further, in the event of liquidation, being a financial creditor is one thing, and being secured is another. The home buyers, in all probabilities, will be classified as “unsecured financial creditors” under section 53, i.e. still much below secured creditors. Hence, the efficacy of the proposed change in serving the underlying objective will be tested in times to come.

Authorised Representative For Creditors

The Amendment provides a new mechanism for debenture holders, deposit holders, retail creditors (such as large numbers of homebuyers in real estate projects) and other specified classes of financial creditors in the CoC to be represented in CoC meetings through a separate trustee, agent, authorized representative or insolvency professional, who would act on their behalf in CoC meetings

Homebuyers Taking Loans From Banks Will Not Be Considered As Financial Creditors

Many homebuyers have booked flats by taking loans from the banks. The general practice these banks follow while giving loans is that they enter into a tripartite agreement with both the homebuyer and the developer.

By entering into such loan -cum -tripartite agreements with the banks, the homebuyers are actually creating third party interests in favour of the banks and are actually subrogating his rights in favour of the banks. In one such case with similar situation, NCLT Allahabad Ajay Walia V. M/s. Sunworld Residency Private Limited (CP (IB) 11/ALD/2018), held that the homebuyers who has subrogated his rights in favour of banks cannot be treated as a financial creditor.

The homebuyers need to be wary of the fact that if they will enter into such tripartite loan agreements while booking a flat, they no longer will be treated as financial creditors and it would adversely affect their rights to initiate a corporate insolvency process against the developer.

Many homebuyers are continuing to pay EMIs for the loans they took from the bank for their flat. This aspect of creating third-party interests in favour of the bank and continuing to pay EMI’s for the flats whose possession they have not really gotten requires a further scrutiny in the Courts of law in the background of the amended Code.

Ambiguity As To Whether They Are Secured Or Unsecured Creditors

The amendment raises ambiguity about the priority in which homebuyers would be repaid their loans. Under IBC, the difference between secured financial creditors and unsecured financial creditors mostly has an implication on the priority of payments upon liquidation.

The amended law grants homebuyers the status of financial creditors but stops short of stating whether they are secured or unsecured creditors. The homebuyer will have to prove which category of creditor he is qualified to be as per the agreement with the real estate company.