Insolvency and Bankruptcy Code (popularly known as IBC) has made a recognisable impact in India. Its impact on the Economy and Industrial and Commercial activities in the country is a subject of wider debate.
Here my attempt is to drive home the NEED TO REVISIT THE CONCEPT AND QUALIFIACTION, OF HOME BUYERS AS FINANCIAL CREDITORS (the highest ranked creditor),in the interest of MAJORITY of the Home Buyers, the struggling Real Estate developers and the Real Estate Development Sector of the Economy.
It is not an exaggeration if we say that making every Individual Home Buyer (the allottee of a unit) a Financial Creditor has created enormous pressure on everybody connected with this sector.
My approach here is not only to bring out the practical ground level realistic reasons to say that it is imprudent but also legally inconsistent and imbalanced.
I take the readers through the Amendment to IBC which bestowed this status on the Home Buyers and the Supreme Court Judgement in a case where the Petitioners failed in their objective of establishing the Amendments made in IBC in August 2018 were ‘unconstitutional’ and were infringing upon their rights.
IBC – Amended definition of Financial Debt:
(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes– (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; *2 [Explanation. -For the purposes of this sub-clause, – (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and (ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);](* Inserted by the IBC Second Amendment Act 2018)
SC Judgment – Constitutional Validity of amendment- Section 7 – Home buyers as FC.
A three-judge bench headed by Justice R F Nariman held as “constitutionally valid” the amendments made to the IBC in August 2018 and said it “does not infringe” upon the rights of real estate developers and is neither “arbitrary” nor “discriminatory”.
It can be seen that the Insolvency Law Committee found, as a matter of fact, that delay in completion of flats/apartments has become a common phenomenon, and that amounts raised from home buyers contributes significantly to the financing of the construction of such flats/apartments, said the bench, also comprising Justices Sanjiv Khanna and Surya Kant.
“This being the case, it was important, therefore, to clarify that home buyers are treated as financial creditors so that they can trigger the code under section 7 and have their rightful place on the CoC when it comes to making important decisions as to the future of the building construction company, which is the execution of the real estate project in which such home buyers are ultimately to be housed,” the bench said
The present uncomfortable and difficult situation is to be resolved.
The IBC amendment done in the definition of “Financial Debt” to give relief to Home Buyers and the Judgments pronounced by the Courts NEED to be revisited.
- What is the relationship between the Home buyer and the Real Estate Developer?
- Is there any action of providing credit or loaning money involved?
- Is there Time Value for money?
- Is the money paid to the real Estate Developer on repayable basis with or without interest?
- Is the obligation one sided or is there mutual obligation?
- Is delivering the Unit under purchase is akin to repaying money?
- Is there a debt at all?
- If there is no debt , will default in repayment arise?
- Can the emotional approach that many home buyers are facing difficulty because of delay in completion of many projects be the basis or foundation to amend IBC without looking at other ways of alleviating the difficulties of Home Buyers?
- If it is wished that IBC should come to help Home Buyers, is it the right way to treat them (many in unmanageable numbers) as Financial Creditors which will not support the intent of IBC?
OTHER THAN THESE LEGAL ISSUES:
- Can the innumerable home buyers earnestly participate and provide support to Resolution Process?
- Is there any useful purpose getting served by an Authorised Representative simply exercising the voting rights (responsibility) spending time, money, energy etc by contacting innumerable persons having varied interest, varied position vis-a-vis the Real Estate Developer?
- Do we conclude that the well-balanced Real Estate Regulation and Development Act does not help the Home Buyers?
- Do we conclude that there is no obligation subsisting on the part of all individual home buyers towards the Real Estate Developer?
- When exactly the money obligation on the part of the Developer to the Home buyer takes birth?
- Answer to 5 will definitely be different for each Home buyer of one Developer.
- Can we allow a single or a small number of Home buyers throw the project and the Developer into the winds?
We can keep on adding issues thrown on us by the Single Emotional action of calling the Home Buyers as Financial Creditors.
VERY IMPORTANT POINT:
The (Home Buyer) allottee buys undivided rights along with enjoyment rights in a large Development and hence his rights to remedies also to be treated as undivided. Hence a recognised, legally structured body of Home Buyers only is to be recognised for a total action on the Developer.
IT IS ESSENTIAL that we go through certain important sections and provisions in the REAL ESTATE (REGULATION AND DEVELOPMENT) ACT 2016 before proceeding to look for answers to the questions and issues:
Section: 2(d) “allottee” in relation to a real estate project, means the person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent;
(zn) “real estate project” means the development of a building or a building consisting of apartments, or converting an existing building or a part thereof into apartments, or the development of land into plots or apartments, as the case may be, for the purpose of selling all or some of the said apartments or plots or building, as the case may be, and includes the common areas, the development works, all improvements and structures thereon, and all easement, rights and appurtenances belonging thereto;
Chapter III FUNCTIONS AND DUTIES OF PROMOTER
(1) A promoter shall not accept a sum more than ten per cent. of the cost of the apartment, plot, or building as the case may be, as an advance payment or an application fee, from a person without first entering into a written agreement for sale with such person and register the said agreement for sale, under any law for the time being in force.
(2) The agreement for sale referred to in sub-section (1) shall be in such form as may be prescribed and shall specify the particulars of development of the project including the construction of building and apartments, along with specifications and internal development works and external development works, the dates and the manner by which payments towards the cost of the apartment, plot, or building, as the case may be, are to be made by the allottees and the date on which the possession of the apartment, plot or building is to be handed over, the rates of interest payable by the promoter to the allottee and the allottee to the promoter in case of default, and such other particulars, as may be prescribed.
Section 18: Return of Amount and compensation:
(1) If the promoter fails to complete or is unable to give possession of an apartment, plot or building,—
(a) in accordance with the terms of the agreement for sale or, as the case may be, duly completed by the date specified therein; or
(b) due to discontinuance of his business as a developer on account of suspension or revocation of the registration under this Act or for any other reason, he shall be liable on demand to the allottees, in case the allottee wishes to withdraw from the project, without prejudice to any other remedy available, to return the amount received by him in respect of that apartment, plot, building, as the case may be, with interest at such rate as may be prescribed in this behalf including compensation in the manner as provided under this Act:
Provided that where an allottee does not intend to withdraw from the project, he shall be paid, by the promoter, interest for every month of delay, till the handing over of the possession, at such rate as may be prescribed
(2) The promoter shall compensate the allottees in case of any loss caused to him due to defective title of the land, on which the project is being developed or has been developed, in the manner as provided under this Act, and the claim for compensation under this subsection shall not be barred by limitation provided under any law for the time being in force.
(3) If the promoter fails to discharge any other obligations imposed on him under this Act or the rules or regulations made thereunder or in accordance with the terms and conditions of the agreement for sale, he shall be liable to pay such compensation to the allottees, in the manner as provided under this Act.
CHAPTER IV RIGHTS AND DUTIES OF ALLOTTEES
4) The allottee shall be entitled to claim the refund of amount paid along with interest at such rate as may be prescribed and compensation in the manner as provided under this Act, from the promoter, if the promoter fails to comply or is unable to give possession of the apartment, plot or building, as the case may be, in accordance with the terms of agreement for sale or due to discontinuance of his business as a developer on account of suspension or revocation of his registration under the provisions of this Act or the rules or regulations made thereunder.
(6) Every allottee, who has entered into an agreement for sale to take an apartment, plot or building as the case may be, under section 13, shall be responsible to make necessary payments in the manner and within the time as specified in the said agreement for sale and shall pay at the proper time and place, the share of the registration charges, municipal taxes, water and electricity charges, maintenance charges, ground rent, and other charges, if any.
(7) The allottee shall be liable to pay interest, at such rate as may be prescribed, for any delay in payment towards any amount or charges to be paid under sub-section (6).
Let us look at what will trigger an action under IBC against a Corporate Debtor.
- There should exist a debt.
- The debt should have become due and should be remaining unpaid.
It is not in the case of all Home Buyers the above two basic requirements are satisfied.
Just because someone is an allottee and there is a delay in delivery of the unit booked does not create a Debt to exist.
The Real Estates (Regulation and Development) Act 2016 clearly spells out the Duties, Obligations and responsibilities of both the Allottee and the Developer.
There are obligations from and to the allottee and the developer and only at certain points of time during the contract between the Allottee and the Developer, these obligations become monetary obligations and monies will become due to be paid by either of them to the other.
Only when it becomes due to be paid, a default can occur. Only if that default occurs, one can trigger actions under IBC.
It means only certain qualified Home Buyers (allottee) can become eligible to be called a Creditor to the Corporate Debtor (Developer)
In other words, if simply put:
The obligation of a developer to the home buyer is performance obligation and not a payment obligation. Hence the allottee is ill-defined as a creditor and misrepresented.
There are so many contracts where payments are involved and the obligations are different kinds of performance.
Then all these performance obligations have to be called “Debt” and all these people who have paid money will have to be defined as creditors.
Let us acknowledge that all people who make payment are not creditors.
A developer is on the one side with an obligation to perform (develop and deliver so many units with un divided interest) to large number of allottees ( Home buyers) on the other side. The performance obligation of the developer in one comprehensive performance of making the project deliverable as per contract and it depends on the retail obligations of the large number of allottees meeting with the obligation individually. The implied imbalance in this situation has got to be appreciated.
At the cost of repetition, let us state:
“The (Home Buyer) allottee buys undivided rights along with enjoyment rights in a large Development and hence his rights to remedies also to be treated as undivided. Hence a recognised, legally structured body of Home Buyers only is to be recognised for a total action on the Developer.”
NOW LET US SEE WHETHER WE CAN CALL IT A FINANCIAL DEBT.
The financial debt is one which at the time of availing or taking, the arrangement is that it is to be paid back with interest or otherwise. Obligation of the person receiving the money should have been well defined as that it should be repaid at some point of time. (time value)
In the case of home buyers/ allottees it is definitely not the case. To categorise as Financial Creditors , I am afraid, is fundamentally flawed.
IT IS VERY NECESSARY TO SAVE THIS PARTICULAR SECTOR FROM POTENTIAL CHAOS AND GREATER LOSS:
The interest of the Home Buyers is very important. But we cannot afford to take steps at the cost of the one whole sector of the economy.
THE FOLLOWING IS SUGGESTED TOWARDS ARRIVING AT A SOLUTION:
(AFTER NULLIFYING THE AMENDMENT OF AUGUST 2018 IN THE DEFINITION OF FINANCIAL DEBT)
- THE ALLOTTEE BECOMES A CREDITOR TO THE DEVELOPER ONLY WHEN THE DEVELOPER’S PERFORMANCE OBLIGATION BECOMES / GETS CONVERTED INTO A MONEY OBLIGATION.
- SINCE THE MONEY HAS BECOME DUE ON CONVERSION OF PERFORMANCE OBLIGATION, IT DOES NOT HAVE THE BASIC INGREDIENTS OF FINANCIAL DEBT AND HENCE THE ALLOTTEE CANNOT BE CALLED A FINANCIAL CREDITOR.
- THESE QUALIFIED ALLOTTEES BE CALLED A SPECIAL CLASS OF CREDITORS.
- WHEN ANY BUILDER CORPORATE DEBTOR GETS INTO CIRP IF A RESOLUTION PLAN IS SUCCESSFULLY CRAFTED AND APPROVED, THERE WILL BEFINITELY BE A SPECIFIC SOLUTION FOR THESE ALLOTTEES.
- IN CASE THE BUILDER CORPORATE DEBTOR UNFORTUNATELY LANDS INTO LIQUIDATION, BY MAKING THESE SPECIAL CLASS CREDITORS ELIGIBLE TO RECEIVE DISBURSEMENTS/ BENEFITS AT PAR WITH SECURED FINANCIAL CREDITORS, THE INTEREST CAN BE PROTECTED TO THE SAME EXTENT AS IT IS AVAILABLE AS FINANCIAL CREDITOR NOW.
The proposed solution will result in :
- Since the right to trigger CIRP against the Builder Corporate Debtor is being prevented from large and wide distribution, the Builder Corporates will be relieved from the worry of stray and unscrupulous individual actions. ( let us bear in mind that Home buyers are complex, divergent and heterogenous group of persons)
- Since the allottees are being placed at par with Secured Financial Creditors, their interest is better-protected than now.
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