POSITION OF HOMEBUYERS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016
Introduction
For a long period of time, the rights of home buyers in the context of insolvency proceedings have been under scrutiny. Previously, home buyers were treated as other creditors and were not considered "financial creditors" or "operational creditors," which limited their ability to initiate insolvency proceedings against a defaulting builder/developer under the Insolvency and Bankruptcy Code, 2016 ("IBC"). More importantly, because they were neither financial nor operational creditors, they were not legally entitled to any minimum payout in a real estate company's corporate insolvency resolution process ("CIRP"), and were assigned a very low position in the statutory payment waterfall in the event of liquidation. Nonetheless, they could bring appropriate proceedings under the RERA and Consumer Protection Act of 1986. However, a fundamental fallacy with these recourses were that there existed and still exists a major discrepancy between RERA proceedings from state to state and hence it was quintessential for a centralized legal instrument to address this situation.
Critical Analysis
The filing of a CIRP against Jaypee Infratech Limited (Jaypee)[1] raised the topic of home buyers' treatment under the Insolvency and Bankruptcy Code, 2016. Immediately after the NCLT in Allahabad admitted Jaypee's bankruptcy plea, a public interest writ petition was filed before the Supreme Court seeking redress for property buyers. The Supreme Court originally stayed the NCLT's order[2] and then lifted the stay, directing the resolution plan to protect the rights of property buyers and requiring Jai Prakash Associates Limited (Jaypee's holding company) to deposit Rs. 2,000 crore with the court[3].
The Insolvency and Bankruptcy Board of India (“IBBI”) amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) to introduce the concept of ‘other creditors', i.e. a class of creditors other than financial creditors or operational creditors.
Other creditors cannot commence CIRP against a corporate debtor, although they can bring claims[4].
The Insolvency Law Committee (“Committee”) was established in November 2017 to make recommendations on concerns emerging from the IBC implementation. Due to the particular character of real estate finance, the Committee recommended that home buyers be treated as financial creditors in order to participate equally in the CIRP under the IBC.
The President then signed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) on June 6, 2018. The Ordinance defines ‘financial debt' as funds raised from home buyers.
Ø Leading Case Laws on the Changing position of Homebuyers under the IBC
Prior to the aforementioned Ordinance, the IBC's treatment of home buyers was ambiguous and vulnerable to court interpretation.
In the case of Col. Vinod Awasthy v. AMR Infrastructure Limited[5], the NCLT Principal Bench noted that ‘operational debt' can come through the provision of goods or services, or dues originating from employment, or dues arising under any law and payable to the Central/ State Government. In this instance, the respondent owed the applicant a monthly ‘assured return' until the applicant took possession of the flat. The NCLT noted that the debt in this case did not fall into any of the four categories which are listed, and that the amount sought by the home buyer was unavoidably linked to the delayed delivery of immovable property. Given the aforementioned, the application house buyer was not deemed a ‘operational creditor'[6].
In this context, ‘operational debt' is defined as “a claim for commodities or services...”. The phrase “in respect of” rather than “for” in the definition can be taken to suggest that the claim can be made by either a provider or a receiver of goods or services.
The NCLT's Chennai Bench observed in Nupower Renewables Private Ltd. v. Cape Infrastructure Private Ltd[7] that the term ‘operational debt' should be interpreted contextually. Deed got an advance from the petitioner for services related to setting up a wind power project but failed to perform and agreed to reimburse the advance. The NCLT noted that the petitioner had loaned money to the corporate debtor for services rendered, thereby qualifying as a ‘operational creditor'.
According to this abovementioned definition as was set in the case of Nupower Renewables Private Ltd. v. Cape Infrastructure Private Ltd, home buyers who have paid for a unit that is still under construction are ‘operational creditors'.
Ø Can the Homebuyers be considered as Debtors?
Where the home buyer and the developer agreed to pay ‘assured returns' until possession of the unit was handed over, the amount paid by the home buyer was held to be “against the consideration for the time value of money” and the corporate debtor had raised it via a sale-purchase agreement, “having the commercial effect of a borrowing”. In some circumstances, the corporate debtor listed the funds raised from property buyers as ‘financial cost' in its annual reports. They were deemed ‘financial creditors' in these circumstances.
In cases[8] where the house buyer was not entitled to any ‘assured return' but only sought a refund due to non-delivery of the unit, the disbursement made was not against the consideration for time worth of money. As a result, the claim in these situations cannot be described as a ‘financial debt'.
Ø The Amendments brought in by the Ordinance
The Ordinance clarifies section 5(8)(f)(15) of the IBC, which states that any sum raised from an allottee under a real estate project is deemed to be a commercial loan.
Contrary to the rulings on this issue, which sought to distinguish between contracts with home buyers where an assured return was payable and contracts where no such return was payable and only a refund was provided in the event of cancellation, the Ordinance includes all allottees (regardless of the contract terms) as ‘financial creditors'. The Committee justified including home buyers as financial creditors by stating that the funds raised by builders from home buyers are utilised to fund the real estate project.
Ø Updated Rights of the Buyer
Home buyers can now file a CIRP against a corporate debtor under section 7 of the IBC and join the committee of creditors.
Further, home buyers who vote against or abstain from voting for a resolution plan authorised by the CoC must be paid the liquidation value owing them before the assenting financial creditors can be paid.
Unless a trustee or agent is appointed under the terms of the financial debt, the interim resolution professional will make an application to the Adjudicating Authority with the name of an insolvency resolution professional other than the interim resolution professional to act as the authorised representative of suc. The Adjudicating Authority will nominate the authorised representative prior to the first CoC meeting.
The designated representative shall attend CoC meetings and vote on behalf of each financial creditor. If a project's home purchasers surpass the specified quantity, they will be represented by an authorised agent.
During the IBC design process, it was determined that members of the CoC must be creditors, both able to assess viability and prepared to amend terms of existing liabilities in talks[9].
Because operational creditors cannot decide on the commercial viability of the corporate debtor and are unwilling to risk restructuring their debts to keep the corporate debtor afloat, it was decided that the CoC would only consist of financial creditors, unless the corporate debtor has no financial creditors.
Home buyers are also unlikely to analyse the corporate debtor's financial viability or willingness to modify their debts. The interests of lenders in a CIRP are usually aligned in that they all want faster and greater recovery. However, homebuyers may request a return or their property.
Having a diverse collection of creditors on the CoC would inherently lead to inefficient decision making. This would counter the goal of speedy resolution and maximisation of the corporate debtor's assets.
Ø Interaction of IBC and RERA
The Real Estate (Regulation and Development) Act, 2016 (“RERA”) was also enacted to protect homebuyer interests.
RERA mandates numerous compliances for real estate projects. To allottees who choose to withdraw from the project, the promoter is obligated to repay the cash paid in respect of that unit, plus interest[10].
In the event of a violation of RERA, the Authority may remove a project's registration and allow the remaining development works to proceed as planned.
While there will be a moratorium on the institution of claims and processes against the corporate debtor, the question arises as to whether the RERA Authority can still withdraw the registration of a project of such a corporate debtor.
In State Bank of India v. Electrosteel Steels Limited[11], the Director of Mines, Odisha, refused to allow the corporate debtor to purchase, store, and transport coking coal and iron ore from Jharkhand, despite the CTO from the Jharkhand State Pollution Control Board. In this instance, the NCLT, Kolkata Bench concluded that since the CTO had expired after the moratorium was declared, the CTO's status remained unchanged. The NCLT further noted that provision 20(1) of the IBC compels the interim resolution expert to protect the corporate debtor's going concern status. Using section 238 of the IBC, the NCLT ruled that the IBC trumped the OMPTS Rules.
Similarly, in State Bank of India v. Orissa Manganese and Minerals Limited[12], the Deputy Director Mines, District Sundargarh, halted mining operations due to non-payment of compensation. The NCLT, Kolkata Bench ordered that any judicial procedures or legal measures against the corporate debtor shall be deemed stayed until the CIRP term expires. The NCLT also ruled that halting mining operations during the moratorium was illegal and ineffective.
The IBC imposed a moratorium on the beginning and continuation of legal procedures to prevent creditors from taking individual enforcement actions that would defeat the CIRP's purpose.
The moratorium was also imposed to ensure that the corporate debtor's value was maximised while minimising stress on the business.
In this context, the question is whether a regulatory action (not a recovery action) such as the RERA Authority cancellation of registration due to non-compliance can be undertaken against the business debtor during the moratorium.
The interaction of the IBC and RERA would be relevant even if the RERA Authority revoked the registration prior to a moratorium being declared. Upon revocation of registration, the RERA Authority (in collaboration with the appropriate Government) may take any action it deems necessary, including completing the remaining development activities. However, the IBC requires that the resolution plan include provisions for managing the corporate debtor's affairs and securing regulatory approvals.
In such a circumstance, the RERA Authority's suggested project execution strategy may conflict with the corporate debtor's proposed resolution strategy. Questions about the project's prospects can prevent bidders from proposing resolution plans for the corporate debtor.
A resolution plan might be blocked if the sum raised from buyers and lenders exceeds 34% in real estate developments.
The practical ramifications of including a varied group like property buyers in the CoC would also need to be considered.
Conclusion
In essence, the Supreme Court's judgement in the Karvy Investors[13] case extends the prior protection provided by it under the Manish Kumar case[14] to outstanding applications already submitted by homeowners who do not reach the minimal threshold criteria. So yet, the Supreme Court has not ruled on the legality of the 2020 Amendment Act in Manish Kumar[15], Karvy Investors[16], or other cases.
It is essential to maintain a reasonable balance in order to avoid situations where developers are taken advantage of by one or a few home buyers while also ensuring that the grievance of one or a few home buyers does not cause unreasonable delays or impediments in the development of a project.
[1] IDBI Bank Limited v. Jaypee Infratech Limited, NCLT, Allahabad, CP No. (IB) 77/ALD/2017, order dated August 9, 2017.
[2] Chitra Sharma v. Union of India, [2017]143 SCL 680 (SC).
[3] Chitra Sharma v. Union of India, [2017]144 SCL 1 (SC)
[4] According to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations 2017, regulation 9A was introduced in the CIRP Regulations to accommodate ‘other creditors’ and facilitate their claim making process.
[5] Col. Vinod Awasthy v. AMR Infrastructure Limited, Principal Bench, New Delhi, C.P. No. (IB)-10(PB)/2017, order dated February 20, 2017.
[6] The National Company Law Tribunal took reference of Pawan Dubey v. J.B.K. Developers Private Limited, NCLAT, Company Appeal (AT) (Insolvency) No. 40 of 2017, order dated August 3, 2017, while pronouncing this judgement.
[7] Nupower Renewables Private Ltd. v. Cape Infrastructure Private Ltd., NCLT, Chennai, TCP/3(IB)/CB/2017, order dated July 7, 2017.
[8] Rajendra Kumar Saxena v. Earth Gracia Buildcon Pvt Ltd., Principal Bench, New Delhi, C.P. No. (IB)-448(PB)/2017, order dated March 5, 2018
[9] Report of the Bankruptcy Law Reforms Committee: Volume I, dated November 4, 2015.
[10] Section 18 of RERA.
[11] State Bank of India v. Electrosteel Steels Limited, NCLT, Kolkata, CA (IB) No. 173/KB/2018, order dated March 9, 2018.
[12] State Bank of India v. Orissa Manganese and Minerals Limited, NCLT, Kolkata, CA (IB) No. 134/KB/2018, order dated March 8, 2018.
[13] Association of Karvy Investors v. Union of India [Writ Petition (Civil) No. 579/2020]
[14] Manish Kumar and Union of India [Writ Petition (Civil) No. 26/2020]
[15] Manish Kumar and Union of India [Writ Petition (Civil) No. 26/2020]
[16] Association of Karvy Investors v. Union of India [Writ Petition (Civil) No. 579/2020]