The IBC (2nd Amendment) Bill, 2019 - A Death Knell for Homebuyers Rights
| IOP Desk - 19 Jan 2020

Gaurav Gaur, a seasoned Insolvency professional and advocate analyses The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 Exclusively for the INDIAN OBSERVER POST 

By Adv Gaurav Gaur

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, proposes to amend Section 7. The proposed amendments which have been promulgated vide an ordinance, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 are of a wide impact and extensively intrude on the rights of the individual Homebuyers.

The amendment by way of an explanation to Section 7 of the Code (The Insolvency and Bankruptcy Code, 2016) provides for an increase in the threshold numbers of Homebuyers required for initiation of Corporate Insolvency Resolution Process.

By virtue of the increased threshold number it is now required that a petition under Section 7 of the Code must be filed jointly by not “less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less”.

The requirement is also applicable to petitions already filed, but not admitted before NCLT (National Company Law Tribunal).

Before dwelling further on the merits or the lack of it in the amendments to the code by the 2019 Ordinance, it would be important to understand the genesis of inclusion of Homebuyers within the mandate of the Code. The Insolvency Law Committee in its report dated 26 March 2018 extensively discussed and deliberated upon the definition of the term Financial Debt with specific emphasis on the finance raised by the builders from Homebuyers and came to the conclusion that “in the case of Homebuyers, the amounts raised under the contracts of Homebuyers are in effect for the purposes of raising finance, and are a means of raising finance”.

Thus, it was deemed prudent to clarify that such amounts raised under a real estate project from a Homebuyer fall within the ambit of definition of a Financial Debt and as a consequence of such an inclusion the monies so advanced by the Homebuyers were also accorded a right to be included in the Committee of Creditor as a class of Creditor.

The Insolvency Law Committee was conscious of the rampant delay in execution and completion of projects, huge amounts of monies being parted by the Homebuyers and almost inexplicable and excruciating delay in handing over possession of units to Homebuyers.

In light of the suggestions by the Insolvency Law Committee, the Government of India again amended the Code and by way of, The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, recognised Homebuyers as Financial Creditors under the Code, needless to say, the Homebuyers were now entitled to be part of the all-important Committee of Creditors even though through an authorised representative.

The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 in itself was groundbreaking and provided a much-needed respite to a harried lot of Homebuyers against the hegemony of real estate developers.

The Joy of homebuyers with the newfound status as a Financial Creditor was short-lived and in no time a whole host of real estate developers challenged the constitutional validity of the amendments made by, The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 regarding the status of Homebuyers as Financial Creditors.

The Government then vehemently supported the amendments to the Code and the Supreme Court pen ultimately ruled in favour of the Homebuyers and upheld the validity of the amendments so made with a few caveats for the homebuyers cautioning them against the misuse of the amended Code for use as a tool for money recovery.

With this background in mind, it is clear that The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which provided for accrediting an Individual homebuyer with the status of a Financial Creditor, was well-intentioned, backed by empirical data and comprised of logic and rationale.

In contrast, the current amendments effectively obliterate The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 as far as the Homebuyers are concerned.

The statement of objects and reasons annexed with the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 as introduced in Lok Sabha in the winter session of 2019 states the reason(amongst others) for amending the Act as “to prevent potential abuse of the Code by certain classes of financial creditors”.

The rationale behind this amendment is devoid of logic, not backed by data and seems to be a knee jerk reaction occasioned by pressure from the real estate lobby.

To date approximately 1800 cases have been filed by the Homebuyers against the erring builders, the amendment would have been on steady footing if the Government substantiated empirically, the misuse and the number of cases in which such misuse was occasioned. 

There is no rational explanation for increasing the threshold of number of Homebuyers required for the initiation of insolvency proceedings under the Code, the increased threshold adds to the woes of Homebuyers. It would be an increasingly insurmountable task to gather the requisite number of Homebuyers usually scattered far and wide before preferring an application.

Where petitions have already been filed and there is a failure to collect the requisite number of Homebuyers, the petitions would be treated as dismissed as withdrawn; this would not only occasion wastage of resources of the Homebuyers but also add to the misery of time wasted in pursuing reliefs under the Code.

It belies reason that when once the Homebuyers have been accorded the rights as Financial Creditors under the Code, then there is no intelligible differentia to treat them differently from any other Financial Creditor for whom no such threshold number has been prescribed.

There exists no basis for treating equals as un-equals and the proposed amendments smack of arbitrariness. There is absolutely no nexus of the proposed amendments with the object sought to be achieved, which also includes balancing the interests of all the stakeholders.

The lack of uniformity and amending the law as a reaction is bound to hurt the prospective Homebuyers looking to invest in real estate projects, even though the intention might have been to salvage the real estate sector; however such amendments shake the confidence of the prospective buyers who are basically left with no effective remedy to redress their misery.

The lack of stable policy and premature amendments before the jurisprudence has sufficiently evolved is, in any case, going to cast a negative shadow on the Government.

It would have been prudent for the Government to incorporate mechanisms like mandatory pre-admission mediation in Homebuyer-Builder disputes filed before NCLT, propose stiffer penalties and punishments for Homebuyers misusing the remedy and increasing the financial threshold for triggering the mechanism under the Code, instead, the Government has come up with the perfect recipe for throttling the hopes of Homebuyers.

The real estate sector in India has had a free reign for a long time, it seemed finally there was a mechanism to correct the behaviour of the real estate sector in the Insolvency and Bankruptcy Code, 2016, however, the proposed amendments simply seek to undo what was required to be done a long time ago in the real estate sector.

(The writer Gaurav Gaur is an Advocate & Insolvency Professional based in Delhi-NCR. Contact at ip.gauravgaur@gmail.com)

Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indian Observer Post and Indian Observer Post does not assume any responsibility or liability for the same.

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