IBC Ordinance 2018 and Home Buyers as Financial Creditors
| Indian Observer Post - 11 Aug 2018

IBC Ordinance 2018 and Home Buyers as Financial Creditors

  • Gaurav Gaur
    (Advocate & Insolvency Professional)

New Delhi, Aug 12, 2018

On 06 June 2018, the Insolvency and Bankruptcy Amendment Code Ordinance 2018 was promulgated. The amendments to the Insolvency and Bankruptcy Code 2016 (IBC) were affected largely to address the problems faced by homeowners - investors in real estate projects and to clarify that allottees under a real estate project, should be treated as financial creditors for the purpose of initiation of Corporate Insolvency Resolution Process (CIRP).

While it is indeed commendable that the Government and the Insolvency and Bankruptcy Board of India have been acting with swiftness in tweaking the IBC as and when needed, however there are a few practical issues particularly pertaining to home buyers-real estate investors which still need to be fine-tuned to make the provisions of IBC an even more potent mechanism.

In a matter recently admitted in the NCLT relating to a real estate project an informal meeting was set up between the home buyers-real estate investors and the Interim Resolution Professional (IRP). A lot of pertinent and logical queries from the home buyers-real estate investors could only elicit ambiguous answers. The first of such concerns is with regard to non-classification of home buyers-real estate investors as secured or unsecured investors.

It is notable that even in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 as tabled in the Parliament, the question whether home buyers-real estate investors are to be classified as secured or unsecured Financial Creditors has not been clarified. The lack of clarification adds to the miseries of home buyers-real estate investors as this classification has a direct bearing on the priority in payments to the home buyers-real estate investors in the waterfall when disbursal of dues in the insolvency proceedings is to be affected.

The problems are further compounded with the addition of Form CA (Form for submission of the claim by Financial Creditors in a class, under regulation 8A) for the filing of claims by the home buyers-real estate investors with the IRP. From the point of view of home buyers-real estate investors, Form CA is being viewed as discriminatory especially in light of the fact that home buyers-real estate investors have been classified as Financial Creditors, thus there is the insistence on the filing of Form C (Submission of Claim by Financial Creditors) instead of Form CA.

Another aspect which needs to be looked into with empathy is pertaining to the appointment of an Insolvency professional to act as an authorized representative on behalf of the Committee of Creditors (COC) comprised of home buyers-real estate investors.

It is important to note that The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) (Third Amendment) Regulations, 2018 prescribes the mode in which the Insolvency Professional is to be appointed as the authorized representative of the COC, however a major concern of the home buyers-real estate investors is that the process of appointment of such an Insolvency professional is neither transparent nor objective.

Additionally on being classified as Financial Creditors, the prerogative for appointment of the Insolvency professional as an authorized representative should either vest with the COC or the same be done upon a order being passed by the NCLT, the Interim resolution professional appointed to conduct the CIRP should have no role to play in recommending the names of the Insolvency professionals in the public announcement.

Additionally, The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate persons) (Third Amendment) Regulations, 2018 also provide in regulation 16 A the mode of appointment of an authorized representative for a class of creditors.

In a real estate project there are invariably a large number of home buyers-real estate investors; in such a scenario the appointment of just one Insolvency professional as the authorized representative will be counterproductive. The home buyers-real estate investors who have lost a lifetime of earnings or savings are usually emotionally charged, objectivity in decisions is commonly replaced with frustration and to manage such a group of home buyers can be harrowing experience for a single authorized representative, add to this the different pulls being exerted by groups and subgroups within the home buyers-real estate investors group.

In such a scenario it is advisable that instead of there being just one authorized representative to represent a big group, the home buyers-real estate investors should be divided into a  smaller group and assigned an authorized representative. There is an implicit fear in the home buyers-real estate investors that appointing an individual Insolvency professional as an authorized representative of the COC is fraught with the possibility of the authorized representative being manipulated by the powerful builder- Corporate Debtor to serve their interests.

The Honorable Supreme Court has rightly observed in the Jaypee Infratech Limited matter on 09 August 2018, that the enactment of the IBC has created a paradigm shift in the regulatory framework and processes governing corporate insolvency, however, for the gullible home buyer-real estate investor to comprehend the fine aspects of this law is a huge task.

It is imperative for the home buyer-real estate investor to understand that they need to get together as a cohesive group to see the successful resolution of the insolvency process of the corporate debtor. It would augur well for the home buyer-real estate investor if IBBI was to undertake an educative print or multimedia initiative and lay down the process and advantages of the latest amendments for the benefit of the home buyer-real estate investor and simultaneously address the concerns of the home buyers-real estate investors.

(The writer Gaurav Gaur is an Advocate & Insolvency Professional based in Delhi-NCR. He can be contacted on ip.gauravgaur@gmail.com )


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