Relief for home buyers: Ordinance cleared to classify them as creditors

The amendment comes months after a new Section 29A was added into the bankruptcy code in November, introducing four layers of ineligibility for potential bidders. 

The present amendment is based on recommendations of a 14-member government appointed committee that had last month suggested a slew of measures, including addressing woes of home buyers and making recoveries easier for lenders. 

Briefing reporters after the meeting of the Union Cabinet, Minister for Law and Justice Ravi Shankar Prasad said, “it’s a new legislation...the Cabinet has approved it”. 

He, however, refused to divulge further details citing constitutional provisions. Asked if the Cabinet has cleared some relief measures for home buyers as per the recommendations of the panel, Prasad said, “An Ordinance, till it is approved by the President, I cannot speak about the details”.

The Insolvency Law Committee had last month recommended to the Ministry of Corporate Affairs, that home buyers should be treated as financial creditors, which will allow them to equitably participate in an insolvency resolution process. The panel has also suggested relaxations for micro, small and medium enterprises (MSMEs) under the IBC. 

With realty firms, such as Jaypee Infratech, facing insolvency proceedings, the ordinance, once approved by President Ramnath Kovind and promulgated, will provide relief for home buyers facing hardships due to incomplete real estate projects. Under the code, financial creditor implies any person to whom a financial debt is owed. The financial debt can include money borrowed for interest. 

The panel had suggested that MSMEs be exempted from application of certain provisions of the code. 

“Illustratively, since usually only promoters of an MSME are likely to be interested in acquiring it, applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs,” it had noted. 

Besides, the panel had suggested that only those who contributed to defaults of the company or are otherwise undesirable should be ineligible from bidding for stressed assets under the Code. For withdrawal of resolution application in exception circumstances, the panel has suggested that in such cases, there should be approval from the Committee of Creditors with 90 pc of voting share. 

“To facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow oneyear time to obtain necessary statutory clearances from central, state and other authorities or such time as specified in the relevant law, whichever is later,” the committee said. 

In January, the IBC was amended to prevent unscrupulous persons from misusing the law. Wilful defaulters and those whose accounts have been classified as non-performing assets, among others, are barred from bidding for stressed assets.

This is a great news for home buyers. Previously, if any realty firm went through bankruptcy, the priority of recovering dues from the project was first given to financial creditors, followed by operational creditors such as vendors and employees. Home buyers, widely regarded as merely consumers, did not fall under the liquidation claim waterfall, placing them at a disadvantageous position and exposing them to significant risk upon investment in under-construction projects. Now, if you are a home buyer in a project that has been stalled by insolvency, you will be granted equal rights with other creditors such as banks and institutional lenders, making it easier for you to recover your money. This will infuse confidence in the home buyers to invest money as it accords priority in the recovery of dues. 

The amendment now effectively treats home buyers as financial creditors, and comes as a massive relief to them. Residential property buyers are now effectively considered at par with banks and other institutional creditors when it comes to recovering dues from developers who have gone bust. But, it needs to be seen how the resolution mechanism for claiming the dues falls in place for the concerned home buyers. The implementation process needs to be clarified to home buyers such as if the NCLT will appoint a resolution professional to represent their rights and interests. But, this will go a long way in bringing more transparency into the overall funding of projects. There is an even stronger burden on developers to deliver on time and they will be more cautious while taking funds from financial institutions and banks.