New Delhi, March 22, 2018

A 14-member panel set up to review the Insolvency and Bankruptcy Code will likely recommend such an amendment to the IBC.

Worried homebuyers waiting for the possession of their flats could soon be granted the status of financial creditors like banks and accorded similar benefits, in case their realty firm goes through insolvency proceedings, sources told FE.

A 14-member panel set up to review the Insolvency and Bankruptcy Code (IBC) will likely recommend such an amendment to the IBC. This means, in case of liquidation of a stressed real estate firm, the homebuyers will be third in the preference order to get proceeds — after the clearance of the cost of resolution and workers’ dues.

Any such move will enshrine the rights of home buyers in the IBC — which, originally, didn’t explicitly recognise such a category of creditors.

But it may prompt other stakeholders in a real estate project, such as contractors, to also seek a similar status under the IBC, according to analysts. This will raise the risk perceptions of a real estate project and discourage banks to lend to realty companies.

Also, treating consumer advances on a par with financial lending could open up Pandora’s box by widening the possibility of litigations, they said. For instance, if a consumer durables firm faces insolvency, all the customers who have made advance payments but are yet to get the products could invoke such a law and make the resolution process unnecessarily complicated.

Once the homebuyers get the status of financial creditors, their representatives will be part of the committee of creditors that approves an insolvency resolution plan, failing which a stressed firm goes for liquidation. Their voting rights will be proportionate to the value of their advances, said the sources.

The Insolvency Law Committee, chaired by corporate affairs secretary Injeti Srinivas, is finalising various changes to the IBC and will soon submit the report with the corporate affairs ministry. Amendments will have to be ratified by the Cabinet and then cleared by Parliament.

Analysts said granting any such status doesn’t address the problems of home buyers who will see a substantial erosion of their advances if their stressed realty firm goes for liquidation. “The status will just enable home buyers to make a trade off between their political rights and economic rights,” said a source. “Their interest will be best served in keeping the firm afloat through a resolution plan and not pushing for liquidation,” he added. For this to be a reality, suitable amendments to the IBC need to be made so that liquidation proceedings can be barred in case of real estate firms. At present, any firm where insolvency proceeding has been initiated will necessarily go for liquidation if a resolution plan is not worked out or accepted by the committee of creditors.

According to the sources, a provision in IBC can be invoked by homebuyers to acquire the status of financial creditors. According to section 8(F) of the IBC, “financial debt” means a debt along with interest, if any, which is “disbursed against the consideration for the time value of money and includes any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”. The money raised by real estate firms from owners of undelivered properties technically has the commercial effect of borrowed funds. However, given the furore over the issue and its political implications, the government is intent on making it more explicit in the code that home buyers are financial creditors.

The panel could also suggest that the share of votes required for approving a resolution plan by the committee of creditors be reduced to 66%, against the current 75%, to speed up the insolvency resolution process.

[The Financial Express]