Headline : Supreme Court upholds homebuyers’ rights as financial creditors under IBC
Why in News:
- The Supreme Court has upheld the validity of an amendment to the Insolvency and Bankruptcy Code (IBC) that treats homebuyers as financial creditors, thus giving homebuyers the right to take legal recourse against developers under three key laws.
The IBC amendment in relation to homebuyers:
- In August, 2018, the government of India has amended the Insolvency and Bankruptcy Code (IBC) to grant the status of a “financial creditor” to a homebuyer.
- The amendment allowed home buyers, as financial creditors, to trigger bankruptcy proceedings under the Insolvency and Bankruptcy Code of 2016. It had brought the home buyers on par with the creditor banks of the property builder.
- The Committee of Creditors (CoC), by voting, makes important decisions on the future of the bankrupt builder. These calls include what to do with his assets and who should finish the pending housing projects.
- Thus amendments have given home buyers their “rightful place” on the (CoC).
Need of Amendments in the Act:
- Prior to the law, the home buyers were often left in the difficult situations. They were made to wait blindly for a solution to come up, either in the form of a completed apartment or a refund.
- Before the Amendment, the assets of the bankrupt builder were divided among his employees, creditor banks and other operational creditors. Home buyers had hardly figured, though their hard-earned savings may have provided a major chunk of the housing project.
- It was needed to protect the rights of homebuyer, who have a huge stake in real estate projects, having invested in them.
- The Centre said recognizing homebuyers as creditors was essential since they get duped by some real estate developers.
Amendment challenged in the SC:
- India’s real estate sector is witnessing a prolonged slowdown, with several developers who have been dragged to courts over project delays facing bankruptcy or insolvency.
- Over 180 batch petitions were filed before the Supreme Court by real estate firms earlier this year, challenging the amendment to the IBC.
- In their petitions, developers had contended that homebuyers were already given enough protection under RERA and consumer forums, and making them a part of the IBC proceedings was not required.
- The builders argued that homebuyers can initiate proceedings on the basis of any “default”, as the definition was very vague, and the delay in completion of the project could also be due to delays in payments by the homebuyer.
- The builders said home buyers were a large, amorphous group. Their presence in the CoC would be a nuisance.
Summary of SC judgment:
- A three-judge Supreme Court has now confirmed the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018, which gave home buyers the status of “financial creditors”.
- The bench said the Real Estate (Regulation and Development) Act, or RERA, has to be read in harmony with the Consumer Protection Act and IBC and, in case of any conflict, IBC will prevail.
- The court further directed the Centre to fill up the vacancies in the NCLT and its appellate tribunals so as to deal with the rising number of bankruptcy litigation in the real estate sector.
- Both central and state government was ordered to file compliance affidavit in this regard within three months.
Points made by SC while upholding the amendment:
- Home buyers finance from 50% to even 100% of a housing project. Their absence from the CoC and denying them a voice on future plans would be “manifestly arbitrary.
- The judge reasoned that the IBC and the RERA operate in different spheres and can be used harmoniously for the interest of home buyers.
- The court further reasoned that no home buyer would frivolously move the National Company Law Tribunal under the IBC. This is because ironing out a resolution plan under the IBC is a long-drawn process. Also, under the Code, home buyer may never get a refund of the entire principal, let alone interest. Thus, only that home buyer who has completely lost faith in the management of the developer, would come before the NCLT under the Code hoping that some other developer takes over and completes the project.
- The amendment was only aimed at defaulting real estate giants. The court said there were adequate mechanisms to check misuse and only a genuine homebuyer will be able to invoke insolvency proceedings against a builder.
Possible impact of the judgment:
- The judgment gains significance as many real estate builders have been under fire for incomplete projects leaving home buyers in dire straits.
- The apex court verdict empowers homebuyers by expanding the scope of the IBC, treating them on a par with banks and institutional creditors, besides protecting their rights.
- It will empower harassed home buyers to initiate bankruptcy proceedings against errant real estate builders. Home buyers will be given priority while recovering dues from bankrupt or insolvent real estate companies.
- Now an aggrieved homebuyer has the option to seek relief under three laws—RERA, Consumer Protection Act and IBC.