How the Insolvency and Bankruptcy Code fails Homebuyers in the Covid Crisis

By | September 29, 2020
Homebuyers in the Covid Crisis

The current article will largely deal with the plight of homebuyers which worsens with each and every amendment that is brought about subsequent to the Pioneer case.

Introduction

Insolvency is a complex procedure, and with the advancement in the rise of companies and startups in the present era, legislation has to be put in place which matches the complexities arising in today’s date. IBC has risen from SICA(Sick Industrial Companies Act). In order to understand IBC, it is extremely important to understand SICA in its lengths and breadths. There was a period in the 1980s when the Indian Government dealt with the extreme atmosphere of industrial sickness. It is important to understand that this unwanted atmosphere in the nation will have a direct impact on the country’s economy as well.

SICA was soon repealed by the Sick Industrial Companies (Special Provisions) Act, 2003, which tried to fill the voids of the erstwhile SICA. However, this new comprehensive Act has the same fate as the erstwhile Act. Since it clearly did not live up to the country’s expectations, the Insolvency and Bankruptcy Code was introduced in 28th May 2016 and the repeal of SICA came into full effect from December 1, 2016.

First off, it is extremely important to understand that the Insolvency and Bankruptcy Code has been a brilliant addition and development to the otherwise Insolvency laws in India. Apart from the Companies Act, that erstwhile dealt with the “Winding Up” of companies, IBC is only and solely dedicated to situations where a company goes insolvent and needs to be wound up. This gives the company a multi-faced mechanism to go for winding up, either it can be voluntary, by the company itself,  or involuntary. The IBC has established various new aspects such as the IBBI, the IPA’s, the Insolvency Professionals and Information utilities.

Advent of the role of “Homebuyers” under the IBC

In the landmark case Pioneer Urban Land and Infrastructure Limited v. Union of India (Pioneer Judgment), the Supreme Court variedly highlighted and upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. Under the same amendment Act, the homebuyers, or the real estate allottees were brought within the ambit of ‘financial creditor’ under the Insolvency and Bankruptcy Code.

Furthermore, the Hon’ble Supreme Court clarified that the IBC and RERA have to be read in harmonious construction with each other, and in case of a conflict, IBC will prevail over RERA. The Supreme Court further clarified that when there is a sale agreement in place between a buyer and a builder, it will certainly have a ‘commercial effect’- and both the buyer and the builder will have a commercial interest and motive arising out of the sale agreement.

The money is paid in advance to the builder to build such flats or property by the homebuyer, which directly puts them in a commercial relationship of a creditor and debtor. Thus, there is no logical reason to count out homebuyers while looking at financial creditors.  Moreover, the legislature included a Section 5(8)(f) in order to expressly state and convey the Supreme Court’s take on the matter of homebuyers as financial creditors. This Section expressly gives power to the homebuyers to start insolvency proceedings against the builders.

This novel development will not only put the homebuyers in the same stance as the other financial creditors but also allow them to reimburse their debts or losses occurred due to many incomplete real estate projects. There have been many cases such as the Amrapali case, Jaypee Infratech case and the Supertech case, where it was clearly proven that homebuyers are terrible sufferers and have much more to lose in case of any foul play or delay by the builders or the developers.

This was a major prompt and a wake-up call for the government to bring in a way to provide these worse suffer from an opportunity to initiate CIRP proceedings against the builders or developers.

Buying a home has myriad emotional and monetary aspects of an individual attached it to. Thus often individuals invest their hard-earned money into buying immovable property in order to preserve it. Therefore, in situations when such individuals are put in a position of delay or subjected to foul play, they are at a worse situation than that of the builders/developers since the developers will have various other channels to earn, but a homebuyer invests a large chunk of their savings put into such a property and in many scenarios, has loans to pay off.

Recent developments under the ‘Homebuyers aspect’

The current article will largely deal with the plight of homebuyers which worsens with each and every amendment that is brought about subsequent to the Pioneer case. One such amendment of 2020 modified the following aspects:-

  1. Financial creditors under Section 21(6A)(a) & (b), whose debt was in the form of securities or deposit, are allowed to file an application for initiating CIRP jointly with not less than 100 such creditors or 10% of their number, whichever is less.
  2. Financial creditors, who are real-estate allottees are allowed to file an application for initiating the CIRP jointly with not less than 100 such allottees or 10% of such allottees under the same real estate project, whichever is less.
  3. The pending applications for CIRP that were filed by the aforesaid two categories of creditors must be altered to comply with the minimum threshold requirements within 30 days of the commencement of the 2020 Amendment Act. A failure to do so would deem the application to be withdrawn before its admission.

When one begins to analyse the aforementioned amendment, it is almost very difficult to miss out on the patent difficulties and conundrums that it poses. Firstly, it poses an unwanted hurdle on the way of the homebuyer to file for CIRP. In accordance with Section 7 of the Code, there are three manners in which one may file for advancing the CIRP against a corporate debtor.

Either the financial creditor can apply by itself(alone), jointly with other financial creditors or with any other person on behalf of the financial creditor, as may be notified by the Central Government. As we look back at the Pioneer Judgment, the Supreme Court variedly explained why homebuyers shouldn’t be counted out while looking at ‘Financial Creditors’. The Supreme Court further laid down explanations stating how homebuyers are put in the same stand as financial creditors and how they fall under the same criteria.

However, in furtherance of the 2020 amendment, the homebuyer is clearly deprived of the same right granted by the Supreme Court. Since homebuyers are equal to all the other financial creditors whose debt falls under the classification of Section 5(8)(a)-(e), they must be treated equally in every aspect of the insolvency proceeding under the Code. Here, under the new amendment, a single homebuyer cannot file for CIRP “by itself”, but needs 10% or 100 homebuyers (whichever is less) to jointly initiate this process.

This provision snatches the individual homebuyer of the right to recover his financial debt alone and on his individual stand but only makes him dependant on the other 99% or 99 people in order to recover the hard-earned money they invested into the property.

There are several problems that draw a trail around the implementation aspect of this novel provision. The first and missed out problem here is the hazards of implementation of this provision. One must look at the practical feasibility of the provision before enacting it. It is a long drawn process of an individual homebuyer to contact and convince other homebuyers(10%/100 homebuyers) in order to initiate a proceeding against the debtor. It is very clear that the provision, in this case, is siding with the developer or the builder.

The second aspect which one must focus on is the next brutal notification. The relevant provision within the realm of the Insolvency and Bankruptcy Code that states the minimum amount to trigger insolvency proceedings is as follows:-

“4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

In acting the powers conferred under Section 4(1) of the IBC, the Central Government vide notification dated 24-02-2020 in the Official Gazette of India has increased the minimum threshold of default by a company in order to be considered insolvent up to Rs. 1 Crore, this being the maximum increase in the power of the Government. Furthermore, a special provision, 40-C has been included by the IBBI under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to exclude the period of lockdown which can be read as follows:-

“40-C. Special provision relating to time-line. Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

Further to this, there is a suspension period or a break taken, the relevant provision can be read as follows:-

The Ordinance introduces Section 10A to the IBC, which suspends the applicability of:

  1. Section 7 (insolvency application by a financial creditor);
  2. Section 9 (insolvency application by an operational creditor) and;
  3. Section 10 (voluntary insolvency application by the corporate debtor),

for a period of six months, on account of any payment defaults that occur on or after 25 March 2020 (Suspension Period). The Ordinance provides that the Suspension Period may be extended by Government notification, for a maximum period of up to one year.

Conclusion

With all these bullets firing straight at the homebuyers, one is of the belief that the IBC is however letting down homebuyers. There aren’t many remedies in place due to the lockdown situation and the unfortunate trail of amendments following the Novel Coronavirus.

This will not only disable homebuyers from taking refuge under IBC in order to recover their lost money and their only savings, but this will clearly allow them to back off and step back on buying homes at all, provided the clear lack of effective remedies. This will strangely have a domino effect on the Real estate market in its entirety and will lead to a very slow death of the market if the laws aren’t reversed in the due course of time.

One can only hope for a correction of these errors in the due course of time and wait for proper remedies to arise in order to do justice to the worst sufferers: the Homebuyers. There are several lacunas in the Ordinances since the ordinance clearly fails to mention willful defaulters, which are the defaulters which have backed up on payment intentionally and purposefully. In myriad situations, since the law already sides towards the defaulters in some manner, many defaulters willfully take advantage of this biased rule and willfully default upon paying their creditors.

There are no clear ideas with regard to COVID 19 related and Non-Covid 19 related defaults.

A question of the genuineness of the defaulting arises in this matter. One cannot fully ascertain whether the default herein question is with regard to COVID 19, or not. There is no clear distinction made in that regard. One simply might take the refuge of this new wild card: The Novel Coronavirus and default upon paying the creditor. One may waive off paying the creditor and take refuge in the current debtor favouring laws and cheat the creditor significantly.

Moreover, another very important aspect has been skipped by the legislators- which is when to count the date of default from, and whether or not to skip the COVID period, and in case the COVID period is skipped, does it wash the defaulters off of dues which started a little before the COVID 19 period.

The government failed to address the scenario in case there are discrepancies in the dates of insolvency, further toughening the interpretation and implementation of the laws. Although the Court made myriad efforts to protect the innocent homebuyers against the corrupt builders and developers, the path to recovery of the lost money becomes darker with the Covid-19 and the Government’s efforts to light the way for the developers.


About the Author

Sneha Mohanty is a 5th-year law student pursuing B.A. L.LB. from CHRIST University, Bangalore


References

  1. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020, Available Here
  2. Suo Moto, In re, 2020 SCC OnLine NCLAT 206, 30-03-2020, Available Here

  1. What led to the enactment of Insolvency and Bankruptcy Code, 2016?
  2. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams

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