10 August 2019: The Supreme Court’s judgment on Friday re-affirming the rights of end-use home buyers as financial creditors under the Insolvency and Bankruptcy Code (IBC) is expected to provide protection and a hope of recovering of their dues especially in projects that are stuck for long with no possibility of delivery in sight.
There are around 1.74 lakh stalled housing units across the top seven cities — Delhi-NCR, Mumbai, Pune, Bengaluru, Hyderabad, Chennai and Kolkata — and their buyers can now stake claims to their dues by initiating insolvency proceedings against the errant developers.
This is also expected to limit loan delinquencies of banks and housing finance companies who have exposure to retail borrowers. While being a confidence booster for end-use home buyers, the ruling will further the consolidation process in the sector, weeding out non-serious developers. Investors, however, may not be able to cite this judgement to exit stuck projects.
“The SC judgment re-affirms the rights of the home buyers as financial creditors under IBC. This is a landmark judgment so far as genuine home buyers are concerned. However, this may not be a happy news for the investor-home buyers who have initiated IBC against the developers for seeking exit from their investments on account of the current condition of the real estate market,” said Abhilash Pillai, Partner, Cyril Amarchand Mangaldas.
The apex court said that the IBC gives an additional forum to the home buyers to raise grievances, adding that the provisions under the IBC, Real Estate Regulation Act (RERA) and the Consumer Protection Act will work harmoniously. The court further said that in case of any conflict between the three Acts, the provisions of the IBC will prevail.
“It is a big boost for home buyers as they now have another legal platform to deal with unscrupulous real estate developers. As doubts about legal validity of the said amendment is now cleared, home buyers as a member in the committee of creditors (CoC), will be also able to protect their interests better if builders themselves or banks or any other stakeholders drags a company to NCLT. The ruling will help in bringing sanity to the real estate sector,” said Abhay Upadhyay, president, Forum For People’s Collective Efforts.
Developers, however, will have two defences available under the IBC. One, if the home buyer has defaulted on payment under the builder-buyer agreement, then there will be no entitlement to relief including payment of compensation. Two, under Section 60 (5) of the IBC, the developer can contest the buyer’s insolvency plea at the NCLT on the grounds that it has been filed fraudulently with malicious intent.
“It is a balanced judgement. With a slowdown in the real estate sector, many home buyers are looking for cancellations, that won’t be possible now. Also, speculative investors won’t be able to use the IBC to get exits,” said Kishore Jain, president-Bengaluru, CREDAI.
Developers’ association NAREDCO welcomed the judgement saying that it gave home buyers an equal footing as secured financial creditors.
“This will enable the completion of projects ultimately benefiting both lenders and home buyers. The liquidity crisis looming over the sector as an outcome of a consecutive policy reforms has caused multiple problems for NBFCs and banks,” said Niranjan Hiranandani, national president, NAREDCO.
According to ANAROCK research, as many as 220 projects equaling 1.74 lakh homes are completely stalled in the top seven cities alone.