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IBC: Home Buyers Will Find It Hard To Recover From Defaulting Builders, Says NCLT President

Is the amended insolvency code enough to rescue stranded homebuyers?



New apartment buildings stand in Gurgaon, a New Delhi suburb (Photographer: Qilai Shen/Bloomberg News)
New apartment buildings stand in Gurgaon, a New Delhi suburb (Photographer: Qilai Shen/Bloomberg News)

It won’t be a “cakewalk” for home buyers to recover their money from defaulting real estate players, even after becoming financial creditors under the Insolvency and Bankruptcy Code, according to NCLT President Justice MM Kumar.

“Home buyers, after becoming financial creditors, under the Insolvency and Bankruptcy Code (after amendments) may not be a happy lot,” Justice Kumar said.

If the Supreme Court exercises its power under Article 142 of Indian Constitution, “that may come to their rescue, otherwise there are many risks, legally speaking,” Justice Kumar said at a seminar in New Delhi.

Explaining why home buyers still faced uncertainties in recovering their money under the amended IBC, Justice Kumar said there is a question mark on how they would be treated as secured creditors.

The home buyers even after they have become financial creditors, would still be suffixed in front of the secured creditors
Justice MM Kumar

As there are different types of financial creditors, how home buyers would be categorised or if they must be treated as secured creditors is a debatable issue, Justice Kumar added. There was uncertainty over the ownership of the property, for which the buyers had made payment., he added.

On being asked that in case, if in the absence of a tripartite agreement (between bank, buyer and builder), sales of future assets, which are being mortgaged and have not come into existence, would be considered a secured asset, Justice Kumar said that is a grey area.

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On May 24, the government amended the IBC allowing home buyers to be financial creditors of the company through an ordinance. Yesterday, Union Finance Minister Piyush Goyal introduced The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018 in Parliament to replace the ordinance.

The amendments to the IBC are intended to give relief to home buyers by recognising their status as financial creditors, thus giving them due representation in the Committee of Creditors and making them an integral part of the decision-making process.

Jaypee Infratech, which is a subsidiary of Jaypee group's flagship firm Jaiprakash Associates is developing about 32,000 flats, of which it has delivered 9,500 apartments. Debt-ridden Jaypee Infratech has an outstanding debt of nearly Rs 9,800 crore, of which Rs 4,334 crore pertains to IDBI. NCLT has already admitted insolvency plea against it.

Besides, home buyers from Amrapali group are also facing similar situation after NCLT admitted insolvency plea against the company.

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