IBC: Insolvency Law May Soon Give Homebuyers Their Due
Homebuyers may soon be treated as financial creditors: Would they be treated as secured or unsecured creditors?
Homebuyers in projects of Jaypee Infratech Ltd. and Amrapali Group have been fighting for their claims against the insolvent companies. So far, they’ve found a sympathetic ear in the Supreme Court that has recognised the disadvantageous position of homebuyers.
Disadvantageous because the insolvency code doesn't recognise homebuyers as a category that gets to have a say in the resolution of the company. They can only submit a form for their claims and hope that the resolution plan, approved by the creditors committee, will settle them.
This will change if the government accepts the proposal of the Insolvency Law Committee to treat homebuyers as financial creditors. If recognised as financial creditors, the committee’s report points out, homebuyers will be able to initiate the insolvency process, get representation on creditors' committee and in the event of liquidation, they will be entitled to get their dues as per the credit hierarchy.
On BloombergQuint’s weekly law and policy show The Fineprint, Harish Chander, executive vice president at Edelweiss Asset Reconstruction Company Ltd., and Divyanshu Pandey, an insolvency law partner at J Sagar Associates, share their views on the committee’s proposal.
Here are the edited excerpts of the interview
The Insolvency Law Committee has suggested that homebuyers should be treated as financial creditors. And this, they’ve said, just needs to be clarified since the existing definition of financial debt is sufficient to include the amount raised from homebuyers. How will this affect the lenders that are so far looked at as financial creditors?
Harish Chander: This creates some balance. If you will see the reasons which were there before the committee and the way the committee has looked at it, there were contracts with homebuyers which are one-sided contracts. They do not have any right to negotiate with the builder. So they are in a weaker position. This brings them to the position that here they can sit along with the financial creditors in an insolvency process.
To some extent, this will be seen as a threat for financial creditors. Financial creditors are of two types – secured and unsecured. Generally, homebuyers are treated as unsecured financial creditors and they will be sharing the pie with unsecured financial creditors. To that extent, they will be impacted.
Do you think that homebuyers will fall in the category of unsecured financial creditors or would the nature of the contract determine the treatment?
Divyanshu Pandey: The nature of the contract will have a bearing in terms of the rights that homebuyers have in the company or the corporate debtor. It will be more in terms of the right vis-à-vis the unit or flat which is allotted to them. But the committee’s recommendation doesn’t make it clear and we’ll have to wait for the actual amendments. As of now, the suggested classification is to treat them as financial creditors without going into the distinction of secured or unsecured.
Generally, if a contract recognises the right in the unit or flat, then there could be a good argument to say that they would classify as a secured creditor. Because there may not be a particular unit identified in their name, it would be more in the nature of an unsecured financial creditor. If a unit or flat has not been specifically identified for their benefit, then they will be treated as unsecured financial creditor. It will depend on how the language comes out in amendments.
If the agreement with a homebuyer says that she is allotted flat 707 in Tower 1 of X project, will such specification change the secured versus unsecured treatment?
Harish Chander: The committee was faced with a situation where the buildings are not complete. That is what they were struggling with. If the building itself is not complete, then your flat is non-existent. And so, practically, the rights are also non-existent unless somebody comes and completes the building. So, once you participate in an insolvency as a financial creditor – being the homebuyer – and see to it that the resolution plan envisages the completion of the building, only then will you get back the flat and will it be of any advantage to you. If the building is not complete, where the flat has not come up, then you will not get anything out of it.
What sort of rights will these homebuyers get if the committee’s suggestion is accepted?
Harish Chander: It will depend on the weight which they carry. In some buildings you will find 60 percent of the funding has come from homebuyers and 40 percent from lenders to that project. So, the composition of the creditors’ committee could be 60 percent homebuyers and 40 percent secured financial creditors. If anybody is coming forward and putting a resolution plan, I don’t think they will succeed unless they provide some kind of relief to homebuyers. That is where their negotiation power will come into play. Where they are in minority, say 10 percent, I don’t know whether the resolution plan will adequately take care of them.
The committee has suggested that if a corporate debtor has large number of financial creditors, such as home buyers, they be represented in the creditors’ committee via one representative or the NCLT appoints a resolution professional to represent their rights and interest. Do you see any operational challenges there?
Harish Chander: In case of Jaypee Infratech, it was observed that there is no way that they could be represented in the committee even though they agreed that they should be there. So, the National Company Law Tribunal had to direct the regulator to appoint a representative on their behalf. Therefore, the committee is suggesting an institutional mechanism for them that somebody who is authorised by them or appointed by NCLT like a resolution professional, he will represent them. Representation is fine. But when you are representing a large number of people you may have to vote according to the wish of each and every individual. That is the challenge for the representative. Mechanism for voting will have to be suitably altered and the hope is technology will take care of it.
Does this suggestion by the committee open the doors for other categories of this nature to be included in the definition of financial creditors?
Divyanshu Pandey: There was a particular situation to include homebuyers in the category of a financial creditor. Because there is borrowing by the real estate company into development and construction of a particular project and a large share comes from these homebuyers. It is a welcome step as it offers some kind of protection and does not leave them out in open in a situation where they were not even being heard or attended to. Whether this expansion will set a precedent for other categories, we will have to wait for the law to evolve.
Watch the full interview here.