Property market in India: Big problem for homebuyers; check out why they must worry
The 14-member committee formed to review the IBC, in its report submitted to the government last week, has recommended the financial creditor (FC) tag for home buyers. According to the government sources, home buyers may be given a separate grade in waterfall mechanism under section 53 of the code. Waterfall mechanism refers to the order of priority in which the proceeds from the sale of liquidation assets are distributed
Home buyers may be placed higher as compared to other unsecured creditors for real estate companies undergoing bankruptcy proceedings under the Insolvency and Bankruptcy Code (IBC), but that will not fully solve the problem for thousands of customers who have been left in a lurch. The 14-member committee formed to review the IBC, in its report submitted to the government last week, has recommended the financial creditor (FC) tag for home buyers. According to the government sources, home buyers may be given a separate grade in waterfall mechanism under section 53 of the code. Waterfall mechanism refers to the order of priority in which the proceeds from the sale of liquidation assets are distributed.
The sources, however, point out that by not clarifying further, the committee has left some ambiguity. And home buyers and legal experts say that it will be only half the job done. “Home buyers getting the financial creditor status solves half of the problem. Apart from the FC tag, it is also important to be classified as a secured creditor,” said Ramakant Rai, a partner at Trilegal. According to the Section 53 of the IBC, the priority is given to secured creditors. They are the ones who will get their money back, said Rai, who is representing the flat owners in Jaypee Infratech case.
The real estate firm for its Wish Town project at Noida in Uttar Pradesh has collected Rs 25,000 crore from around 35,000 home buyers. “Home buyers can’t be equated with banks. The bank is a secured creditor as debtor has given land as security for getting loans,” said Ved Jain, former president of the Institute of Chartered Accountants of India. As a secured creditor, banks will continue to have a more favourable position. The resolution plan of most bidders takes care of only secured creditors, while the unsecured ones are left high and dry, rues Bhupendra Kumar, a home buyer.
The Ministry of Housing and Urban Affairs had recommended that home buyers should be given the top priority. Home buyers have been demanding the status of secured financial creditor. Thousands of home buyers have been left stranded after a number of real estate companies have failed to deliver the projects on time. If the government accepts the suggestion of the committee to categorise home buyers as financial creditors, the latter will have a representation in the Committee of Creditors (CoC), said Sanjay Gupta, director of Primus Resolution.
All the money raised under a real estate project from home buyers is a financial debt, as per Section 5(8) of the code. It is a commercial borrowing considering it is neither used to construct nor to refund. Currently, any firm where insolvency proceeding has been initiated goes into liquidation if a resolution plan is not accepted by the CoC.
The resolution plan should not be implemented if a developer has not set up an escrow account, say experts. “Rera (Real Estate (Regulation and Development) Act, 2016) provides for an escrow account to be set up by the realty firm. As much as 70% of the amount collected from home buyers goes into it,” said Rai, adding that the money is required to complete construction.
The committee, in its report, has also suggested that resolution plans have to comply with all the provisions of Rera. Meanwhile, stakeholders feel that there is a need to protect home buyers considering that the developers structure contract with home buyers unilaterally. The government while finalising the report of the IBC panel should consider dealing the case of home buyers separately, demand experts.
“Instead of going in for liquidation, the state government should take over the incomplete project and complete it. Rera also provides for the central government to take over the company and deliver the under construction project,” said Rai. The government will soon decide on the report. The amendments will be ratified by the Cabinet before they are tabled in Parliament.
By Anjul Tomar
(Source: DNA Money)