With the inception of Insolvency and Bankruptcy Code, 2016 (“IBC”), several real estate companies have been admitted under the insolvency process. The dynamics of the real estate company insolvency proceedings are unlike any other company under insolvency process as it involves multiple homebuyers who are involved in the real estate projects whose delivery/completion/possessions of flats or homes are stalled due to initiation of insolvency process against the real estate company.
Further, as per the latest data available with IBBI around 21% of the all insolvency resolution processes are related to the real estate sector. Some of the high profile real estate projects like Jaypee Infratech (Jaypee-Wishtown), Amrapali, Supertech etc which are under insolvency process have already contributed enough in the development of the rights of homebuyers and insolvency law related to real estate projects.
This article aims to clarify and suggests plausible solutions to several issues which a homebuyer faces when the insolvency process against the real estate company is initiated.
1. Whether a single homebuyer has the right to initiate an insolvency process against the defaulting builder company under IBC
Through the 2018 Amendment Act, the Homebuyers were categorized as Financial Creditor and allowed to file an insolvency application against the builder company. However, in 2020 another Amendment came in which position was changed significantly with respect to the filing of insolvency application powers of the homebuyers.
Through the 2020 Amendment, now the homebuyers in order to take a defaulting builder / real estate company in the insolvency process, must jointly file an application for initiation of corporate insolvency having either at least 100 homebuyers or at least 10 percent of the homebuyers in the same real estate project. It is also to be noted that the lesser number in the two conditions above mentioned shall be sufficient to file an insolvency application.
This Amendment was challenged before the Supreme Court in the case of Manish Kumar vs Union of India, however, the Supreme Court upheld the constitutionality of the 2020 Amendment. Hence, it is now crystallized that there must be a minimum of 10% of the homebuyers pooling together or at least 100 of the homebuyers of the same real project to file an insolvency application.
For example: In a real estate project “ABC Builders” having 1500 allottees, than minimum of 100 allottees are jointly required to file an insolvency application against ABC Builders.
In another case, in a real estate project “XYZ Constructions Ltd” having 80 allottees, than minimum of 8 allottees are jointly required to file an insolvency application against XYZ Constructions Ltd. i.e minimum 10% of the allottees/ homebuyers in real estate project.
2. What happens when the homebuyers cases is moved to the Liquidation Stage
In case when the insolvency process of the real estate company fails and the company is pushed into liquidation, in such case the homebuyers will get their amount as per the waterfall mechanism under Section 53 of IBC. Presently, the homebuyers are treated as unsecured financial creditors and therefore, they shall be placed under Section 53 (d) of IBC.
Waterfall mechanism (Section 53)
It is to be noted that liquidation is a highly disadvantageous position for the homebuyers as they are placed on the fourth position under the waterfall mechanism after insolvency process costs, dues of the secured creditor, dues of workmen and employees. Hence, the claims of the Homebuyers under liquidation shall be provided in their respective ratio after dues of above placed categories are satisfied first.
Therefore, the position accorded to the homebuyers in decision making as the member of committee of creditors needs to be exercised carefully and collective endeavor of homebuyers should be made to avoid the liquidation of the company.
3. What are the relevant forms that are required to be submitted to the RP by the Homebuyers.
When an insolvency proceedings is initiated against a real estate company, the NCLT appoints Interim Resolution Professional, who is duty bound to collate information related to claims of the creditors of the company. During such a situation, the Homebuyers are required to submit their claims under FORM CA of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) to the Resolution Professional (“RP”) of the company. FORM CA can be accessed by clicking here.
Along with FORM CA it is important to submit documents along with the FORM CA as an attachment which will help the allottees/ homebuyers to prove the existence of debt. Following are the documents which are generally provided by the homebuyers in such case:
- the records available with an information utility, if any; or other relevant documents, including any-
- agreement for sale;
- letter of allotment;
- receipt of payment made;
- documents for case filed for claims with any authority, if any
- order passed by any authority in support of claim, if any
- such other documents, evidencing the existence of debt.
After the submission of claims to the RP, the RP shall verify each claim and will upload the list of the accepted claims on the website of the company. In case there are discrepancies with the submitted claim of the homebuyers or the claims of the particular is not accepted by the RP, such homebuyer(s), can directly address the concern with the RP for redressal.
4. What are the realistic timelines for the completion of projects once the project goes into insolvency?
One of the major focuses of IBC is to expeditiously complete the insolvency process and the IBC allows the maximum time-limit of 330 days as per Section 12. However, we have seen there are multiple impediments which delays the insolvency process including but not limited to pending litigations, prospective bidders availability, operational challenges etc.
As per the data available with the IBBI average time period required to complete an insolvency process initiated by a Financial Creditor is 643 days for FY 24 Q1 and 552 days for FY 23 Q1. Strictly speaking this timeline includes time taken from the date of commencement of the insolvency proceedings till the approval of the resolution plan of the bidder by NCLT.
However, once the resolution plan is approved by the NCLT of the bidder, it is very subjective to comment on the completion of the project and delivery of the flats, as it certainly depends on the status of the project. If the project is in its nascent stage it will take more time to complete the project as compared to any real estate project which was admitted into insolvency after substantial completion was already done.
5. Classification of homebuyers: whether an Operational Creditor or a Financial Creditor.
IBC initially did not recognise the homebuyers as either financial or operational creditors. The Supreme Court for the first time through its judgment in Chitra Sharma vs Union of India categorized the Homebuyers as the “Financial Creditor”. However, it was only with the introduction of Amendment of IBC in 2018 and the upholding of the constitutionality of the 2018 Amendment by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, the Homebuyers were recognised as the Financial Creditor.
The explanation added to the definition of Financial Debt under Section 5(8) of the IBC through the 2018 Amendment Act states that monies advance by an allottee (homebuyer) under a real estate project would be deemed as a financial debt. This firmly establishes the position of an allottee as a Financial Creditor to the real estate project. Therefore, the homebuyers are now categorized as ‘Class in Creditor of Financial Creditor’ as per Regulation 8A of the IBBI CIRP Regulations. This change effectively now allows a homebuyer to be directly involved in the insolvency process of the real estate process and have the power to make commercial decisions as they are now represented in the Committee of Creditors.
It is to be noted that the homebuyers are represented in the committee of creditors through an Authorized Representative (“AR”) who is appointed by the interim resolution professional after the selection made by the allottees through a voting mechanism (discussed in detail at point no. 6 of this guide). As there may be hundreds of homebuyers in the insolvency process it was deemed prudent to appoint an AR to represent the interests of the homebuyers in the committee of creditors meetings.
6. Who is an Authorized Representative, does it make any difference to vote the correct Authorized Representative.
Originally IBC did not provide for the concept of AR. Although after the Amendment of 2018, the AR concept was introduced under IBC who shall be representing the interests of the Class of Creditor of Financial Creditors. As per Regulation 16A of the IBBI CIRP Regulations, an IRP shall select the insolvency professional, who is the choice of the highest number of financial creditors in the class in Form CA received under regulation 12 (1) of CIRP Regulations, to act as the authorized representative.
In a nutshell whenever there is a class of creditors having more than 10 or more financial creditors they are required to be represented by an AR. Since homebuyers are also categorized as a class of creditors in such a case, the IRP along with the invitation of claims from the allottees/ home buyers provide a list of three (3) prospective insolvency resolutions to be appointed as AR. The candidate who is the most preferred choice of the homebuyers is selected as AR to represent the homebuyers in the insolvency process.
It is to be borne in mind, the profile of such prospective ARs are attached with the invitation to submit and it is prudent on the part of the homebuyers to conduct a small due diligence before voting in favor of any particular candidate.
7. Can a homebuyer submit their claims after the 90 days of statutory time-limit or it can be allowed till approval of resolution plan.
Filing of claims is an important process of the insolvency process. Regulation 12 of CIRP Regulations throws light on the timelines related to the filing of claims. Generally, the claims are required to be filed within the time period as mentioned under the public announcement of insolvency process published by RP. However, with the law amended in 2018 has added a sub-regulation (2) to Regulation 12 which states that the claims can be filed till the 90 days from the date of the commencement of insolvency proceedings. However, there is a different position taken by the courts at multiple instances.
Latest being the Supreme Court judgment in State Tax Officer vs Rainbow Papers Limited, wherein the Supreme Court held that the timeline for submission of claims is not mandatory in nature but only directory and the claims of the creditors can be filed till the approval of the resolution plan by the committee of creditors.
However, it’s important for creditors to be diligent in submitting their claims within the prescribed time frames to ensure that they can participate in the insolvency resolution process and have their claims considered. Late submission of claims can be a complex and discretionary matter and potentially involves litigations.
The amendments of 2018 and 2020 under IBC have brought in many welcome changes for the homebuyers with the most important being the categorizing of homebuyers as financial creditors. The legislature and the courts being sensitized and aware of the needs of the homebuyers have brought in several key amendments under IBC to ensure that the homebuyers have a fair say in the insolvency process.
These changes will not only aid the homebuyers in making an informed decision with respect to their real estate projects but will endeavor to complete the projects and deservedly provide a home to the homebuyers of their hard earned money.
Thoughts of this article was composed and compiled by –