Why the Centre has not classified home buyers as ‘secured’ or ‘unsecured’ creditors under IBC

Home buyers may be treated as ‘financial creditors’ under the insolvency code, but they will have to argue their own case as to whether they should be considered a ‘secured’ or an ‘unsecured’ financial creditor, a top government official said.

Being treated as ‘secured’ or ‘unsecured’ is important in the “waterfall” mechanism which sets out the order of priority in which proceeds from the sale of liquidation assets are to be distributed under the Insolvency and Bankruptcy Code (IBC).

“We have consciously kept away from secured or unsecured. It is for the home buyer to argue his case. I will not get into that. The insolvency laws committee did not get into that. The government has also not gone into that,” Injeti Srinivas, Secretary, Ministry of Corporate Affairs, said. This will be the position even as the recently promulgated insolvency ordinance allows home buyers to be treated as a “financial creditor” for the purpose of IBC. “RERA is an Act protecting the consumer. On the other hand, IBC is protecting the company. Once the pre-RERA cases are sorted out, there will not be any issue for home buyers,” Srinivas said.

In the coming days, the insolvency regulator IBBI is expected to come out with a mechanism for representation of home buyers (as financial creditors) in the Committee of Creditors. Shardul S Shroff, Executive Chairman, Shardul Amarchand Mangaldas, a law firm, told BusinessLine that a home buyer’s position has improved with the latest insolvency ordinance, but he will not be in the position of a secured financial creditor because that would distort the financing of the home construction market.

“By becoming a financial creditor, a home buyer would have priority over Government and operational creditors. Under the waterfall mechanism, he (home buyer) would be in the category of financial creditor which would be above the category of operational creditor and Government,” Shroff said. Saurav Kumar, Partner, Induslaw, said no amendment has been brought about to classify the home buyers as ‘secured’ or ‘unsecured’ creditors for the purpose of ‘waterfall’.

“So their contracts with the builder will determine whether they are secured or unsecured creditors,” Kumar said.

Pankaj Mahajan, Head-Restructuring and Insolvency, Mazars, said it all depends on whether an agreement exists between the home buyer and the developer or not.

“Where a home buyer has been allotted a specific unit specifically earmarked in his name by virtue of an agreement, the said buyer will be treated as a secured creditor,” Mahajan said.

Aseem Chawla, Partner, ASC Legal, a law firm, said home buyers would have a say in the resolution plan with the latest amendment to the insolvency code.

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