Pro consumer: The SC’s IBC ruling gives homebuyers greater say, but may prolong realtors’ bankruptcy proceedings

| Updated on August 15, 2019 Published on August 14, 2019

Disagreements between homebuyers and other creditors at the negotiating table due to conflicting priorities may lead to a stalemate

Homebuyers in over one lakh stalled real estate projects across India, at long last, seem to have won some support in their prolonged battle with developers. On August 9, the Supreme Court upheld the constitutional validity of the government’s 2018 amendments to the Insolvency and Bankruptcy Code (IBC) which anointed buyers in a real estate projects with the status of financial creditors. In effect, it has reiterated that homebuyers, like other creditors, can now invoke bankruptcy proceedings against developers under the IBC for default in their contract terms. They can also seek representation on the Committee of Creditors that votes and approves on resolution plans in bankruptcy cases. The redressal offered for homebuyers under the IBC will be in addition to the recourse already available to them under the Consumer Protection Act and Real Estate (Development and Regulation) Act.

In a bunch of petitions challenging this amendment, 200 developers had contended that allowing IBC proceedings to be triggered for delivery delays would be ‘arbitrary and excessive’, as homebuyers already had remedies under RERA. They also argued that allottees in real estate projects who are speculators, and not genuine homebuyers, would use the IBC to file frivolous lawsuits. The SC dismissed these fears by stating that the NCLT could decide on the genuineness of the homebuyers’ plea on a case-to-case basis. Concerns had also been raised about whether placing customers to a business on par with the lenders was bad in law, as it would set an unhealthy precedent for other industries. But the Supreme Court has rightly upheld these rights for homebuyers as a unique case. After all, there is hardly another industry in India where customers double up as the key working capital providers, by paying up 50-100 per cent of the selling price in advance to ‘book’ a product that exists only on paper.

But while the Supreme Court’s latest ruling does give homebuyers a greater say in the proceedings when developers are hauled to insolvency court by lenders, this new route is unlikely to fetch them quick justice. For one, though the IBC amendments have granted homebuyers the status of financial creditors, they remain unsecured creditors and will rank below secured lenders in the waterfall mechanism that decides their share in liquidation proceeds. Should secured lenders have a higher exposure to the developer than homebuyers, their decisions will still prevail. Two, given their inherently conflicting objectives (homebuyers seek delivery of completed projects while other creditors seek to maximise recoveries through asset sales), disagreements between homebuyers and creditors at the negotiating table may lead to a stalemate. Due to their sheer numbers, thrashing out a consensus among homebuyers may also not be easy. All this is likely to stretch the resolution process for the real estate giants lined up before the NCLT. However, given the magnitude of homebuyers’ life savings that are stuck in incomplete real estate projects in India, there’s no alternative but to take this difficult road.

Published on August 14, 2019
This article is closed for comments.
Please Email the Editor