Evolution of the Status of a Home Buyer: Consumer Protection Act, 1986 to Insolvency and Bankruptcy (Amendment) Ordinance, 2018

By: Ayush Chaddha

Under the Consumer Protection Act, 1986 (hereinafter ‘COPRA’), home buyers are regarded as consumers, thereby providing the remedy to approach the consumer court in case of a default by the builder in the delivery of the real estate project. Over the years, home buyers had the remedy exclusively under COPRA and were treated at par with consumers of other goods and services. In March 2016, the Real Estate (Regulation and Development) Act was enacted under which the allottees of the real estate project could approach the Real Estate Regulatory Authority for redressal of their complaints.

Thereafter, in May 2016, the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘the Code’) was introduced. Under the Code, the right to initiate a Corporate Insolvency Resolution Process (hereinafter CIRP’) was restricted to financial creditors, operational creditors, and corporate debtors. The Adjudicating Authority in its orders had rejected the plea of the home buyers for initiating the CIRP as they neither qualified as financial creditors nor as operational creditors. The Adjudicating Authority held that a transaction between home buyers and the builder was a pure and simple agreement and did not acquire the status of a financial debt as it did not have the ingredient of consideration for the time value of money.

In Col. Vinod Awasthy v. AMR Infrastructure,[1] the Adjudicating Authority held that the class of home buyers does not fall within the realms of the operational creditor as it does not supply any goods or services to the real estate developer. Further, the NCLAT in Nikhil Mehta & Sons v. AMR Infrastructure Ltd.,[2] held that wherein the sale-purchase agreement contains a committed assured return plan, wherein an assured return will be provided to the home buyer till the possession of the flat, the amount received by the real estate developer from the home buyer by way of sale and purchase agreement have a commercial effect of ‘borrowing’ and hence the amount paid by the home buyer is against the consideration for time value of money. Thus, conferring it with the status of a financial creditor, in case the developer has an obligation to provide an assured return to the home buyer.

The Insolvency and Bankruptcy Board of India vide its notification dated August 16, 2017, permitted creditors other than financial and operational creditors to file their claim before the interim resolution professional in ‘Form F’. The Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (hereinafter ‘ the Ordinance’) promulgated on June 6, 2018, raised the status of an allottee of a real estate project as a financial creditor.

Therefore, from being recognised as ‘consumers’ under the COPRA to being recognised as ‘financial creditors’ under the Code, the status of the home buyers in respect of the remedy available against the defaulting builder has undergone substantial changes.

The Ordinance recognises the amount raised from an allottee under a real estate project as having a commercial effect of borrowing thereby being a financial debt. Thus, the allottees are recognised as financial creditors, thereby having the right to exercise the decision making power in the COC. It has also raised the status of the allottee in case of liquidation.

Though the Ordinance has been lauded by the stakeholders, it raises certain practical concerns. The article intends to point out these practical issues.

The Ordinance empowers an allottee to initiate CIRP against a defaulting builder, however, it is silent on the ‘trigger event’ for initiating the CIRP. The right has been vested with the home buyers, but the appropriate event for invoking it has not been clarified in the Code. While the Code expressly defines ‘default’ in respect of an operational and a financial creditor.

The term ‘default’ is defined under clause (12) of section 3:

12) default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be;”

The definition of ‘default’ under the code in respect of a financial creditor would not be applicable in case of an allottee.

Section 18 of RERA requires the promoter to pay a certain amount in case of delay in the project. Therefore, the question that arises is whether an allottee can approach the Adjudicating Authority, in case there is a delay of a single day in the delivery of the real estate project.

Further, the Ordinance empowers an allottee to be a part of the Committee of Creditors. This will ensure a higher representation of the allottee in comparison to other financial creditors i.e. commercial banks and financial institutions.

Allottees by virtue of the amount of debt owed will possess better decision making powers as compared to the banks, which may not go down well with them, making it less attractive for them to invest in the real estate sector. In case the dues to homebuyers are more than 34% of the total dues, the lenders cannot approve a resolution plan without support from homebuyers, as the minimum votes needed for approving a resolution plan is 66% as per the amended Code. Thus, the lending by the commercial banks in real estate projects is expected to reduce as they understand that in the event of the insolvency of the defaulting builder they won’t be in control. This will prove to be a hindrance to achieving the target of affordable housing for all, further increasing the rate of lending for real estate projects.

The Ordinance does not specify whether the allottees would be regarded as secured or unsecured creditors. Though financial creditors- both secured and unsecured- have equal rights in approval of a resolution plan, in case the corporate debtor goes into liquidation, in which case the dues are paid in accordance with the waterfall mechanism which places the secured creditors at a higher pedestal than the unsecured creditors.

While the Ordinance has been interpreted to be a major relief to the homebuyers, it includes within its scope allottees of real estate both for commercial as well as for residential purposes. Therefore, the Ordinance does not make a distinction between real estate for personal use and for commercial purpose. Since the object of the Ordinance was to confer protection on the home buyers, it ideally should have provided for a distinction with respect to the final use of the real estate project, as has been provided under the COPRA.

The Ordinance is a welcome step in respect of the status of home buyers under the Code. However, it is expected to face certain initial practical hurdles in its implementation. The tribunal’s interpretation will be decisive for its fate.

[1] CP No IB-10 PB /2017.

[2] Company Appeal (AT) (Insolvency) No 07 of 2017.

(Ayush is currently a student at ILS Law College, Pune.)

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