Home Buyers to get Rights as ‘Creditors’ of Insolvent Firms

The Union Cabinet has given its approval for an ordinance to amend the insolvency law to, among other things, treat home buyers as ‘financial creditors’ in the insolvency process. This move is aimed at classifying home buyers such that they can participate equitably in the insolvency resolution process under the Insolvency and Bankruptcy Code (IBC), sources said. Briefing reporters on today’s Cabinet decisions, Union Law and Justice Minister Ravi Shankar Prasad, however, declined to go into the specifics of the ordinance. Residential property buyers are now effectively considered at par with banks and other institutional creditors when it comes to recovering dues from real estate developers that go bankrupt. “This amendment will certainly go a considerable way in bringing more transparency into the overall funding of projects. With home buyers now getting the opportunity to claim their dues from builders, there is an even stronger burden on developers to deliver on time,” he said. PropEquity’s Founder & CEO Sanir Jasuja said the announcement will go a long way to renew home buyers’ faith in the legal system and getting them equal footing vis-à-vis lenders to get their money back. “Our latest study shows that there are still 5, 95,074 units of unsold stock in the top 9 cities in India. We expect more developers to file for bankruptcy if they are not able to clear their unsold inventory,” he said. India Ratings and Research (Ind-Ra) believes the Cabinet ordinance could be credit-negative for the lenders of developers, while it may strengthen real estate buyers’ (end-customers) protection and boost customer sentiment. Saurav Kumar, Partner, Induslaw, a law firm, said the amendments are a welcome change and would speed up the CIRP process. He added that the recognition of home buyers as financial creditors was a “populist move” and would face challenges. “The bankability of a real estate project is likely to suffer. Bankability depends on various factors, including the debt-equity ratio of a company. Since such amounts raised from the home buyer will now be treated as a financial debt, it needs to be seen if the banks take such factor into account and are willing to provide the same leverage to a project, as before,” Kumar said. Many experts see builders becoming more cautious while taking funds from financial institutions and banks, as they would now also be accountable to home buyers and financial institutions if their business goes belly-up. Diwakar Maheshwari, Partner, Khaitan & Co, said: “While the text of the latest IBC ordinance is awaited, it is expected that the same would have appropriately considered the various relevant changes suggested by the 14-member insolvency law committee, more so, as the said committee had, inter alia, taken pertinent judicial guidance while suggesting its change(s) in its report.”