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Insolvency & Home Buyers

Some financial experts are against courts resorting to the IBC to enforce buyers’ rights

Photo Credit : Reuters

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The recent liquidation cases against two key builders in the national capital region – the Jaypee and Amrapali Group – puts home buyers struggling for possession of their homes amidst long construction delays, in the spotlight again.

Radical Realty Media Foundation, a newly formed outfit comprising professionals, users and buyers, highlights the enormity of the problem. The foundation claims to represent the cause of afflicted buyers of over 200 housing projects, with a cumulative value of Rs 1 lakh crore. The seriousness of the problem can also be gauged from industry statistics. As per Assocham data, over 800 housing projects have been delayed by as much as four years. The Liases Foras Real Estate Research Report says 1,53,000 housing units across the top eight cities have been delayed by three years.

The IDBI Bank has initiated insolvency proceedings against Jaypee. Bank of Baroda has moved the National Company Law Tribunal (NCLT) for liquidation proceedings against the Amrapali Group. Home buyers are opposing the insolvency proceedings, apprehensive that their interests are not safeguarded by the Insolvency and Bankruptcy Code (IBC). Insolvency experts, however, opine that interests of home buyers are protected by the Resolution Plan under insolvency as it takes care of raising finance from investors for construction and delivery of incomplete apartments. In case of Jaypee, two representatives of home buyers are part of the Resolution process on the directive of the Supreme Court and an amicus curiae is representing home buyers in the insolvency proceedings at the NCLT.

Some financial experts are against courts resorting to the IBC to enforce buyers’ rights, fearing that it may deter faster resolution of bad loans of NPA- hit banks. They believe that banks that are already cautious of sanctioning construction loans to real estate developers, may turn twice shy, which would hit the sector hard. The Insolvency & Bankruptcy Board of India (IBBI) has, meanwhile, tweaked rules to ensure that any Resolution plan on bankruptcy deal with the interests of all stake holders, including home buyers left high and dry. The problem is that under the IBC, home buyers are not in the category of financial or operational creditors and secured creditors now come third in order of preference (after taking into account the cost of liquidation and dues of workers).

This is the reason why the Urban Development Ministry  wants to prioritise home buyers over secured creditors in sharing the proceeds. Law-makers and insolvency experts fear that the move may open a Pandora ’s Box, with other stakeholders making similar claims. The same concern prompts the Corporate Affairs Ministry to tread cautiously and consult all stakeholders. 

The current crisis has arisen because developers lack funds to complete stalled projects. The Supreme Court directive that Rs 2,000 crore be raised to complete stalled projects is reassuring for home buyers. The Greater Noida Industrial Development Authority  (GNIDA) proposes a Rs 1,500-crore bailout for stalled housing projects.  Distress funds for stuck projects should not be a problem, today when  most real estate funding comes from domestic and global private equity firms.

Some prominent developers like Naveen Raheja, former chairman of the National Real Estate Development Council (NAREDCO) and head of  the real estate committee of Assocham, calls for proposals like subsidised loans for distressed builders from a fund created through bonds. The GNIDA has already prepared such a proposal. The real estate regulator could, as suggested by housing experts like Deepak Parekh of HDFC Bank, mitigate the current crisis through an Asset Reconstruction Company (ARC).

Going forward, RERA has all the preventive and punitive safeguards necessary to protect home buyers and ensure timely delivery of  flats.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Vinod Behl

The author is senior real estate media professional

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