Rights Of Homebuyers Under The IBC

Homebuyers recognised as Financial Creditors

On June 6, 2018, the Insolvency and Bankruptcy Code (Amendment) Ordinance was passed, which was replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 ("2018 Amendment Act")^[3] on August 17, 2018. By way of the said amendment, an Explanation to Section 5(8)(f) of the IBC was added, which provides a definition of "financial debt". It was clarified that the amount raised from an allottee under a real estate project shall be deemed to be aan amount having the commercial effect of a borrowing. It was further clarified that the expressions "allottee" and "real estate project" shall have the meanings assigned to them under the Real Estate (Regulation and Development) Act, 2016 ("RERA"). As a result, Homebuyers/allottees were expressly recognised as financial creditors under the IBC, which enabled them to initiate corporate insolvency resolution proceedings ("CIRP") against a defaulting developer under Section 7 of the IBC. It may be noted that Homebuyers have been recognized as allottees under RERA. [See Section 2(d)].

The 2018 Amendment Act was challenged before the Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited v. Union of India^[4] on the grounds of it being violative of Article 14 and Article 19(1)(g) read with Article 19(6) of the Constitution of India. The Supreme Court rejected the challenges and upheld the constitutional validity of the 2018 Amendment Act. The Supreme Court on a reading and interpretation of Section 5(8)(f) of the IBC, observed that Homebuyers/allottees were included in the main provision i.e. Section 5(8)(f) from the very inception of the Code, the Explanation being added in 2018 merely to clarify doubts that had arisen in relation the status of Homebuyers. Therefore, the Court held that the 2018 Amendment Act does not infringe Article 14 and Article 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

Minimum threshold requirement

On December 28, 2019, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, was promulgated which was replaced by Insolvency and Bankruptcy Code (Amendment) Act, 2020 ("2020 Amendment Act")^[5], inter alia inserting provisos to Section 7 of the IBC. The second proviso states that in case of Homebuyers, an application for initiating CIRP under Section 7 of the IBC is to be filed jointly by at least 100 allottees or 10% of the total allottees under the said project, whichever is lesser. The third proviso further stated that matters already filed by individual Homebuyers but not yet admitted by the adjudicating authority before the commencement of the 2020 Amendment Act shall be dismissed if they are not modified to fulfil the minimum threshold requirement as stated above within 30 days from the commencement of the 2020 Amendment Act. The constitutional validity of the 2020 Amendment Act was upheld by the Apex Court in the case of Manish Kumar v. Union of India,^[6]

Submission of claims by Homebuyers

The above makes it clear that the courts as well as the legislature have taken an active approach in not only recognising but also protecting the rights of Homebuyers. There are a host of issues which periodically arise for consideration vis-à-vis their rights, and one such issue is with regard to submission of claims by Homebuyers.

Once a Section 7 application is admitted, the adjudicating authority has to pass an order under Section 14 of the IBC, declaring moratorium and appointing an interim resolution professional ("IRP"). The IRP is required to then make a public announcement which is required to mention the last date for submission of claims by creditors. In terms of Regulation 6 read with Regulation 12 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations"), the creditors may submit their claims within 14 days from the date of appointment of the IRP, failing which the claim may be submitted within a period of 90 days from the insolvency commencement date. In numerous judgments the National Company Law Tribunal ("NCLT") has clarified that rejection of claim on the ground of delay beyond the 90 day period is not sustainable as the aforesaid provision is merely directory and not mandatory in nature.^[7]

While this appears to be settled law, on June 1, 2022, the Principal Bench of the National Company Law Appellate Tribunal ("NCLAT"), New Delhi, comprising of Justice Ashok Bhushan, Ms. Shreesha Merla, Mr. Naresh Salencha granted further relief to Homebuyers in relation to filing of their claims. In the said case titled Puneet Kaur v. K V Developers Private Limited,^[8] the NCLAT held that even claims of those Homebuyers ought to be included in the information memorandum who did not file their claims, if the same were reflected in the record of the corporate debtor. The NCLAT held that non-consideration of such claims would lead to inequitable and unfair resolution.

The Appellate Tribunal further noted the difficulty faced by Homebuyers in filing their claims. It was observed that the public announcement inviting claims is normally done in the area where the corporate debtor has its registered office and corporate office, and there is every likelihood that all the Homebuyers who are usually hundreds in number neither come to know about the CIRP nor do they file their claims within the stipulated period. The NCLAT thus observed that non-submission of claims within the prescribed time is a common feature in the insolvency process of almost all real estate projects. The Appellate Tribunal went on to hold that once the allotment letters have been issued to the Homebuyers and payments have been received, there is an obligation on the part of the real estate company to provide possession of the houses along with other attached liabilities. Therefore, the Homebuyers have every right to agitate their claim.

The NCLAT has recognised the difficulties faced by Homebuyers, who, as the NCLAT recorded in its judgment dated June 1, 2022, usually belong to the "middle class of society", majority of whom have taken loans from banks and other financial institutions, saddling them with liability. In doing so, the NCLAT furthered the trend of the courts, viewing Homebuyers with an equitable mindset and reiterated the need to protect Homebuyers from the technical rigours and procedures contemplated in the IBC.

Authors: Angad Varma, Partner; Prashant Kumar Sr Principal; Toyesh Tewari Sr Associate & Mahima Singh Associate are members of a Dispute Resolution team at Dua Associates focusing on Insolvency & Bankruptcy