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Homebuyers are now creditors of builders

LiveMint logoLiveMint 31-08-2017 Ashwini Kumar Sharma

The corporate insolvency and resolution process (CIRP) initiated against Jaypee Infratech Ltd under the Insolvency and Bankruptcy Code, 2016, has triggered an amendment in the insolvency code itself. Earlier, the code did not include homebuyers of under-construction projects as creditors under any category. However, according to the amendment carried out on 16 August, homebuyers of various under-construction projects of Jaypee Infratech were asked to file their claims as creditors. But their rank in the hierarchy of creditors was lower than that of financial and operational creditors. 

To accommodate the interests of homebuyers as creditors, a separate form—Form F—has been issued. This form is for creditors who don’t fall under any of the previously defined categories of creditors in the code. 

However, by defining homebuyers as creditors, does this amendment also allow homebuyers to file insolvency petitions against developers? While this would be the last option that a homebuyer would like to resort to, need for such action could arise given the current state of affairs where many under-construction housing projects have been completely stalled or are running way behind their schedule—some by even 5-7 years. In fact, in many cases there is no longer any hope that homebuyers will get the homes they were promised. 

Let us read about whether homebuyers can file insolvency petitions or not.

Who can initiate insolvency petitions

Under the code, an insolvency petition can be filed by a creditor against the debtor. As defined in the code, “creditor” means any person to whom a debt is owed and includes "a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder.”

“CIRP is a legal mechanism provided under the code, whereby the financial creditor or operational creditor (a lender, in general term ) in case of default made by the corporate debtor (a company, in general terms) in repayment of the loan, obligation, or debt as and when they became due, file an application for disposing the assets of the corporate debtor for realizing the amount of loan or debt before the National Company Law Tribunal (NCLT),” said Harsh Pathak, a Delhi-based lawyer.

Can homebuyers initiate insolvency petitions?

“The legal position as to whether homebuyers can file application under the code against any developer is still a grey area,” said Mayur Shetty, associate partner, Rajani Associates, a law firm.

Pathak agrees: “(Whether) homebuyers—by simply making payments to the builder—can avail the remedy of insolvency code is yet to be decided as homebuyers are non-defined and non-categorized under any form of creditors in the code.”

However, in a few appeals made to the National Company Law Appellate Tribunal (NCLAT), the order was in favour of homebuyers. The insolvency code was enacted last year and there are a few cases that lawyers refer to for this conclusion. The landmark judgment by NCLAT came in the case of Nikhil Mehta & Sons Vs. AMR Infrastructure Limited, and all the lawyers that Mint interacted with made their statements based on this judgment. “However, the facts of the case are unique and may not apply to most of the homebuyers,” said Shetty. He explained that in this case, one of the flat units was purchased by the applicant under the “Committed Return Plan”. 

Under the plan, the appellant was to pay a considerable portion of the total consideration on execution of the memorandum of understanding (MoU) and the developer had committed to pay a particular amount to the buyer each month as “Assured Returns”. The developer had defaulted in paying the assured returns and therefore the buyers approached the NCLT. The petition was rejected by the NCLT, as homebuyers were not categorised as creditors under the code. Thereafter, the appellant approached NCLAT and “it was held that as the developer treated the appellants as investors and borrowed the amount for its commercial purpose, the amount invested by the flat purchasers would come within the meaning of financial debt as defined in the code and therefore the appellant flat purchaser ought to be treated as a financial creditor,” explained Shetty. Subsequently, NCLAT had to deal with three appeals against the same developer—AMR Infrastructure Ltd—by three other homebuyers— Rubina Chadha, Sajive Kanwar and Mukesh Kumar.

All of them first approached the NCLT, where their appeal was rejected based on different reasons. In case of Rubina Chadha, NCLT, Delhi, held that the appellant could not satisfy the tribunal that they come within the meaning of financial creditors or operational creditors. In Sajive Kanwar’ claim, NCLT, Delhi, had held that flat buyers cannot be treated as financial creditors since such debts are not disbursed against the consideration for the time value of money. In Mukesh Kumar’s appeal, where he claimed to be an operational creditor, the NCLT, Delhi held that a flat purchaser cannot be treated as operational creditor as the debt has not arisen out of provisions of goods, services or employment. 

After their cases were declined by the NCLT, all the three approached NCLAT, which passed an order based on an order passed in the Nikhil Mehta Case. “NCLAT did not decide whether or not the homebuyers would be the operational creditors or financial creditors,” said Shetty. But NCLAT held that as in the Nikhil Mehta case, the appellants therein were held to be the financial creditors of AMR Infrastructure by NCLAT, the tribunal was bound to admit the application filed by Nikhil Mehta & Anr. against AMR Infrastructure Ltd. The appellants in the subsequent three appeals could file their respective claims before the Interim Resolution Professional appointed in the Nikhil Mehta case. 

Therefore, the question of whether a homebuyer can file an application under the code as an operational creditor or a financial creditor continues to remain unanswered, Shetty added.

It all depends on the builder-buyer agreement. If there are any clauses related to assured return or debt obligation of homebuyers, a homebuyer will be considered as financial creditor and can thus file a petition for liquidation.

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