In a major development that is expected to benefit homebuyers, the Cabinet has approved amendments to the IBC allowing homebuyers to be treated as financial creditors
If there is one act of the government that has struck the fear of the Divine into the hearts of promoters then it is the Insolvency and Bankruptcy Code (IBC). Fear of losing their company has resulted in banks recovering around Rs 83,000 crore from defaulting promoters. This same fear can now be seen in the eyes of real estate developers.
In a major development that is expected to benefit homebuyers, the Cabinet has approved amendments to the IBC allowing homebuyers to be treated as financial creditors.
What this means is that in case a builder is unable to deliver a house and files for bankruptcy then the buyer will be treated at par with banks and other institutional creditors who had given loans to the builder.
Earlier the buyer was treated as an ‘unsecured creditor’ which graded his payments to the builder at a lower level than that of the banks. In case of insolvency the bank and other institutional creditors would have first recovered their money by selling the assets of the builder and after which, if there was anything left, the buyer would have got his money.
The reason this amendment came about was that it collided, in principle with another act. The Real Estate (Regulation and Development) Act, 2016 which has been drafted keeping the buyer in focus holds the developer responsible in case of a delay in the project and expects the buyer to be compensated if the project is not completed in stipulated time.
The amendment has now cleared the path and the homebuyer now has the same right over the asset of a bankrupt builder as a bank does.
Since RERA and IBC acts have been introduced many builders have declared bankruptcy as their delaying tactics are no longer allowed under the law if the buyers seek protection. Earlier, the Allahabad bench of the National Company Law Tribunal had declared Jaypee Infratech as an insolvent company. Other builders who have expressed their inability to pay included Amrapali, Earth, Era, and Gardenia.
The insolvency law committee had recommended to the ministry of corporate affairs to address the situation of home buyers, making recoveries easier for lenders, and expediting the decision-making process by creditors.
Though the amendment is good for the homebuyers it does not augur well for the bankers as well as builders. Bankers will now have to share the recovery proceeds with the buyers.
But the biggest beneficiary will be the real estate sector. Thanks to the amendment and RERA, buyers will now have the confidence of recovering their money even if the builder is in trouble. The fence sitters may now feel it’s safe to deploy their money.