New IBC amendment puts homebuyers at par with financial creditors

NEW DELHI : The Union cabinet recently approved an ordinance to amend the Insolvency and Bankruptcy Code (IBC) 2016 to put homebuyers on par with financial creditors when deciding the fate of real estate firms that have defaulted on loan payments. The ordinance will come into force once it is approved by the president. Until now, homebuyers were treated as unsecured creditors who came after secured and institutional creditors in terms of priority for recovery of dues. “The cabinet has approved it,” said law minister Ravi Shankar Prasad after a meeting of the cabinet. He declined to give further details.

The move is likely to positively impact the claims of homebuyers in pending court cases against leading real estate groups such as Jaypee Infratech and Amrapali Group. The changes were based on suggestions made by a 14-member insolvency law committee to the ministry of corporate affairs. The panel, chaired by secretary Injeti Srinivas, made a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and decide their future along with lenders.

Legal and real estate experts hailed the ordinance as a move that will benefit millions of homebuyers. “The decision to include homebuyers under the ambit of financial creditors... will be received with a cheer. Several developers have misappropri- ated funds of homebuyers, whose position in the resulting insolvency proceedings has been the topic of speculation for a while now. The decision to end this uncertainty is a step in the right direction,” said Punit Dutt Tyagi, executive partner at law firm Lakshmikumaran & Sridharan Attorneys. Tyagi, however, said that banks may not welcome the development as their dominant position in the proceedings may be threatened. Ramesh Nair, chief executive officer and country head of real estate consultant JLL India, said the move will benefit homebuyers and help revive the stagnant real estate market.

“This will infuse confidence in the homebuyers to invest their money as it gives them priority in the recovery of dues if the realty firm in which they have invested goes bust,” he added. Changes in the code will also help micro, small and medium enterprises by allowing their promoters to submit their resolution plan in insolvency cases. Small and medium firms are key to India’s jobs growth. The committee also proposed to make it easier to get resolution plans as well as routine decisions approved.

Accordingly, it suggested that the current requirement of votes from 75% of creditors be relaxed to 66% of financial creditors for critical decisions and 51% for routine decisions. Critical decisions have been defined as appointment or removal of resolution professionals and approval or rejection of resolution plans.

The cabinet also approved spending Rs7,330 crore to improve mobile connectivity in 96 districts in 10 states that have been affected by left-wing extremism. It also approved the waiver of around Rs1,400 crore penal interest on loans taken by Paradip and Visakhapatnam ports.

THE MOVE IS LIKELY TO POSITIVELY IMPACT THE CLAIMS OF HOMEBUYERS IN PENDING COURT CASES