Govt may tweak bankruptcy code
to ensure investments are protected and home buyers do not lose out to banks when properties are liquidated
The central government is likely to step in to protect the interest of homebuyers whose investments face uncertainty when bankruptcy proceedings are filed against builders.
The government is considering two options. First, amend the bankruptcy law so that homebuyers do not lose out to banks and financial institutions when a defaulting builder’s properties are liquidated and debts settled. Second, change the law’s operational rules to make homebuyers trustees so that their investments are mandatorily protected.
More than 31,000 homebuyers have been affected by insolvency proceedings against some projects of Jaypee Infratech and Amrapali. Their vulnerability stems from the fact that they figure very low on the creditors’ list for repayment of dues under the Insolvency and Bankruptcy Code.
IBC rules stipulate that once a defaulting builder’s properties are liquidated, the proceeds must first be used to recover liquidation costs, pay workmen such as security guards, settle the dues of banks and financial institutions, pay the salaries of other employees and clear government dues. Homebuyers come only towards the end of this list, which means that by the time their turn comes, there might be nothing left of the proceeds to settle their dues.
Amending Section 9 of the IBC to bring homebuyers at par with secured creditors, including banks and financial institutions, can ensure that they aren’t shortchanged when a defaulting builder’s debts are settled.
Alternatively, the government can tweak IBC rules to treat homebuyers as trustees, which would mean that their investments must be protected after a company is taken over for insolvency proceedings.
“Changes in section 9 of the code will require an amendment, which will take time. But elevating homebuyers to a new category of trustees could be done through a notification,” said an official who is privy to the deliberations in the government.
The government is also watching proceedings in the Supreme Court, which is hearing pleas of Jaypee homebuyers caught in insolvency proceedings.
What makes real state in India peculiar is that the builders are allowed to take money from homebuyers and use them for construction, unlike other countries where homebuyers pay only after the construction is complete. As a result, builders raise money from both banks and homebuyers for construction.
The Fight for RERA, an umbrella group of about 100 homebuyers associations and consumer groups wrote to Prime Minister Narendra Modi early this week, demanding amendments to the IBC to ensure that they get “top priority” in insolvency cases involving realty developers.