Cabinet clears ordinance for amendments to bankruptcy code

NEW DELHI: The Cabinet on Wednesday approved the proposal to treat home buyers as financial creditors when a loan defaulter company is auctioned, a move that will help quickly recover investments in bankrupt real-estate companies.

The Cabinet headed by Prime Minister Narendra Modi approved promulgation of an ordinance to amend the Insolvency and Bankruptcy Code 2016 (IBC), Minister for Law and Justice Ravi Shankar Prasad told reporters here.

He, however, did not give details of the amendment proposed but official sources said the Cabinet has approved treating home buyers as financial creditors rather than operational creditors.

Financial creditors like banks get to recover their dues first when a company or its assets are auctioned.

It, however, was not clear if the home buyer will have a right over the unfinished property he or she had invested in after getting back a part of the investment from the bankruptcy proceeds.

As has been the experience so far with loan defaulting companies referred for insolvency proceedings under IBC, the successful bid is hardly enough to cover for all the loans given by financial institutions and banks. They usually get a share in the proportion of their exposure. With home buyers joining the list, the pie would get smaller, and banks would have to take a bigger haircut in real estate companies.

On the positive side, home buyers could recover some portion of their dues in case the builder defaults, as against the current scenario where buyers have to depend on the residual value after financial creditors are paid, which entails higher hair-cuts.