In times when the real estate developers face financial trouble and they are unable to finish building homes, the homebuyers are left in a tough situation. The emotional stress and financial burdens faced by homebuyers in such situations cannot be overstated. Consider the case of the Amrapali Group in India (Bikram Chatterji v. Union of India, (2019) 19 SCC 161), where the Supreme Court canceled the developer's registration and ordered the attachment of its properties to ensure the completion of unfinished housing projects and the refund of investments made by homebuyers. In this article, we explore the rights and protections available to homebuyers in insolvency proceedings.
As per the Insolvency and Bankruptcy Code, 2016 ('IBC'), homebuyers are financial creditors. A 'financial creditor' is a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. In other words, a financial creditor is someone who’s money is not yet paid by the person who owes the repayment. Homebuyers under IBC are treated as financial creditors. Their status as operational creditors has been reversed.
Homebuyers, who have invested in residential projects but have yet to receive possession of their homes, are typically classified as financial creditors. They have already paid advance money for the possession and are awaiting the same. They are given priority in insolvency proceedings. Operational creditors are those contractors, suppliers, or service providers who have provided goods or services necessary for project construction but have not been paid.
When a company or person is unable to repay their debts, it's called a situation of insolvency. In the real estate sector, insolvency occurs when developers cannot finish projects or deliver homes within a stipulated timeline because they have run out of finances. Insolvency cases in the Indian real estate sector have affected thousands of homebuyers, which highlights the prevalence and gravity of the issue.
As a homebuyer, you are not left helpless by the legal system. You are bestowed certain rights. Here's what you're entitled to if you've bought a home from a developer facing financial problems:
Priority Status: As a homebuyer whose money is owed by a developer, you have the advantage of being prioritized to receive your money back. This special treatment was established following the landmark IDBI Bank v. Jaypee Infratech Limited 2017 LawSuit (NCLT) 5069, which granted homebuyers the position of financial creditors under the IBC.
Asset Protection: You have the right to stake a claim on any property or assets owned by the developer in order to recover your funds.
Legal Assistance: Additionally, you have the option to pursue legal action against the developer to retrieve your money, compel them to complete the construction, or terminate the agreement and receive a refund.
Regulatory Support: Government agencies like the Real Estate Regulatory Authority (RERA) in India is empowered step in to help complete the building projects or find new developers to take over, as seen in the Pioneer Urban Land and Infrastructure Ltd. and Anr. V. Union of India Writ Petition (Civil) NO. 43 OF 2019.
Delays: When a company is insolvent, it can be a lengthy process before a resolution is reached, causing delays. It is important to address these issues promptly, as seen in the Pioneer Urban Land case.
Limited Funds: In situations where there is not enough money to cover all debts, you may not receive full repayment.
Legal Expenses: The costs associated with legal proceedings can be substantial, therefore it is wise to review the risks and the costs involved. Obtaining guidance from seasoned legal professionals is key.
Market Influences: The completion of projects may be impacted by economic factors. Market is subject to various factors including cost of various raw materials, taxations, loan interest etc. It is the situation of the market which will determine the completion of the project with sufficient economic resources.
Recently, the Supreme Court in Vishal Chelani and others v. Debashis Nanda, 2023 LiveLaw (SC) 894 held that homebuyers cannot be treated different from other ‘financial creditors’ under the IBC only because they have secured favorable orders from the authority under RERA.
Court also overruled a National Company Law Appellate Tribunal (NCLAT) order which held that the beneficiary RERA orders should be treated differently from other home buyer allottees. It further stated that it is only home buyers that can approach and seek remedies under RERA – no one esle. In such circumstances, to treat a particular segment of homebuyers differently from another segment, on the ground that one had taken back the deposits with interest as ordered by RERA, would be highly inequitable.
With the rising economy of a developing nation like India, real estate sector is at an all-time boom. With the continued interest in the sector, real estate projects are also growing significantly. Hence, it becomes pertinent to know what are your rights as homebuyers. If you find yourself in a situation where your developer is facing insolvency, stay informed about the insolvency proceedings and any developments related to your housing project. Explore legal options and file appropriate claims or petitions to assert your rights as a homebuyer. Cooperate with regulatory authorities like RERA and provide all necessary documentation to support your case. It is imperative to choose the right course of action whether litigation or alternate dispute resolution to resolve the matter efficiently.