Having no animus revertendi can land you in Insolvency…

Ever since the insolvency law has been curated, it has caused an upheaval in the lives of people possessing no animus revertendi after they take loans from banks or purchase goods, services on credit having no intention to return. The basic idea of the insolvency law was to consolidate the existing laws pertaining to insolvency which have gone haywire and have resulted in the stupefaction instead of recovery for those who seek action against the defaulting debtors; whether it is the Sick Industrial Companies Act, 1985 or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 etc. The insolvency and Bankruptcy code has created an umbrella-like structure and is trying to accommodate the plethora of laws which were earlier existing to resolve the matters relating to debts.
Insolvency process is triggered by the occurrence of a default. A default under Section 3(12) means “non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not [paid] by the debtor or the corporate debtor, as the case may be.” The bare reading of this section exhibits that the debtor does not get a prima facie opportunity to narrate his story with respect to the debt. The rationale behind the same is that the code was created to provide quick disposal of the application by National Company Law Tribunal and thereafter by the Interim Resolution Professional/ Resolution Professional. This stipulation seeks to provide an embargo against the debtor so that he does not go on filing flimsy, unfounded and whimsical objections under the garb of natural justice.
The code has provided a mechanism for the creditors to initiate insolvency, whether it is the Financial creditors or the Operational creditors. Recently, an amendment has been made into the code that accorded a status of financial creditors on the homebuyers. However, it is still to be elucidated whether they are secured creditors or unsecured creditors. The code is still at its nascent stage, it will take time to cross various practical and logistic hurdles before becoming fully comprehensive.
Having said that and considering the entire process of IBC, it is important to understand that a resolution process under Insolvency and Bankruptcy Code, 2016 is neither a liquidation nor a recovery. Liquidation is only to be gone into, in case of failure of the resolution process. As against the above the Insolvency and Bankruptcy Code, 2016 aims to balance the interests of all stakeholders and does not only scope itself in maximizing the value of Financial creditor. Therefore, it is to be kept in mind that the person making an application is the one who is actually affected in some possible way; it must not be a fanciful suggestion of grievance. A likelihood of some injury in the course of trade may meet the test of locus standi.


Homebuyers U/S 7 of IBC, 2016

Q- Are homebuyers considered as Financial Creditors under IBC, 2016?

A- Homebuyers are at the mercy of builders. They invest money in their homes but have no control over when they will get possession. In some cases, possession has been delayed for more than five years. But all that will change now. The government has handed homebuyers a potent weapon against errant builders. President Ram Nath Kovind has given his nod to promulgate an ordinance amending the insolvency law, recognizing homebuyers as financial creditors to real estate developers. Under the Insolvency and Bankruptcy Code Amendment Ordinance, 2018, homebuyers will get due representation in the committee of creditors (COC) that takes a call on resolution proposals, making them an integral part of the decision making process.

Homebuyers would be able to invoke Section 7 of the IBC against errant developers. Section 7 allows financial creditors to file application seeking insolvency resolution process. The move also comes at a time when many home buyers are facing hardships on account of delayed and incomplete real estate projects. This provision on homebuyers will only affect those builders whose projects began before RERA kicked in. With this amendment, homebuyers will now have a say in the insolvency proceedings that were largely the prerogative of the financial institutions so far. Even if one homebuyer moves the NCLT (National Company Law Tribunal), the company can go in for insolvency. That is the intention of bringing them into the creditors fold.

However, the amended Insolvency and Bankruptcy Code (IBC) does not specify if homebuyers will be treated as secured or unsecured creditors. “The homebuyer will have to prove which category of creditor he is qualified to be as per the agreement with the real estate company. Insolvency and Bankruptcy Board of India will frame the detailed mechanism of representation of the homebuyers on the committee of creditors.
The transactions of home buyers with the builders generally have following features which are matching with the definitions given under the IBC:

a) The amount of advance given by a home buyer to a builder is a ‘debt’ for the builder as he is under obligation and liability to pay back or deliver the agreed product or service.

b) It is not important if the payment of interest is mandated in the agreement or not

c) The amount of advance is disbursed to builder by home buyer

d) The consideration of giving such advance by home buyer to builder is time value of money as the price for ready home/flat would be much higher than the price in advance booking against advance payment.

e) The builder has raised debt under a transaction of future sale of home/flat and the nature of transaction is covered in the definition of transfer as per section 3(34) & 3(35) of IBC, 2016

f) The transaction of taking advance against an agreement to sell in future is a transaction of future sale as defined under section 5(8)(f) of IBC, 2016

g) The transaction of taking advance against future sale of flat is a transaction having the commercial effect of borrowing for the builder.

The nature of transaction where a builder take an advance from a home /flat buyer against future sale of home /flat matches with the provisions of IBC, 2016 and the debt of the builder is ‘Financial Debt’ and the home buyers are ‘Financial Creditors’.

The amount of advance given by home buyer to builder is a debt in the books of builder and the home buyer is a creditor for builder as per definition of debt u/s 3(11) and definition of creditor u/s 3(10)

b) The home buyer is a financial creditor as per section 5(7) as the amount of advance given by home buyer to builder is a financial debt as per section 5(8) (f).