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).

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