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Soon, it will be easier to get a refund if your builder goes bankrupt

In an ongoing dispute between distraught homebuyers and Gayatri Hospitality & Realcon Ltd, a realty firm in Noida, the former claim that the latter has not so much as laid a brick in Gayatri Aura, a project it launched way back in 2011. The company has been booked for cheating, fraud, and forgery following a complaint by the flat owners.

Sunil Kumar, who represents a few buyers, told Business Standard that the realty firm was to build 1,500 homes for which it was 17.5 acres in Sector-1 of Noida Extension. "Each buyer has so far paid Rs 1.6 million (Rs 16 lakh). It's been over seven years, and despite repeated meetings and promises by the developer, no construction has commenced on the plot of land. We have made 30 per cent to 90 per cent payments against bookings made in 2011 and 2012," Kumar said.

Another distressed investor said he still had not been able to recover his money and some buyers were still living under the illusion of getting possession even after 11 years of false promises.

Until recently, all the flat buyers in the project would not only risk losing their hard-earned savings but would also have to forgo the hefty interest paid on their home loans. This is because the builder's financial creditors would have first charge on his fixed assets, including properties under construction.

But the Centre has now come to the rescue of such distraught homebuyers, with President Ram Nath Kovind giving his approval in May, to the promulgation of an ordinance to the Insolvency and Bankruptcy code (IBC), 2018. Under this ordinance, flat owners will be treated as 'financial creditors', on a par banks and other financial institutions during debt recovery.

The ordinance is path-breaking in that the homebuyer, as a financial creditor, can recover the money he paid to a bankrupt builder from the sale of its assets. This includes properties under construction, the builder's company and associated assets. Apart from enjoying legal powers equal to those of the banks, home buyers will also have voting rights that would enable them to participate objectively in the insolvency resolution process and shield their interests in the same way as those of the banks. They will get due representation in the Committee of Creditors (CoC) that voluntarily takes a call on resolution proposals for the bankrupt firm.

What's more, since a homebuyer is a financial creditor, nobody can touch his property. Earlier, when a realty firm went bankrupt, the flats for which home buyers had paid advances would become the property of banks and other lenders. Often times, their property would be auctioned, even though there was no default on their part, since they were merely treated as consumers and did not have any say in the legal proceedings of a bankrupt real estate firm.

Anuj Puri, chairman, ANAROCK Property Consultants, while admitting that the new ordinance comes as a massive relief to home buyers, says: “It needs to be seen how the resolution mechanism for claiming the dues actually falls in place for home buyers. They need to know how exactly they will be represented in the creditors’ committee – in other words, whether the NCLT will appoint a resolution professional to represent their rights and interests."

On a more positive note, Puri adds: "We now see builders become more cautious while taking funds from financial institutions and banks, as they would now also be accountable to home buyers as well as the financial institutions if their business went belly-up.”

Varun Kalsi, partner, PSA Legal Counsellors, says: "The only loophole that still remains is that despite being financial creditors, home buyers are still not recognised as ‘secured creditors’, which banks are. That means under the primacy of claims under the IBC, your priority to claim your money comes much later.”

Insolvency and Bankruptcy Code (IBC)

There is now a single law to deal with the process of insolvency, bankruptcy and liquidation of financially distressed entities. Basically, this IBC specifies guidelines to deal with insolvency proceedings. But is there a difference between the terms 'bankrupt' and 'insolvent' in the first place? In common parlance, no, but legally there is a difference.

What is insolvency?

Your builder will be deemed insolvent if it is unable to clear its overdue debts – the money it owes you, its bankers and other financial creditors. If it cannot complete the construction of your apartment on time for lack of financial resources or meet its monetary commitments, it is insolvent. To be declared insolvent, your bust constructor might file an application for insolvency, after which its financial status would be analysed by an insolvency resolution professional (IRP). You might still be able to recover your money during the analysis stage, if the builder's financial condition improves. Typically, an insolvent firm has an excess of liability over assets and its financial difficulties prevent it from running business at the current pace. Cautionary signs of insolvency include a slowdown in progress of work, delay in payments, transactions and supplies, loss of share capital, and cash flow disruption.

What is bankruptcy?

After the financial analysis of the insolvent builder, if it is found that it has completely run dry of resources to clear creditors' dues or complete under-construction projects, the court might legally declare it bankrupt.

Bankruptcy is a legal declaration of one’s inability to pay off debts and might result in an order for its resolution, under which the assets of the bankrupt firm are disposed of or liquidated to pay the creditors.

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