Homebuyers need to know the nitty-gritty of the law before they move the National Company Law Tribunal against a developer.
Delay does not mean default:
For a homebuyer to drag a developer to the National Company Law Tribunal (NCLT) and initiate proceedings, the developer has to default on payments. “Just because a realtor has been delaying the project, buyers cannot move NCLT,” says Aashit Shah, partner and chair, banking and finance practice, J Sagar Associates. Delay in delivery is a performance default that is not covered under the IBC.
Shah explains that a default in payment can happen if a developer mentions in the contract that it will compensate homebuyers in case of delays but fails to do so by the stated timelines.
Another payment default can happen when homeowners ask developers to cancel the booking and refund the money, and the realtor is unable to do so.
If buyers plan to move NCLT, lawyers say that it’s best that they first approach the real estate regulator.
“In case of delayed projects, a homebuyer is entitled under the RERA
as well as Consumer Protection Act to seek refund along with interest, or possession and delay compensation. Accordingly, when a developer fails to provide a refund or delay compensation, a homebuyer would be entitled to file insolvency petition,” says Ramakant Rai, partner, Trilegal.
Secured lenders are still above homebuyers
: In most cases, homebuyers will be treated as secured creditors. “It means they will be below the secured creditors like banks when it comes to recovery of dues,” says Rajeev Vidhani, associate partner, Khaitan & Co. Only in specific cases, a homeowner can claim to be a secured lender.
For example: Some developers promised buyers or investors that they would have the option to sell the house back at a specific value after certain years. In such cases, the purchaser can be a secured lender. Being an unsecured lender comes with its drawbacks. If a company goes into liquidation, secured lenders are first paid their dues, and unsecured lenders come next after them.
Organise to fight
: When secured lenders initiate bankruptcy proceedings against a developer, homebuyers need to organise themselves to ensure that they get their dues. When the cases go to NCLT, an interim resolution professional is appointed, and a committee of creditors (CoC) is formed. It’s the committee that takes most of the decisions.
According to the new regulations, the resolution professional will appoint an insolvency professional, who will represent all the homebuyers in the CoC. It’s the homebuyers who will have to bear the fees of the expert appointed.
Lawyers say that the government may issue a schedule of charges which homebuyers can use as a reference. When bidders submit their resolution for the real estate project, the insolvency professional has to discuss the plans with the homebuyers and take a vote on whether they agree to the offer given or not.
A higher number of purchasers coming to vote will ensure an outcome that suits most homebuyers.
Under the IBC, the voting power of the members of the committee of creditors is determined by the amount of debt owed to them. If the homebuyers’ dues are higher than secured creditors’, they can control the proceedings. Say, a developer has total outstanding dues of Rs 60 billion — Rs 20 billion to secured lenders and Rs 40 billion to homebuyers.
Since the dues to homebuyers are higher, they will also have a higher voting right and more say in the proceedings. The contrary is also true. If secured lenders have a higher outstanding, they will have more control.
Does it conflict with RERA?
IBC and RERA
both have provisions that say that each Act presides over all others. Say, homebuyers have approached a real estate regulator. At the same time, banks move to NCLT
against the developer.
The IBC law says that all other proceedings will be halted when a company is admitted to NCLT.
It remains to be seen what will happen to the RERA proceeding under such circumstances: Will it be halted or not.
RERA also says that within three months of 51 per cent booking in the project, a builder is duty bound to form a society and hand over conveyance to the newly formed society. If a real estate regulator cancels the developer's project, the society can take over the project.
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They also have the first right of refusal if a new realtor takes over the project. In case a project, where the developer has handed over the conveyance, is part of the bankruptcy proceedings, it is not clear whether the RERA regulations will be applicable or not.
There are also provisions under RERA which say that two-thirds consent of buyers is mandatory for any changes in the sanctioned building plan.
Even in this case, there’s lack of clarity whether a bidder would need approval of the homebuyers to take over the project and make changes to it.
Lawyers feel that the Act will evolve with time and cases. Practically, there are chances that the bidder (a new developer or an asset reconstruction company) will give separate plans for a different class of creditors. It may ask secured creditors to take a haircut and ask homebuyers to pay extra so that it can finish the project.
Rs 100,000 – Any creditor can initiate insolvency resolution process if the default exceeds this amount
270 days – Maximum time for resolution
180 days – For initial proceedings
90 days – An extension can be sought
66% votes – Required for a committee of creditors to accept a resolution plan
67% consent – Two-thirds homebuyers should agree to changes in sanctioned plans under RERA
Taking promoters to task is not easy
Developers make a separate subsidiary for each project
Homebuyers can only initiate proceedings against the subsidiary
The parent company can be dragged to NCLT if it has provided guarantees
The promoters can be dragged if they have given personal guarantees
If the subsidiary had diverted funds, promoters and parent company can be made part of proceedings