Entry of Home Buyers under IBC

Entry of Home Buyers under Insolvency and Bankruptcy Code (IBC), 2016 via amendment ordinance namely “Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (6 of 2018) (hereafter referred “the ordinance”) w.e.f. 06.06.2018. An depth analysis on home buyers and reason of  brought them under IBC explained in this article:

I. History of Law on Home Buyers before the Ordinance (6 of 2018):

1. Financial debt under section 5(8):

Section 5(8) of the Code defines ‘financial debt’ to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and inter alia includes money borrowed against payment of interest, etc. Section 5(8) explain as under:

Section 5(8)

2. Analysis of above definition in respect to Home Buyers:

The above definition of ‘financial debt’ under section 5(8) of the Code uses the word “includes”, thus the kinds of financial debts illustrated are not exhaustive as interpreted by NCLAT in case of B.V.S. Lakshmi v. Geometrix Laser Solutions Private Limited.

The phrase “disbursed against the consideration for the time value of money” has been the subject of interpretation only in a handful of cases under the Code. The words “time value” have been interpreted to mean compensation or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money as elaborated by NCLAT in case of Nikhil Mehta and Sons(HUF) & Ors. Vs. AMR Infrastructure Ltd, or factoring of a discount in the payment.


3. Some other case laws on matter of Home Buyers:

Apart from above judgments, there are various judgments have categorised home buyers as neither fitting within the definition of ‘financial’ nor ‘operational’ creditors, some case laws as under:

  1. Nikhil Mehta v. AMR Infrastructure, NCLAT, New Delhi- If Developer has shown the amount taken from home buyer under borrowing head and charged the interest thereon under Finance Cost in his Financial statements then that amount is constituted as debt under IBC.
  2. Anil Mahindroo & Anr v. Earth Organics Infrastructure– Money disbursed by home buyer is against the consideration for the time value of money and for all purpose, they come within the meaning of ‘Financial Creditor’ as defined in Section 5(7) of the ‘IBC’
  3. Col. Vinod Awasthy v. AMR Infrastructure Ltd., NCLT, Principal Bench, Delhi, CP No. (IB)-10(PB)/2017, Date of decision – 20 February, 2017- Home Buyer as neither fitting within the definition of ‘financial’ nor ‘operational’ creditors.


4. Recommendation of The Insolvency Law Committee:

The the Insolvency Laws Committee, chaired by Shri Injeti Srinivas, made following recommendations on issue of home buyers under IBC:

“On a review of various financial terms of agreements between home buyers and builders and the manner of utilisation of the disbursements made by home buyers to the builders, it is evident that the agreement is for disbursement of money by the home buyer for the delivery of a building to be constructed in the future. The disbursement of money is made in relation to a future asset, and the contracts usually span a period of 4-5 years or more.The Committee deliberated that the amounts so raised are used as a means of financing the real estate project, and are thus in effect a tool for raising finance, and on failure of the project, money is repaid based on time value of money. On a plain reading of section 5(8)(f), it is clear that it is a residuary entry to cover debt transactions not covered under any other entry, and the essence of the entry is that “amount should have been raised under a transaction having the commercial effect of a borrowing.” An example has been mentioned in the entry itself i.e. forward sale or purchase agreement.

Thus, not all forward sale or purchase are financial transactions, but if they are structured as a tool or means for raising finance, there is no doubt that the amount raised may be classified as financial debt under section 5(8)(f). Drawing an analogy, in the case of home buyers, the amounts raised under the contracts of home buyers are in effect for the purposes of raising finance, and are a means of raising finance. Thus, the Committee deemed it prudent to clarify that such amounts raised under a real estate project from a home buyer fall within entry (f) of section 5(8).

Finally, the Committee concluded that the current definition of ‘financial debt’ is sufficient to include the amounts raised from home buyers / allottees under a real estate project, and hence, they are to be treated as financial creditors under the Code. However, given the confusion and multiple interpretations being taken, at this stage, it may be prudent to explicitly clarify that such creditors fall within the definition of financial creditor, by inserting an explanation to section 5(8)(f) of the Code. Accordingly, in CIRP, they will be a part of the CoC and will be represented in the manner specified in paragraph 10 of this report, and in the event of liquidation, they will fall within the relevant entry in the liquidation waterfall under section 53. The Committee also agreed that resolution plans under the Code must be compliant with applicable laws, like RERA, which may be interpreted through section 30(2)(e) of the Code. It may be noted that there was majority support in the Committee for the abovementioned treatment of home buyers. However, certain members of the Committee, namely Sh. Shardul Shroff, Sh. Sudarshan Sen and Sh. B. Sriram, differed on this matter.” (From Report of the Insolvency Law Committee, March 2018)

 

II. Amendment by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (6 of 2018):

An explanation after section 5(8)(f) inserted by the Ordinance to state that any amount raised under a real estate project from an allottee shall be deemed to be an amount having the commercial effect of borrowing where the terms “real estate project” and “allottee” shall have the meaning assigned to them under the Real Estate (Regulation and Development) Act, 2016.

The clause (f) of section 5(8) after inserted the explanation, read as under:

“(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

Explanation. -For the purposes of this sub-clause,-

(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);”

 

 

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