HOMEBUYERS’ ARE NOW ‘FINANCIAL CREDITORS’ UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

The President Mr. Ram Nath Kovind gave assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 on 06.06.2018.

The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors.  This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process.

Homebuyers Current Legal Position being ‘Financial Creditors’ under Insolvency and Bankruptcy Code, 2016

Being a Financial Creditors, homebuyers can now initiate corporate insolvency resolutions process against errant real estate companies/ developer. (Section 6 of Insolvency and Bankruptcy Code, 2016)

The current ordinance will enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers/ builders.

As per Section 7 of the said code now the homebuyers may file an application against the defaulter real estate companies/ developer before Adjudicating Authority, in case of any default.

Earlier Position of Homebuyers under Insolvency and Bankruptcy Code, 2016

Homebuyers did not fall in the category of financial creditors earlier under the Insolvency and Bankruptcy Code, 2016 and get back their money only if something is left for them after secured creditors and operational creditors. In the case of Nikhil Mehta vs. AMR Infrastructure, National Company Law Appellate Tribunal observed homebuyers neither financial nor operational creditors.

Supreme Court Stand

Supreme Court of India, however, had taken a favorable stand on this issue first time to protect the interest of home buyers by staying insolvency proceeding against real estate giants ‘Jaypee Infratech’ by NCLT.

A bench headed by CJI Dipak Mishra along with HMJ AM Khanwilkar and DY Chandrachud also asked to Attorney General K.K. Venugopal to protect homebuyers’ interest. However, in the said case, the homebuyers had asked to declare them ‘secured creditors’ to protect their rights.

Types of Creditors under Insolvency and Bankruptcy Code, 2016

As per Section 3 (10) “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder;

Financial Creditors

As per Section 5 (7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;

For example:- Money raised through finance or credit facility, receivable sold, issue of debentures, loan etc.

Operation Creditors

As per Section 5 (20) “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

For example:- Employment, Repayment of dues arising under any law etc.

Secured Creditors

There is no definition of ‘Secured Creditors’ available in Insolvency and Bankruptcy Code, 2016, however, Section 2 (zd) of SARFAESI Act, 2002 (The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) includes bank, financial institution, securitization company and reconstruction company as Secured Creditors.

Priority of Creditors in Liquidation Process

1. Insolvency Cost
2. Liquidation Cost
3. Workmen dues of 24 months and Secured Creditors Debt (to the extent of Security?)
4. Employees’ dues of 12 months
5. Unsecured financial creditors
6. Crown debts & unpaid dues of secured creditors
7. Other debt (including trade creditors)
8. Preference Shareholders

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