How homebuyers can effectively leverage financial creditor status

There have been high-profile insolvencies of many real estate and housing development companies across the country. Scores of homebuyers, particularly in NCR, have some relief as now they will be treated as financial creditors.

Homebuyers are recognised as financial creditors under the insolvency law, with the government promulgating an ordinance. President Ram Nath Kovind gave his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 last week.

What are the next steps to take? How do you protect your financial interest? DNA Money spoke to top experts to get the answers.

Who is eligible

It is important to understand which homebuyers will be eligible to be represented as financial creditors. Buyers who have completed the registration formalities of an announced project – recognised under state RERA (Real Estate Regulation and Development Act) would be considered a financial creditor, said Ashutosh Limaye – Head Research & REIS, JLL India.

“Those homebuyers to whom plot, apartment or building, as the case may be, has been allotted, sold or otherwise transferred by the promoter, and will include those homebuyers who subsequently have acquired the said allotment through sale, transfer or otherwise,” says Sandeep Shah, Partner, N.A. Shah Associates LLP. Homebuyers who purchased properties in the redevelopment scheme will also be covered, he added.

On creditors’ panel

Home buyers will be considered financial creditors if and when the company invokes the Insolvency and Bankruptcy code, said Limaye. However, the amended IBC does not specify whether homebuyers will be treated as secured creditors or unsecured ones. Secured creditors are top on the list when it comes to recovering payments because they largely have a custody over the assets held by the company.

Anuj Puri, Chairman - ANAROCK Property Consultants said: “Following liquidation, secured creditors stand a higher chance of receiving payments. On the other hand, unsecured creditors rank below the secured creditors as far as receiving payments is concerned. Here, the homebuyer will have to prove as to which category of creditor he is qualified to be as per the agreement with the real estate company.”

According to Shah, if the value of outstanding relating to homebuyers is more than 10% of the debt, they can appoint a representative to represent them before the Committee of Creditors.

The entire implementation process of this also needs more clarification, as in whether homebuyers will be represented in the creditors’ committee via one representative or whether the National Company Law Tribunal will appoint a resolution professional to represent their rights and interests, said Puri.

Flexible strategy

Depending on the share of the money lent to developer, creditors will have varied power and preference in decision making about the future course of action when loan is defaulted or bankruptcy is filed for.

“The decision making could involve selling of assets, completion of under construction work by taking over the project and appointing a contractor to complete it, providing to additional funds in project to complete it and sell it to recover the money etc.,” Limaye said.

If home buyers are secured financial creditors (like banks and financial institutions), they will be in a better position during the assessment process of the insolvency plan and in determining changes to the existing liabilities through negotiations, said Puri.

Insolvency laws in most western countries recognise homebuyers at par with other financial creditors where they can participate during the decision-making process, he added.

According to Shah, decisions are always in the order of ensuring that maximum value is extracted from the resolution process. “The decision on whether the project should be assigned in favour of a buyer or whether the corporate debtor should be put it through liquidation, is taken based on factors such as the nature of the project, stage of completion, demand and market value if the project was completed, total outstanding dues both from homebuyers and lenders of the project, unpaid creditors, the balance cost to complete the project, etc ,” he said.

In any event, the representative on the panel will have to specifically seek the advice of the homebuyer and he will have to vote in accordance with instructions so received. If there are no instructions, the representative will have to abstain from voting as far those particular creditors are concerned, Shah advised.

Strength in unity

It is advisable for homebuyers to outsource the decision-making function to some individual, either appointed by them or the adjudicating authority itself, said Puri. This could be a lawyer, a real estate expert or somebody who understands the resolution process.

Remember, the voting power of the creditors’ committee members is determined by the amount of debt owed to them. Since, a large real estate development project will have many affected buyers, it is in the interest of all homebuyers that a common law firm is engaged so that a uniform strategy is adopted and costs are borne by all.

Considering the recent decision of NCLT, Mumbai bench in case of Rajendra K Bhutia v/s Maharashtra Housing & Area Development Authority, homebuyers who have bought apartments were constructed under Joint Development Authority, will have to be advised properly in view of the decision in MHADA’s case, said Shah.

Homebuyers should let the developer make full attempt to secure rescue finance from specialty funds. This will ensure that homebuyers do not destroy value by hasty decision of filing for insolvency, which very often is a point of no return.

ON THE RESOLUTION PATH

• Homebuyers will be considered financial creditors if the realty company invokes IBC
   
• IBC does not specify whether homebuyers will be treated as secured or unsecured creditors
   
• Secured creditors are top priority when it comes to recovering payments