Options for buyers when builder goes bankrupt

Consult legal experts before changing status from title owner to creditor to the developer

Ravi Kumar, a senior official with a public sector company, is among the many who have booked flats in Jaypee’s Wish Town, Noida. He had done so in 2010. Over the next three years the developer built the superstructure and took 90 per cent of the cost. The completion period was three years from the time of booking, but deliveries did not happen. “We thought the financial issues would get resolved. The news that the company is in insolvency proceedings has come as a shock,” says Kumar.

Recently, the National Company Law Tribunal (NCLT) admitted bankers’ plea to initiate insolvency proceedings against Noida-based Jaypee Infratech. Thousands of buyers who had invested in its projects are wondering what they should do next. 

Homebuyers’ rights under IBC: According to insolvency resolution professionals, there are no specific provisions under the Insolvency and Bankruptcy Code (IBC), 2016, regarding homebuyers’ rights when a builder goes through insolvency proceedings. “Homebuyers are neither financial nor operational creditors under IBC,” says Mamta Binani, an insolvency professional and former president of the Institute of Company Secretaries of India (ICSI).

Legal experts say a homebuyer can be treated as a creditor only when he opts to seek refund of his money by terminating the purchase agreement. “If he doesn’t opt to do so, he is entitled to get his agreement implemented,” says Nilesh Sharma, director, IRR Insolvency Professionals. 

Another view is that when the home buyer does not want possession, the money paid by him may fall under the definition of ‘deposit’, according to the Companies Act, 2013. “As there has been a default in payment of the deposit by the company, the home buyer may be treated as a financial creditor,” says Binani. Not all insolvency professionals agree. “In case home buyers claim refund of their money, they should be treated as operational creditors,” says Sharma.
 

Getting possession: Insolvency professionals say the most likely scenario is that some of the builder’s assets may be sold off and the proceeds used to complete the flats. Sharma feels that under a resolution plan, a resolution applicant may offer to complete the semi-finished buildings against payment of the balance amount by flat buyers. But, if the money required to complete the buildings is more than the balance payable by the flat buyers, resolution applicants may not apply to acquire them. “In that case, the builder will have to be liquidated,” says Sharma. Another scenario is that flat buyers form a Residents Welfare Association, acquire the building and complete the semi-finished flats through contributions by members. When a builder undergoes liquidation, legal experts say the liquidator has the option to disclaim the buildings as onerous property, according to Regulation 10 of the Insolvency and Bankruptcy Board of India (Liquidation) Regulations, 2016. Homebuyers will then have to be treated as the builder’s creditors for the amount of damages caused to them due to non-implementation of the agreement. 

The Insolvency and Bankruptcy Board of India (IBBI) has issued Form-F for homebuyers to present their claims. “At least homebuyers get a way out, though they may not strictly fall under the definition of creditors,” says Binani. The board has said homebuyers will be treated at par with financial creditors (see box). 

Insolvency lifeline 

 

• The Insolvency and Bankruptcy Board of India, which implements the Insolvency and Bankruptcy code, has said claims of owners of undelivered properties will be treated at par with those of other financial and operational creditors

• Earlier, homebuyers' claims, would have been settled only after the dues of all financial and other operational creditors were paid 

• If homebuyers are treated at par with financial creditors, their claim will be met first. They also get a say in the approval of the resolution plan

• But, if the project is almost complete and you have title on it, don't turn creditor, as all creditors may have to take a haircut if the liquidation value of assets is low

However, issues remain. “There is still no form through which a claim for a ‘right to enforcement of agreement’ can be made,” says Sharma. He suggests while filing Form-F, homebuyers mention that they want implementation of their agreement with the builder. 

Insolvency professionals feel there should be a specific provision under the Code to protect the rights of homebuyers. In fact, they say, rights of bonafide buyers –who hold valid purchase agreements and have made part or full payment — should be treated as superior to that of secured lenders.

What should you do? Every homebuyer shouldn’t automatically elect to fill Form-F to prefer merely a money claim. Says Sitesh Mukherjee, partner and head of disputes and regulatory practice, Trilegal: “Under RERA home buyers are entitled to claim, title and possession of the property. Jaypee’s project is registered under RERA. Filling the form to make a money claim will lead to a situation where it is construed that the homebuyer has given up his right to receive possession of the property. Such homebuyers would then stand in the queue as a creditor and could be subjected to financial sacrifices that may be agreed upon by the committee of creditors as part of the insolvency resolution process, or alternately in any potential liquidation process.”

If a homebuyer gives up his right to claim possession and title in an apartment that is 90 per cent ready and becomes a creditor, it is possible he may get only 50 per cent of what he had paid. What he gets will depend on the value of the company's assets versus its loans. If a building is close to completion, buyers can spend, say, another Rs 10-20 lakh to complete it. 

Once you fill the form to make a money claim, you can’t later demand a flat. Note that in case of Jaypee Infratech the insolvency resolution professional (IRP) has clarified that home buyers are also allowed to make claim for possession of their respective properties as promised by Jaypee. “It may be preferable to take this route. On the other hand, if the building is in early stages, a buyer may be better off making a claim for his money,” says Mukherjee.

The builder borrows project finance from a bank (by pledging the property) and he sells the same flats to homebuyers. Homebuyers need to take a No Objection Certificate (NOC) from the project lender at the time of booking. If you decide to stay on as a title holder, make sure you have the NOC to be able to assert your ownership rights. 

Homebuyers need to check their sales agreement to see if it was with Jaiprakash Associates or with Jaypee Infratech. “If the agreement was with the former, work on their project is likely to continue,” says Anirudh Hairani, counsel at the Bombay High Court and NCLT, Mumbai bench. 

Since the IBC is not old, the law is still evolving regarding homebuyers' rights when a developer gets into insolvency proceedings. Act after taking proper legal advice.