Soon, a single aggrieved homebuyer will not be allowed to take a defaulting developer to the bankruptcy court. According to a proposed change in the Insolvency and Bankruptcy Amendment Bill (IBC), 2019, at least 100 or 10% of the total buyers, whichever is lower, in a project will have to come together to initiate the corporate insolvency resolution process against a developer in the National Company Law Tribunal (NCLT). The cabinet has cleared the proposed change to Section 7 of the IBC. Under the current IBC regulations, even a single financial creditor, including a homebuyer, with claims of at least ₹1 lakh can move to NCLT against a developer.
Consumer activists see the move as an impractical one and a setback for aggrieved homebuyers even as developers and some other stakeholders have welcomed it.
Setback for buyers
Nothing will change for homebuyers whose applications have already been accepted by the NCLT, but new applicants may have to comply with the new rule after it becomes law.
“The amendment provides no relief to real estate companies for existing ongoing projects where NCLT has admitted applications for initiating insolvency proceedings filed by homebuyers. These will be subjected to the full insolvency resolution process under IBC," said Ashoo Gupta, partner, Shardul Amarchand Mangaldas & Co., a law firm.
However, there is no guarantee that any new application filed before the proposal is enacted into law will be accepted either. NCLT has the right to reject the application of a financial creditor and not start proceedings against the defaulting developer. “If an application filed by the homebuyer has not been admitted before the amendment bill comes into effect as an Act of Parliament, then such application will have to be modified to meet the new requirement, within 30 days of the Act coming into effect," said Gupta.
If such a modification is not carried out, the application will be deemed to have been withdrawn after 30 days, he added. “Thirty days is too less for bringing so many homebuyers together," said Abhay Upadhyay, president, Forum For People’s Collective Efforts, a Kolkata-based consumer body.
There are other practical challenges as well. “For all practical purposes, this amendment can block this forum (NCLT) permanently. In most cases, you will see less than 5% of the homebuyers taking the legal route against the developers. Homebuyers do form associations, but only a few people take the lead. Bringing at least 100 or 10% of homebuyers together is very difficult," said Upadhyay.
Apart from coordination, the costs involved in gathering data for so many people can discourage homebuyers from taking this route. “Most buyers would already be burdened with servicing the home loan. The amendment will make it necessary to spend extra money on collection of data and extra time in mobilizing other buyers to file a case," said Jehangir Gai, a Mumbai-based consumer activist.
However, moving NCLT collectively may help buyers bring down the litigation cost. “As this is a large enough problem, it will be helpful to go collectively, and will also bring down the cost of litigation," said Mudassir Zaidi, executive director, North, Knight Frank India, real estate consultancy firm.
Activists said that homebuyers were included as financial creditors after a lot of struggle, and the current move was a step down from what they had achieved. In June 2018, IBC was amended to give homebuyers the right to initiate a case against an errant developer. They were allowed the right to be on the committee of creditors and were given voting rights to influence the resolution process.
“A total of 1,821 cases filed by homebuyers against builders since June 2018 were pending in NCLT as on 30 September 2019," said Anurag Singh Thakur, minister of state for finance and corporate affairs, in Parliament last month.
Advantage developers
Ever since the homebuyers got the financial creditors’ status, developers have been alleging that the law was being misused, leading to more project delays (read more). The change, they said, would reduce cases of misuse and protect the developers.
“When two or three people go to NCLT, the objective may not be to get their houses but to recover their money, given the present scenario, where if you had invested, say, ₹1 crore, you may only get, say, ₹80 lakh when you sell the property," said Anil Goel, founder and chairman, AAA Insolvency Professionals LLP, a Delhi-based insolvency professionals’ entity. There are cases where buyers have approached NCLT even though the projects were delayed by only a few months, he added.
“IBC was brought in to review the insolvent companies which are net worth negative, but now even net worth positive companies are being dragged to NCLT. Also, IBC is company-specific and not project-specific. So, when a homebuyer from a single project takes a company to NCLT, all its projects get jeopardized," said Pankaj Goel, secretary, Confederation of Real Estate Developers’ Association of India National.
The middle path
Developers have been demanding an increase in the minimum number of people required to take a company to NCLT to two-thirds of the total homebuyers in a project. They have also been demanding that the real estate regulatory authority (Rera) be made the sole authority to address the grievances of homebuyers. The proposed rules have not given in to these demands in entirety and seem to have taken a middle path.
“Even under company law, a single shareholder can’t raise the issue. Shareholders with minimum 10% of the total paid-up capital are required," said Mukesh Jain, a Mumbai-based corporate lawyer and founder, Mukesh Jain and Associates, a law firm.
For lakhs of aggrieved homebuyers, however, the move is a let-down, and poses challenges. “It is impossible to implement the amendment since sales are an ongoing process and the figures keep changing, which will keep changing the number of homebuyers constituting 10% (in case 10% of the homebuyers in the project is lower than 100). How will homebuyers track sales on a daily basis? Further, even if they somehow manage to do it, if the developer settles with some of the buyers before the case is admitted, the numbers may again fall below the threshold. Keeping the flock together for a long period will be impossible," said Upadhyay.
It may be noted that the number of homebuyers need to comply with the stipulated limit only till the case is admitted, said Jain.
According to government data, about 1,600 projects and over 450,000 units are stalled across India. It still needs to be seen what course the resolution process takes in the future.
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