WH

HAT TO
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Consultt legal experts before
e changing
g status fro
om title ow
wner to creditor to the
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develop
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 Business Standard
S

 21 Aug 2017

 SANJAY KU
UMAR SINGH & SUDIPTO DEY
D

Ravi Kumar, a senior

s officcial with a public
p secto
or companyy, is among g the manyy who
have boo oked flats in Jaypee’s Wish Town n, Noida. H
He had donee so in 2010 0. Over the next
three yeears the devveloper buillt the superrstructure aand took 90 0 per cent of the cost.. The
complettion period d was threee years from m the timee of bookin ng, but delliveries did
d not
happen. “We thou ught the fiinancial issues would d get resoolved. The news thatt the
company is in insollvency procceedings ha as come as a shock,” saays Kumar.
Receently, the National
N Co ompany La aw Tribunaal (NCLT) aadmitted b bankers’ pleea to
initiate insolvencyy proceedin ngs against Noida-bassed Jaypeee Infratech. Thousand ds of
buyers who
w had invested
i in
n its projeccts are won ndering wh hat they shhould do n next.
Homebu uyers’ rightts under IBBC: According to insolvvency resollution proffessionals, tthere
are no specific prrovisions un nder the Insolvency
I and Bankrruptcy Cod de (IBC), 2 2016,
regardinng homebu uyers’ rightts when a builder go oes through h insolvenccy proceed dings.
“Homeb buyers are neither financial nor operationaal creditorss under IBC C,” says Maamta
Binani, an insolven ncy professsional and former preesident of the Institu ute of Company
Secretarries of India
a (ICSI).
Legaal experts sa
ay a homeb buyer can bee treated ass a creditorr only whenn he opts to seek
refund of
o his moneey by termin nating the purchase
p aggreement. ““If he doesn
n’t opt to d
do so,
he is enntitled to get his agreeement imp plemented,”” says Nileesh Sharmaa, director, IRR
Insolvenncy Professiionals.
Anotther view iss that when the home buyer
b does not want p
possession, the money paid
by him may
m fall un nder the deffinition of ‘deposit’, acccording to the Compaanies Act, 2 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 says 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 FormF 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).
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 say 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 ~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.