The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, effective from June 6, 2018, recognized home buyers as “financial creditors” (FC). The constitutional validity of this amendment was challenged in court by Pioneer Urban Land and Infrastructure Limited and subsequently more than 100 builders attached their writ petitions to the original case. On August 09, 2019, the Supreme Court came out with its verdict in the case, upholding the constitutional validity of the amendment. It is also pertinent to note that in a related judgement on April 2, 2019, the Supreme Court pointed out that a home buyer cannot be made to wait indefinitely for possession of an allotted flat. Further, he can’t be forced to take possession in delayed projects and is entitled to seek refund of the amount paid by him/her, along with compensation.

Commenting on the developments, Mr. Shubham Jain, Senior Vice President and Group Head – Corporate Ratings at ICRA said, “While the verdict addresses the concerns of home buyers in light of the increasing instances of project delays, they also increase the default risk for real estate developers, especially for those having delayed legacy projects wherein aggrieved home buyers may choose to initiate corporate insolvency proceedings. The time bound nature of the insolvency process provides a limited window for developers to reach settlements with the claimants, failing which the resolution professional (RP) takes over the management. Even a single buyer in a single project pursuing such a remedy could put the company at risk of defaulting on loan obligations, irrespective of the liquidity position of the company on account of moratorium generally imposed by RP. Managing such risks will be a challenge for developers, especially those with projects where completion has been affected by factors such as weak sales, declining prices, inadequate funds or delayed approvals.”

The verdict states that in an application to the National Company Law Tribunal (NCLT), a real estate allottee has to prima facie show a default pertaining to project-related refund/interest payable amounts on the part of the real estate developer. If the NCLT is satisfied with the same, the real estate developer is given a window of 14 days to point out any reasons due to which the allottee would not be entitled to any relief, including compensation/refund. Such reasons could include the following:

- Allottee is himself a defaulter in paying the installments to the developer, and hence not entitled to any relief

- The allotees’s application has been fraudulently filed with malicious intent, or for any purpose other than the resolution of insolvency, for example - speculative investment

- Allottee does not want allocation of the flat in a scenario where the real estate market is undergoing a downturn, and has filed the application to get back the amounts paid by him

The court further mentioned that the Real Estate Development and Regulation Act (RERA), Consumer Protection Act (CPA) should be harmoniously read with provisions of IBC. However, in the event of any conflict, the IBC will prevail.

“While the consideration of factors that would deem the allottee ineligible for refunds/compensation alleviates the risks for the developers to some extent, it is to be noted that the burden of proof for the same remains on the developer, and the developer’s ability to actually demonstrate such ineligibility remains to be seen. The window available with developers will be highly prone to disputes as the reasons cited by them on speculative investment or market downturn may not be acceptable to buyers,” added Mr. Jain.