[Explained] Homebuyers Under Insolvency & Bankruptcy Code : Evolution Of Law & Present Position

This article is an attempt to trace the origin and process as to how home buyers were brought under the umbrella of "financial creditor" given in the Insolvency and Bankruptcy Code as a creditor.Home-buyers apart from civil remedies were approaching the consumer forums under the Consumer Protection Act, 1986, subject to them proving that there was no "commercial purpose" attached to such investment.To provide additional relief, Real Estate Regulatory Authorities under the Real Estate (Regulation & Development) Act 2016 were introduced and the same has concurrent jurisdiction with the Consumer Fora. In brief, RERA is a special law with the object of providing speedy redressal to the home-buyers' grievances as well protecting the interest of the homebuyers in the real estate sector. As per Section 18 of RERA, if the builder/promoter/developer fails to complete the project or is unable to give possession of the apartment, he is liable to return the amount received by him from the home-buyer on demand. The Home-buyer may also chose to claim delayed payment interest from the developer if he does not wish to withdraw from the project. The Home-buyer is further allowed to claim compensation in case of any loss caused to him due to non-compliance by the builder/promoter/developer of any of the provisions of RERA.After the advent of the IBC, many real estate giants were dragged to NCLTs. However, there was no clarity given in the Code as to whether the transactions of home-buyers would fall under the definition of a financial or operational debt. Many applications of the Homebuyers were rejected, because of the lack of clarity as to whether the home-buyers were operational creditors or financial creditors, mIn a case filed by the home-buyers before any forum, the reliefs are generally of three kinds, depending on the contracts:Possession.Cancellation/refund of monies (principle and interest component).Raising a demand of assured returns as promised by the builder/promoter/developerIn NCLT, only two types of debts are entertained: Financial Debt and Operational Debt.The Code defined financial debt under Section 5(8) as follows: "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes— (a)money borrowed against the payment of interest; (b)any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; " And operational debt under section 5(21) is defined as : "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;" Considering the nature of reliefs sought by the homebuyer in their applications, description of debt needed judicial interpretation to clear the position. The difficulty faced by the Home buyers was taken note of by the Supreme Court in Chitra Sharma & Ors. v. Union of India (Writ Petition (Civil) No.744 of 2017). During the pendency of the writ petition, the NCLAT in Nikhil Mehta v. AMR InfrastructuresLtd. clarified the position and observed as follows: "24. Learned Adjudicating Authority has rightly highlighted the opening word of the definition clause which indicate that a 'financial debt' is a debt along with interest which is disbursed against the consideration for the time value of money and may include any of the events enumerated in sub-clause (a) to (i). Therefore, it is to be seen whether the amount paid by the appellants to the Corporate Debtor, fulfil the other condition of "disbursement against consideration of time value and...

[Explained] Homebuyers Under Insolvency & Bankruptcy Code : Evolution Of Law & Present Position

Amrita Sarkar

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