Most Common FAQ covering all the issues faced by Homebuyers while dealing with NCLT /IBC Laws
What is the (Insolvency and Bankruptcy Code) IBC?
- The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India that seeks to consolidate the existing framework (SARFAESI Act,2002; SICA,1985; DRT,1993, etc.) by creating a single law for insolvency and bankruptcy. Thus, IBC is like a summation of all existing acts.
- Insolvency and Bankruptcy Board of India (IBBI) has been constituted as a regulator and it can oversee these proceedings.
- The purpose was to identify the default and defaulting company at the earliest point and maximize the value of the remaining assets.
- Upon filing the petition, if the default is proved, the defaulting company is taken over by appointing IRP, and resolution is invited from the market.
- Section 12 of the Code states that any Insolvency Resolution Process shall be completed within a period of 180 days from the date of admission of the application to initiate the process. The maximum time period may be up to 330 days from the date of admission.
What is the NCLT (National Company Law Tribunal)?
NCLT (National Company Law Tribunal) is an adjudicating authority under the Insolvency and Bankruptcy Code, 2016 which would hear and adjudicate the matter filed under IBC Laws relating to Corporate Debtor. Under IBC Laws. Under IBC Laws, Hon’ble NCLT is adjudicating Authority, Hon’ble NCLAT (National Company Law Appellate Tribunal) is the appellate authority. All appeals against NCLAT shall lie before the Hon’ble Supreme Court.
How can homebuyers file their claim petition?
There are certain points that are to be taken into consideration whilst filing a petition for the homebuyers under the newly amended Section 7 of IBC. The points are being briefly discussed hereinbelow:
- There have to be a total of 100 homebuyers or 10% of the homebuyers to file the petition.
- The homebuyers should be of one single project only that is being developed by the corporate debtor.
- The homebuyers are required to have all the relevant documents pertaining to their projects resulting in building up of their relationship with the Builder i.e., Builder Buyer Agreement, Allotment letter, and the payment receipts issued by the builder.
- The default in the case of every homebuyer filing the matter should have occurred. In other words, the date of possession, as promised by the builder, should have been lapsed.
- The default for the total homebuyers should be more than Rs.1 Crore to fulfill the pecuniary jurisdiction for filing the petition before NCLT.
Are homebuyers categorized as ‘Secured or ‘Unsecured Creditors?
Under IBC, the difference between secured financial creditors and unsecured financial creditors mostly has an implication on the priority of payments upon liquidation. The amended law grants homebuyers the status of financial creditors but stops short of stating whether they are secured or unsecured creditors. The homebuyer will have to prove which category of creditor he is qualified to be as per the agreement with the real estate company.
If the developer company gets into liquidation, and the homebuyer is an unsecured creditor as per the agreement, he is actually even worse off.
What are the various forums where the homebuyers can file their claim?
- The two forums available for homebuyers are:
- 1) Real Estate (Regulation and Development) Act and
- 2) Insolvency and Bankruptcy Code (IBC) were both implemented in the year 2016, with an aim to protect the interest of homebuyers suffering at the hands of defaulting real estate developers.
- For starters, RERA was brought to protect the homebuyer’s from unscrupulous real estate deals and developers. Whereas the purpose of NCLT is to be an adjudicating authority to solve cases of insolvency under the IBC.
- Taking steps to protect the homebuyer’s interests, flat buyers have been upgraded to unsecured financial creditors by the government under IBC. They are now eligible to be on the CoC with voting rights proportionate to their share in the financial debts of the company.
- However, in most cases, lenders have much higher exposure than homebuyers. Hence, the lenders who are also the secured creditors are likely to have a decisive say in the formulation of a resolution package. The homebuyers, being unsecured financial creditors, shall be legally entitled only to the liquidation value of what they would have got as per the waterfall mechanism applicable to liquidation. Anything more shall be a bonus.
How can homebuyers initiate CIRP?
- The IBC lays down different procedures for the initiation of CIRP by financial creditors and operational creditors.
- Where a financial creditor files an application for initiating CIRP against a corporate debtor, once the Adjudicating Authority is satisfied as to the existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed resolution professional, it is required to admit the application. The Adjudicating Authority is not required to look into any other criteria for admission of the application.
- On the other hand, in case of a default in payment of an operational debt, the operational creditor is first required to deliver a demand notice to the corporate debtor. In case the operational creditor does not receive its payment or a notice of the existence of a dispute within the specified period, it is then entitled to file an application for initiating CIRP against the corporate debtor.
- The rationale for specifying different procedures for financial creditors and operational creditors was two-fold. Firstly, operational debts tend to be small amounts (in comparison to financial debts) or are recurring in nature and may not be accurately reflected on the records of information utilities at all times and, secondly, the possibility of disputed debts in relation to operational creditors is higher in comparison to financial creditors such as banks and financial institutions.
- In case of builder-buyer agreements as well, there is a high possibility of a dispute between the builder and the home buyer in case of delay in completion of the project on account of force majeure or forfeiture of booking amount in case of cancellation by the buyer, etc.
- As against a simpliciter loan agreement where the only obligation of the borrower is to pay the outstanding’s, in a transaction between an allottee and a builder the primary obligation of the builder is to construct the units, and only in certain events, the builder has an obligation to pay the allottees. Consequently, the possibility of a genuine bona fide dispute between the builder and the allottee cannot be ruled out. Despite the nature of the contracts between builders and home buyers being more akin to operational debt than financial debt, the latter are now entitled to initiate CIRP against a corporate debtor even for a disputed debt.
Whether homebuyers can participate in the Committee of Creditors (CoC)?
- At the time of designing the IBC, one of the aspects which were considered for determining the composition of the CoC was that the members of the CoC have to be creditors, both with the capability to assess viability as well as to be willing to modify terms of existing liabilities in negotiations.
- Since operational creditors are typically not able to decide on matters relating to the commercial viability of the corporate debtor, nor are they typically willing to take the risk of restructuring their debts in order to make the corporate debtor a going concern, it was decided that the CoC would comprise only of financial creditors except in cases where the corporate debtor does not have any financial creditor.
- Homebuyers would also usually not be competent to assess the commercial viability of the corporate debtor or be willing to restructure their dues. The interest of lenders in a CIRP would be typically aligned in as much as all of them would want speedy and better recovery. Homebuyers, on the other hand, may either want a refund or want their homes.
- Having a disparate group of creditors as members of the CoC would inevitably lead to inefficiencies in the decision-making process. This would defeat the objective of time-bound resolution and maximization of the value of assets of the corporate debtor.
What are provisions related to voting in the case of homebuyers?
- With regards to homebuyers, in Nikhil Mehta v AMR Infrastructure,the NCLT issued its decision on the lines of the NCLAT above and held that, where financial creditor constitutes solely of real estate financial creditors (residential and commercial), the decision taken by the highest percentage is to be regarded as final. Therefore, it meant that the votes of homebuyers who were absent from the meeting shall not be counted, and whatever the majority decides will be final. For example, consider a scenario where 66% votes are required to pass a resolution for appointing a resolution professional and the CoC is constituted solely of real estate (commercial and residential) creditors and 40% of those creditors are absent from the voting The vote of 60% of creditors shall be considered as 100% and whatever the majority of the 60% decide shall be final.
- However, another problem came up in the Japyee Infra case, where the CoC consisted of a mix of real estate financial creditors, banks, and asset reconstruction companies as financial creditors. In case the real estate financial creditor holds substantial shares in voting, absenteeism of the majority of homebuyers from the voting process can have a negative impact on the resolution process. Here, the required threshold of 66% will be difficult to achieve. There can be two possible solutions to this problem:
(i) Rule of Present and voting: The approach taken in Arvind Mills case can be taken into consideration and the total votes shall be of those who are present and have voted. Hence, if homebuyers are absent their share of votes are excluded from the total voting percentage.
Take an example where homebuyers have 60% voting share and other financial creditors have a 40% share. Now, out of these 60%, only 20% have been present and have voted either for the motion or against the motion. The votes of the 20% should be taken as the entire share of the real estate financial creditors as a whole.
(ii) Creating homebuyers as a separate class of financial creditors: Whatever the majority of the class of homebuyers shall decide could be taken as the opinion of the group as a whole and then their share is to be counted in the total vote share. Voting more than 50% by the homebuyers in class shall be deemed as 100% for the whole group
What steps/actions can homebuyers take when there is a dispute with the builder?
- Section 18 of RERA – A troubled homebuyer can file a complaint u/s 18 of the RERA Act.
- Joint Petition before NCLT under IBC Laws – Homebuyer may file a joint petition with more than 10% of homebuyers in the project or 100 in nos, whichever is less, u/ s 7 of the Code.
- A troubled homebuyer can also seek legal help from RERA which would prescribe punishment or penalty after acknowledging the nature of the default by the builder. Moreover, the buyer can also appeal in the Real Estate Appellate Tribunal if unsatisfied with the decision of RERA. In addition, the buyer can further appeal and challenge the order of the Tribunal in the High Court within 60 days.
- Section- 79 of RERA, civil courts are not allowed to entertain disputes in respect of matters which the Authority or the authorized officer or the Tribunal is empowered under the law are empowered to determine, but National, State or District Consumer Forums will also be authorized to redress buyer-builder disputes.
- Section- 71 of RERA allows the buyer to withdraw his complaint from the Consumer Forum regarding complaints under Sections- 12, 14, 18 &19 and file it with the Authorized Officer under law.
How can homebuyers approach NCLT?
No less than 100 or 10% of home-buyers to initiate insolvency against builder or developer. Under the IBC amendment passed by the Parliament in March 2020, a single home-buyer is barred to approach the National Company Law Tribunal (NCLT) under Section 7 of the IBC. In simple words, home-buyers are now required to approach the NCLT with a joint application of at least 10% or 100 of the total home-buyers of a project. If the numbers of home buyers are less than that, NCLT will dismiss their application ipso facto.
What are the rights of homebuyers under RERA?
Section 19 under Chapter 5 of the RERA Act, 2016 lays down certain rights and duties of the home buyers or allottees which have been listed below:
- Right to obtain information: The homebuyers is entitled to obtain project information regarding sanctioned plans, layout plans, RERA registration number, and specifications approved by the competent authority.
- Right to know Completion schedule: The homebuyers has every right to know the stage-wise time schedule of completion of the project, including the provisions for water, sanitation, electricity, and other amenities and services mentioned in the terms and conditions of the agreement for sale.
- Right to claim possession: The homebuyers has the right to claim the possession of the property including the common areas in case all the relevant formalities have been completed and necessary remuneration has been paid.
- Right to claim a refund: The homebuyers has the right to file a complaint under RERA and claim the refund of the amount paid along with interest and compensation from the builder, in case the builder fails to comply or is unable to give possession of the property as per the terms mentioned in the agreement for sale or due to discontinuance of his business as a developer on account of suspension or revocation of his registration. However, developers would be given one more chance to set a reasonable timeline for the delivery, failing which they will have to pay the requisite penalties. A complaint can also be filed with the Appellate Tribunal in case the buyer isn’t satisfied with RERA’s decision.
- Right to have documented: After handing over the physical possession of the property by the developer, the home buyer is also entitled to have the relevant documents and plans, including that of common areas.
- Right in case of any defects:If there are any structural defects or problems in the quality of the property within 5 years of possession, the builder will have to rectify these damages within 30 days at no extra cost to the buyer.
What are the duties of Homebuyers under RERA?
RERA Act also lays down the duties of the home buyers which are as follows:
- Duty to research: A smart homebuyer is fully aware, conducts full research and background checks on projects, and is not easily swayed by market trends and other marketing tactics. Due diligence even on projects registered by RERA is a must as RERA has definitely brought in more accountability and transparency but precaution is always better than regret later.
- Duty to make payment: Every homebuyer, who has entered into an agreement for sale to take a property has the responsibility to make necessary payments within the specified time and place in the agreement for sale which include registration charges, municipal taxes, water and electricity charges, maintenance charges, ground rent, etc.
- Duty to pay interest: The home buyers have the duty to pay interest for any delay in payment towards any amount to be paid.
- Duty to participate in the registration: The homebuyers have the duty to actively participate in the registration of the conveyance deed of the said property.
- Duty to form Association of buyers: Every buyer of a property has the duty to participate in the formation of an association or federation of homebuyers to look after the welfare of its residents.
- Duty to take possession: Every homebuyer must take physical possession of the property within a period of 2 months of the occupancy certificate issued.
How can homebuyers form a registered association of buyers?
Homebuyer association can be made as per the State Level regulations as prescribed in this regard. General requirements are as under : (these requirements may differ from State to State)
- At least 7 buyers with local (where the property is located) address proof.
- At least 1 buyer with local (where the property is located) permanent address proof.
- Elect/choose the office bearers – President, Vice President, Treasurer, General Secretary, Secretary among these 7 odd buyers and share the same when applying.
- Post formation of the buyer’s society/association, you may open a bank account and apply for a PAN Update model by-laws if required and share the same with the members. Invite other group members for joining society/association after defining the minimum joining fees that shall be in form of cheque in favor of society account. After this, contributions can be collected legally as and when necessitated. Ensure that responsibilities are well communicated to the office bearers and the members.
- Homebuyers may also fight the case against builder legally in consumer and other jurisdiction courts as a registered association.
What are the documents required for registration of the HomeBuyers Association?
- Request letter to register a society under Societies Registration Act 1860.
- Two sets of Memorandum of the association including a list of proposed Governing Body and list of desirous persons
- Two sets of rules and regulations framed for the functioning of the organisation.
- Affidavits (on Rs.2/- stamp paper from president/Secretary of the Society regarding the name/title of the society.
- Copy of residence proof of all desirous persons.
- Proof of ownership of the registered office of the society and no objection certificate (on Rs.2/- stamp paper).
How can homebuyers claim delayed payment to housing society by the Builder (in case of re-development)?
If the builder is carrying out the redevelopment of a housing society, they must pay the rent to the members of the housing society. Till the building in the housing society is revamped, the members must be given temporary accommodation. If these conditions are not adhered to, it might lead to serious disputes between the buyer and the builder. In times of a financial crisis, the builder might declare insolvency, and the project ends up being stalled.
Below are some steps to take so that non-payment of dues by the builder does not affect your home buying experience:
- Homebuyers can opt to get the lump sum amount instead of periodic rents from the builder, in case the builder decides to jump ship before providing possession.
- With the substantial amount of money received, homebuyers may invest in the open market to make a profit or find alternate accommodation.
- Homebuyers can include a heavy penalty clause or a guarantee of alternate accommodation in the consent agreement signed with the builder.