The Insolvency and Bankruptcy Code (IBC), as it was originally enacted, did not contain an adequate recognition of the interests of home buyers in real estate projects.
It is well known that home buyers are vital stake holders in a company implementing real estate projects. Thus, the process of corporate insolvency resolution started against such company directly impacts upon the rights and interests of the home buyers in such real estate projects. In spite of this, the IBC, as it was originally enacted, did not protect the home buyers in such real estate projects.
However, by the Amending Act 26 of 2018, with retrospective effect from 06.06.2018, an Explanation was inserted under sub-clause (f) in clause (8) of Section 5. This Explanation has the effect of bringing home buyers in a real estate project [which is covered under the Real Estate (Regulation and Development) Act, 2016] within the category of “financial creditors” under the IBC. Thus, this amendment would protect such home buyers under IBC proceedings.
The relevant amended provisions of Section 5 of the IBC are as under:
“(7) “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;
(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes—
*** *** ***
(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
Explanation.— For the purposes of this sub-clause,—
(i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of Section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);
*** ***.”
Thus, it is quite clear from the above provisions that now allottees of a real estate project (commonly known as home buyers) are covered within the financial creditors under the IBC.
In this regard, it may be pointed out that in the case of Chitra Sharma v. Union of India, 2018 SCC OnLine SC 874, the Supreme Court has held that:
“As a result of the amendment brought about in the definition of ‘financial debt’, amounts raised from allottees under real estate projects are deemed to be amounts “having a commercial effect of a borrowing”. Hence outstandings to allottees in real estate projects are statutorily regarded as financial debts. Such allottees are brought within the purview of the definition of ‘financial creditors’.”
In fact, in the above case of Chitra Sharma, for protecting the interests of home buyers in projects floated by Jaypee Infratech Ltd. the Supreme Court remanded the matter back to the National Company Law Tribunal (NCLT) while directing that home buyers be included in the Committee of Creditors (CoC) to be constituted afresh in accordance with the aforesaid amended provisions.
Therefore, now the home buyers in real estate projects covered under the Real Estate (Regulation and Development) Act, 2016, are protected under the Insolvency and Bankruptcy Code (IBC).
