By Sukrit R Kapoor
The insolvency and bankruptcy landscape in India is fraught with legal tussles between homebuyers (or real-estate allottees) and lending institutions, which, based on recent developments, seem far from resolution. The insolvency regulator, Insolvency and Bankruptcy Board of India (IBBI), in June 2022 invited public suggestions for effective and expeditious resolution of real-estate projects. However, the power struggle between homebuyers and lending institutions for dominant control over the corporate insolvency resolution process (CIRP) of real-estate developers has only intensified post the July 2022 IDBI Trusteeship Services Limited v. Abhinav Mukherji judgment of the National Company Law Appellate Tribunal (NCLAT), which confirmed the power of homebuyers to challenge lending institutions from qualifying as Financial Creditors (on a case-to-case basis) and finding a place on the Committee of Creditors (COC).
The implications of the NCLAT judgment need to be appreciated alongside the history of homebuyers in CIRPs. Within a year of enactment of Insolvency and Bankruptcy Code, 2016, homebuyers knocked on the doors of the Supreme Court, urging that they be given representative power on the COC of their insolvent developer; accordingly, necessary protective directions were passed by the Court in Chitra Sharma v. Union of India. Thereupon, in March 2018, the Insolvency Law Committee recommended that the 2016 Code be amended to identify homebuyers as Financial Creditors, which was given effect through a June 2018 amendment which conferred homebuyers a seat on the COC and effectively a say in the CIRP. Importantly, the quantum of one’s claim is proportionate to the voting power one possesses in the COC. This development led to various litigations—many of which are pending consideration.
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For instance, the lending institutions—particularly housing finance companies (HFCs)—faced dejection when the NCLAT, in PNB Housing Finance Limited v. J.S.S. Buildcon Pvt. Ltd. (2020), did not identify them as “Financial Creditors” of real-estate developers in transactions where the HFCs had extended loans to the homebuyers and the said homebuyers had in-turn defaulted in repaying the loan to HFCs that were secured through mortgages of the under-construction homes. To simplify, the real-estate developer stood as a trustee for the HFCs by holding the under-construction home on behalf of the HFC and based on the understanding between the developer and the homebuyers, the developer was obligated to pay the pre-EMIs of the loans until the homes were delivered. As a consequence of the NCLAT judgment, the HFCs could not trigger CIRPs against defaulting developers when the homebuyers failed to pay their EMIs. This order of the NCLAT is subject of an appeal pending before the apex court.
Logically, the HFCs in various instances then proceeded against defaulting homebuyers under the contours of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). However, this time homebuyers approached the High Court of Delhi (Ashish Tiwari & Ors. v. Union of India & Ors.) to contend that lending institutions had disbursed loans without examining the credibility of developers and had even “acted in collusion with the developers”. Notably, the circumstances before the High Court pertained to subvention schemes wherein the developers had committed to pay the EMIs of loans of homebuyers till they offered possession of the homes. However, the developers in the instances before the High Court had neither offered possession nor paid the EMIs. While the said matter is still pending consideration, much to the dismay of lending institutions, the High Court, vide order dated 31.01.2022, restrained the lending institutions from proceeding against homebuyers. Consequently, certain lending institutions in today’s date can neither find a seat on the COC nor can they sue the homebuyers for realisation of loans.
The onslaught continued when the Supreme Court in Union Bank of India v. Rajasthan Real Estate Regulatory Authority & Ors. permitted homebuyers to sue lending institutions before adjudicating authorities established under Real Estate (Regulation and Development) Act, 2016 in the event that they initiated proceedings under SARFAESI against homebuyers.
In the above backdrop, the NCLAT in July 2022 confirmed in IDBI Trusteeship Services Limited that even a single homebuyer, who has been admitted to the COC of the real-estate developer, can challenge the claims of other Financial Creditors—such as other lenders in the said matter—seeking to disqualify them from COC. In the said matter, a debenture holder and its assignee were denied the status of Financial Creditor—at the behest of a homebuyer—on account of the NCLAT identifying their position as a “related party” of the developer and for non-invocation of the corporate guarantee prior to the initiation of CIRP. With such and other litigations, it would be all the more prudent for the IBBI to carve out a distinct resolution mechanism for real-estate projects.
The author is New Delhi-based advocate
