IBC new ordinance more beneficial for homebuyers
In a welcome relief for homebuyers, the government of India has amended the Insolvency and Bankruptcy Code (IBC) 2016 to grant the status of a “financial creditor” to a homebuyer. The President of India has also granted his assent to the IBC (Amendment) Ordinance. Relief for the homebuyer This move will be particularly helpful for borrowers facing hardships due to incomplete real estate projects. In India, 20-30% of projects face delay due to various reasons, most common of which is a debt trap that a developer finds himself in. This will, however, change with the new IBC amendment. After having attained the status of a financial creditor, homebuyers have now been granted the right to invoke Section 7 of the IBC against an errant developer. The Section allows them to file an application seeking resolution for insolvency under the corporate insolvency resolution process (CIRP). Homebuyers can also expect fast tracking of pending court cases against leading real estate groups, as a result of this amendment. Claiming proceeds after liquidation Homebuyers were at a disadvantage even if the proceeds from the sale of a liquidated real estate asset were distributed among stakeholders. There were as many as eight levels in the order of distribution, and homebuyers couldn’t make a valid claim even after liquidation of a project as they were regarded as consumers. Proceeds from liquidation were claimed first by financial creditors such as banks and financial institutions, then by operational creditors such as employees and vendors. Then came unsecured financial creditors, government stakeholders and finally the equity shareholders. While the new IBC ordinance benefits homebuyers, promoters will not really lose out. So long as the promoter is not a wilful defaulter, he will still be given a fair chance of resolution rather than liquidation under CIRP. Increase in borrowing rates But lenders may take a step back as a result of this amendment as proceeds from recovery have another added layer of distribution that was not taken into consideration at the time of the origin of loan. This dilution in the rights of lenders on liquidation proceeds may result in increase in borrowing rates depending on the borrowers’ credit profile.
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