Status as on 24/01/2019
The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted with the motive to identify the distressed assets, to protect the interests of all the stakeholders and creditors of the corporate debtor.
Under IBC laws, creditors have been categorized into 2 categories
(i) Financial Creditors – As per section 5(7) and 5(8) of IBC laws, all creditors which have lent or debt to corporate against the time value of money shall be financial creditors.
(ii) Operational Creditors – As per section 5(20) and 5(21) of IBC laws, any creditors having a claim with respect to the provision of goods or services including employment and Govt dues are Operational creditors.
However, from the plain reading, it was interpreted that the homebuyers wrer not classified under any of the creditors. And to remove this ambiguity, an amendment was brought in section 5(8) giving the homebuyers the status of financial creditors.
Amendment under IBC
In the amendment dated 6th June 2018 the homebuyers fall under the category of financial creditors, by inserting an explanation to section 5(8)(f). According to which:-
“Section 5- Financial debt is defined to mean a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes inter alia any amount raised under any other transaction having the commercial effect of borrowing.
Explanation- Any amount raised from an allottee under a real estate project is deemed to be an amount having the commercial effect of a borrowing.”
Filing of application
Under section 7 of IBC, a financial creditor shall file the insolvency application if:-
- There is a debt owed to the corporate debtor; financial debt
- The default has been committed by the corporate debtor in repaying the amount of debt owed to the financial creditor.
As per the amendment, the amount raised by the builder from the homebuyer has been treated as the financial debt.
Consequently, the homebuyer shall be eligible to file an insolvency application under section 7 of IBC if the builder fails to deliver the possession of the unit/flat/property within the time frame stipulated in the builder buyer agreement or fails to refund the amount paid by the homebuyer at the time of booking of the said property.
Moreover in the matter of Rajendra Kumar Saxena vs. Earth Gracia Buildcon Pvt Ltd. NCLT observed that “by the insolvency and bankruptcy code (Amendment) Ordinance, 2018 dated 6th June, 2018 followed by the act, in clause (8), in sub-clause (f), of section 5 an explanation has been inserted as per which any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of borrowing. Thereby, after the amendment of the act, the allottees of real estate project have been treated as financial creditors”
Hon’ble National Company Law Tribunal (NCLT) in the matter of Neeraj Gupta vs. EMAAR MGF Land Limited laid down the abovementioned law.
Brief facts of case:-
The homebuyer booked a flat in the project namely Palm Greens constructed by EMMAR MGF Land Ltd. And paid an amount of Rs. 88,49,036 through various instalments. Thereafter the builder was supposed to deliver the said flat within 36 months but the builder failed to handover the flat/unit to the homebuyer even after the grace period of 3 months.
The liability of the builder arises along with the interest when the builder fails to deliver the possession within the time period (including the grace period) stipulated in the agreement. Thus enabling the homebuyer to file the insolvency petition against the builder’s company.
In the light of above decisions and amendments, either if the builder delays in delivering the possession of the flat/unit/property or fails to refund the amount paid by the homebuyer as an advance to make the booking of the said unit, the application filed by the homebuyers under section 7 of IBC shall be maintainable. Therefore the homebuyers are advised to approach NCLT under IBC to recover their stuck money in a time-bound manner.