What if your builder is declared insolvent?
Provisions under the Insolvency and Bankruptcy Code (IBC)
If a builder is declared insolvent, IBC provides two options – resolution or liquidation. The resolution process will involve an analysis of the builder’s financial position to see if the business can be rescued or revived. If the first option is not viable, the builder’s assets will be liquidated and the proceeds will be used to clear the creditors’ claims.
It should be noted that IBC is aimed at protecting the rights of operational and financial creditors, and buyers are considered neither. The legislation does not have any clauses pertaining specifically to the rights of homebuyers when a developer becomes bankrupt. Rohit Poddar, Managing Director, Poddar Housing and Development Ltd, states that it is not likely that customers would be able to recover their full dues in such a situation and, hence, it is always advisable to buy from a reputed developer.
What happens once a builder files for insolvency?
Gunjan Goel, Director, Goel Ganga Developments explains that once a builder files for insolvency, the National Company Law Tribunal (NCLT) will appoint an insolvency resolution professional who will attempt to resolve the builder’s financial situation. If a revival is not possible, he will verify the claims of creditors, and oversee the liquidation and settlement process.
Buyers may use Form F issued by the Insolvency and Bankruptcy Board of India (IBBI) to raise their claims, which can be for the refund of the amount they had invested in the builder’s project, the damages suffered by them due to the non-execution of their purchase agreement, or for receiving possession of the property they had paid for. However, primary creditors such as banks are likely to get the first right to receive payments if the builder’s assets are liquidated. Often, this might not leave enough funds for the homebuyers, states Goel.
What is the recourse in case the builder is declared insolvent?
Since IBC does not state the recourse available to homebuilders, experts anticipate the following scenarios:
- Some of the funds raised by selling off the builder’s assets may be used to complete the project and hand over the units to the buyers
- Buyers may be asked to pay the balance pending for their units, which will be used to complete the project
- Buyers may form a resident welfare association, acquire the under-construction project, and oversee its completion through personal contributions
- Creditors may take over and attempt to revive the project in order to earn value appreciation
The solution would differ case by case and would largely depend on the insolvency resolution professional hired for a particular builder’s insolvency request.
What can buyers do in case the builder is declared insolvent?
Experts are of the opinion that buyers may stand a chance to be treated as creditors if they terminate their purchase agreement and file for a refund. However, this means they will not be able to demand possession in case the project is rescued and completed. Thus, this option is not advised for all buyers.
Let us consider a property that is 75 percent complete. If a buyer in such a project claims for refund by giving up his right to possession, he may receive only 50 percent of his investment as part of the liquidation settlement decided by creditors. It is important to note that a buyer’s share in such a scenario would depend on the value of the builder’s assets as compared to his debts.
Claiming a monetary refund would be suited to those buyers whose projects are still in early stages, assert experts. Meanwhile, buyers of projects which were close to completion when the builder filed for insolvency are better off filing a claim for possession. This is especially applicable if the project was registered under the Real Estate (Regulation and Development) Act (RERA) since RERA entitles homebuyers to claim possession of their property.
Who has the first right to get their dues cleared if a builder becomes insolvent?
Secured creditors will get the first priority when a builder’s dues are being settled. However, as per existing norms, homebuyers are not specifically stated to be secured creditors. Generally, banks and other financial institutions get the first right to get their dues cleared when the builder’s assets are liquidated.
Can a buyer go to court to claim a refund or possession of his property?
The Insolvency and Bankruptcy Board of India has been charged with the responsibility of overseeing insolvency proceedings. Two tribunals, National Company Law Tribunal for companies and Debt Recovery Tribunal for individuals, have also been formed to resolve such matters and pronounce judgement on them. In case of a builder becoming insolvent, homebuyers may apply to these authorities for redressal. Buyers may also approach the court to intervene in cases where massive amounts are involved.
Quick tips for buyers
- Do not stop paying EMIs for your home loans even after your builder becomes insolvent
- File your claims within the timelines announced by the insolvency resolution professional
- It would be wiser for homebuyers to work collectively as a team to compel the authorities to ensure that either the delivery of the project is seen through, or the invested money is returned
Experts have been urging the government to amend the IBC and place the rights of genuine homebuyers, who have made partial or complete payments for the project, ahead of the institutional creditors. The IBC is a new law and is likely to undergo changes in the future to incorporate homebuyers’ rights. Until this happens, buyers should stay aware of their options in order to make the best of the situation in case their builder is declared insolvent.
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