Seller beware: homebuyers and Bankruptcy Code

Homebuyers parted of their money by real estate developers have some relief coming their way. The Union Cabinet has cleared an ordinance amending the Insolvency and Bankruptcy Code (IBC), a law which came into force in November 2016 to hasten the process of winding up failed businesses. While the government refused to divulge specific details of the amendment, the change to the law is expected to help offer better treatment to homebuyers when it comes to recovering their dues from bankrupt companies. A 14-member panel formed by the Ministry of Corporate Affairs had recommended last month that homebuyers should be treated as financial creditors during the bankruptcy resolution process. It is yet to be known whether homebuyers will be treated better or worse than banks and other financial lenders under the amended law. But there is a sound reason to treat them a step above these traditional lenders. Economically speaking, homebuyers are not creditors but only customers to real estate developers. Unlike traditional creditors such as banks and institutional investors, they do not offer their money in expectation of excess returns. Homebuyers simply want the delivery of a good that was promised to them. It is thus unfair to push homebuyers, who did not choose to risk their money on an uncertain venture in the first place, down the pecking order when it comes to sharing the spoils of a bankrupt entity.

Until now, homebuyers have had to knock on the doors of the courts to uphold their rights, while other stakeholders benefited significantly at their cost. The travails of several homebuyers in the Jaypee insolvency case, in which the Supreme Court had to intervene in favour of homebuyers in the bankruptcy resolution process, is a case in point. The amendment, if it meets expectations, could also reduce the inconsistencies between the IBC and the Real Estate Regulation Act (RERA). While RERA was introduced with the goal of protecting the rights of buyers by ensuring the timely and honest delivery of homes, they have had to be content with a relatively low status among the various stakeholders in a bankruptcy proceeding. In fact, buyers have been treated as unsecured creditors. The removal of this inconsistency can help courts deliver better justice to homebuyers in the future. Along with RERA, the proposed amendment can go a long way in stopping unscrupulous real estate developers from fleecing homebuyers with promises that they cannot really keep. While upholding homeowner rights could cause pain to wayward real estate developers and large creditors like banks, it will help in the development of a transparent and more efficient real estate market.

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Printable version | Oct 22, 2020 4:01:29 PM | https://www.thehindu.com/opinion/editorial/seller-beware/article23980946.ece

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