Protecting Home Buyers' Rights During Liquidation: A Roadmap for Reforms Under the IBC and RERA

The rights of home buyers in insolvent real estate projects have been a subject of debate for quite some time. To protect the rights of home buyers, the Insolvency and Bankruptcy Code (“IBC”) was amended in 2018.  The amendment recognized the home buyers as 'financial creditors' under the IBC, granting them rights in insolvency proceedings.  But their position remains precarious in the case of liquidation procedures that involve secured financial creditors, who claim a major stake, leaving a pittance for the rest. The article proposes an amendment to the Real Estate Regulation Act (RERA) as well as IBC to address the issue. 

Amendment of 2018 and changes to the position of home buyers thereafter

Before the amendment of 2018, the right of a home buyer in an insolvent real estate project was virtually nonexistent. The home buyers had no legal standing in the corporate insolvency resolution process ("CIRP").  They were excluded from decision-making, leaving them vulnerable to financial loss. The amendment, which was upheld by the Supreme Court (“SC”) in Chitra Sharma v. Union of India, raised the status of the home buyer to that of a “financial creditor” after deeming the amount paid in a real estate project a “financial debt.”

The status of the financial debtor entitled the home buyer to make an application for initiating a corporate insolvency resolution process (“CIRP”) in case of default. However, the amendment of 2020 restricted the power to initiate the CIRP to the joint application by allottees not less than one hundred under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less. The status of financial creditors also facilitated the representation of the home buyers in the Committee of Creditors (“CoC”). While the amendment was a step forward, home buyers’ legal position remains uncertain in insolvency cases that extend beyond project-specific insolvency cases, and it didn’t fully secure the interests of the home buyers, especially in the liquidation scenarios.

Challenges in Liquidation Proceedings

Section 30 (4) of the Insolvency and Bankruptcy Code, 2016 mandates that the CoC may approve a resolution plan (“RP”) by a vote of not less than sixty-six percent of the voting share of the financial creditors. In the ordinary course, the secured creditors possess a major share of the voting percentage in the CoC. So, it is unquestionably difficult for home buyers, given that they are unsecured financial creditors, to get a plan approved that will measurably be in their favour. Data shows that as of June 2024, out of 1400 admitted insolvency cases in the real estate sector, the corporate debtors (“CD”) were rescued successfully in 65% of cases, leaving only 261 to liquidation. The optimism suggested by the date doesn’t accurately reflect the situation; the fear of going into liquidation forces the home buyers to settle for a resolution plan that caters relatively better to their needs.

Section 33 mandates that the adjudicating authority pass an order requiring the CD to be liquidated if the CoC fails to approve a resolution plan within the maximum period prescribed under Section 12, 180 days. Once a CD goes into liquidation, the liquidating officer estimates the liquidation assets of the CD and sells it to third parties through an auction. The liquidation estate herein also includes the asset proposed to be allotted to the home buyer under a builder-buyer agreement. As a result, the most desirable remedy for the home buyer is rendered unattainable. Now, the preferable remedy for the home buyer is to recover as much money as he had paid for the house. However, in the distribution waterfall under Section 53, financial debts owned by the secured financial creditors take precedence over the debts owed to the unsecured creditors. The secured financial creditors hold a significant portion of the claims; the remaining assets are often insufficient to provide a meaningful recovery for home buyers. As a result, they are forced to accept minimal compensation, rarely enough to recover their initial investment.

The Rationale for Prioritizing Homebuyers in the Liquidation Process

The position of a home buyer in sui generis in the liquidation process. Home buyers are the only stakeholders who don’t have a commercial interest and whose debts can be majorly realized only via the construction of a house. In most cases, home buyers invest their savings and often take loans to realize their dream of having a house of their own. They are also the most vulnerable; the institutional creditors and operational creditors are profoundly literate in all the operations involved and aware of the available remedies.  

The right to shelter is a fundamental right. The state shall strive to ensure that the rights are not violated and make policy decisions accordingly. It is also imperative that the confidence of the home buyers is well sustained, as they are the primary benefactors of the market. Non-preservation of consumer interests may also lead to prolonged litigation, causing long-term economic impact in the real estate and related sectors. Another factor to be considered is the significance of aligning with the objectives by which the Real Estate Regulatory Act (“RERA”) was enacted, safeguarding the interests of the home buyers, and ensuring that the house is completed and handed over in time.

In a catena of judicial decisions, the significance of safeguarding the interests of the home buyers can be noticed. In Union of India v. Rajasthan Real Estate Regulatory Authority & Ors, the SC held that the RERA act will take prevalence over the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act"), and the Real Estate Authority has the right to entertain a complaint against the bank if it takes recourse to the provisions contained in Section 13(4) of the SARFAESI Act. In Chitra Sharma v. Union of India, the SC used its power under Article 142 of the Constitution to give relief to the home buyers. The court directed that the initial period of 180 days for the conclusion of the CIRP shall be deemed from the day of the order. The National Company Law Appellate Tribunal ("NCLAT"), in its judgment in Beacon Trusteeship Limited v. Jayesh Sanghrajka & Ors, upheld the entitlements of the home buyers to their houses with no escalation in price, rejecting the objection of other financial creditors of unfairness as a haircut of 93% percent was imposed on them. The tribunal also acknowledged the imbalance in the interests and rights of the secured and unsecured financial creditors. 

Proposed Reforms and Recommendations

Various bodies have suggested resolutions to the conundrum. The discussion paper of the Insolvency and Bankruptcy Board of India (IBBI) dated 7th November 2024 proposed that the moratorium imposed on the CD may not apply to the units of which the creditor has performed his part of the contract; the home buyer may take possession of the unit on an “as is where is” basis if 66% of the CoC approves it. The discussion paper of 2023 proposed that the units already in the possession of the allottees may be excluded from the liquidation estate. Yet, a series of legal and procedural reforms are required to be introduced to ensure that the home buyers are not unfairly disadvantaged in the liquidation proceedings.     

A general provision should be inserted in the IBC prioritizing the completion of real estate projects over the asset sale. This aligns with the objectives of RERA and avoids unnecessary financial distress for the home buyers.

In cases where the liquidation assets include real estate projects and other assets, efforts should be made to establish two separate CoCs, one for home buyers and another for secured financial creditors. This will ensure that the interests of the home buyers are not overridden by secured creditors.  A conciliation proceeding followed by an arbitration proceeding should be resorted to in case of conflict between the resolution plans.

The units should be allotted to the home buyers on an “as is where is” basis if they are willing to take possession, notwithstanding the approval by the CoC. A distinction has to be made between the buyers who made an advance payment of the full amount and those who are making payments in instalments. Resolution plans should include provisions for completing units for fully paid buyers, while installment-based buyers shall be reimbursed or required to cover the additional costs.

Including RERA representatives in the CoC will ensure that the statutory rights of the home buyers are protected and that their interests are properly considered in the insolvency proceedings.

Conclusion

Though the amendment of 2018 was a positive step towards safeguarding the interests of the home buyers, their position remains precarious, especially in liquidation proceedings. Aligning the IBC with the objectives of RERA, restructuring the CoC, and introducing alternative mechanisms are important to ensure that home buyers are not subjected to disproportionate losses. Legislative and procedural reforms should be adopted to balance the interests of all stakeholders, keeping in mind the specific case of the home buyers.