IBC Code: Are speculative homebuyers misusing insolvency law?

Are unscrupulous or speculative homebuyers trying to disrupt otherwise well-run real estate companies? Are homebuyers who have an axe to grind misusing the insolvency and bankruptcy law? If MCA Secretary Injeti Srinivas is to be believed, there have been reports of misuse of the insolvency law by some homebuyers, who have now been given the status of financial creditors.

"There have been complaints that a single homebuyer, who could be a speculative buyer, is trying to dislocate otherwise well-run real estate companies. In Mumbai, many such cases have been admitted. As a result, half of the cause list (in National Company Law Tribunal) comprises real estate companies," Injeti Srinivas said in a conference organised by the Insolvency and Bankruptcy Board of India (IBBI).

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He also called for innovative ways to stop such misuse of insolvency law by unscrupulous homebuyers. "We may have to look at a threshold because there are a large number of homebuyers. These are not typical financial creditors, who are few in numbers. So we need some threshold, of say 5 per cent (of the issued share capital), which is there for class action suit or threshold of 1/5th which you have for oppression and mismanagement. We may have to look into similar thresholds or some measures to check the abuse," said the MCA Secretary.

Recently, the NCLT admitted an insolvency application against Umang Realtech brought about by two homebuyers, who had bought flats in one of the projects of the real estate company in Gurugram for Rs 1.01 crore each. However, the NCLAT has asked the resolution professional not to form the committee of creditors until further orders and asked the homebuyers to settle the dispute with the builder.

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This insolvency resolution professional, Manish Kumar Gupta, had earlier told Business Today that homebuyers association moved the NCLAT against the NCLT order to initiate insolvency proceeding against Umang Realtech. He said he was confident that all flats in the project would be delivered in two-three months. The NCLAT has even asked the IRP to seek help from the suspended board of the company to ensure flats are delivered on time.

It is to be noted that homebuyers were given the status of financial creditors through amendments made in the IBC. In the original draft, there were no provisions for homebuyers to be treated at financial creditors. But this has not helped the homebuyers much.

So far, out of over 2,200 cases of insolvency admitted by the NCLT, close to 500 have been those of the real estate companies. Of that, only 164 cases have been closed so far (as on June 30, 2019), with most of them being liquidated. Of the 123 cases where a resolution was achieved under IBC, only one case is of a real estate company -- Vishwakrama Real Estate and Constructions. In the case of Vishwakarma Real Estate and Construction, all flats were delivered to homebuyers.

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