The Bankruptcy and Insolvency Act, 2018 collected the assent of President on 6th June. The alteration to the Code is offered about with an aim of balancing the interests of different stakeholders, particularly the interests of end users.
In the perspective of ruin proceedings of a firm involved in the real estate growth, these order benefits end users by treating the end users as the financial creditors under Code. Before the amendment, end owners are not treated as the financial creditors or operational creditors. Instead, they are treated as the unsecured creditor because they are not capable to start the insolvency proceedings in opposition to the defaulting developer. In the event of developer facing liquidation, based on liquidating waterfall, end users will get just the remaining proceeds once paying off the workmen dues, government dues, insolvency costs and financial creditors.
After the amendment process, the homebuyers are classified as the allottee under the ‘real estate venture’. These two terms come with respective meanings when defined under the (Regulation and Development) Real Estate Act, 2016 (RERA). Any cost increased from the allottee under this real estate venture is believed to be the amount having some commercial effect of borrowing process. Under the Code, hence, the cost paid by end users to the developer team will be considered as the financial debt as well as end users will be classified as the financial creditors. As financial creditors, the end users can individually or jointly file the petition for starting the insolvency proceedings in opposition with the defaulting developer team.
However, the alternation is classified the end users as financial creditors, the description of a term default vis-à-vis an end user is not amended. Thus, to detect exactly when this default happens, we will require taking recourse to the RERA. RERA’s section 18 offers an option to end users to either select the control of a residence or to look for a refund.
The section states that the developer team is responsible for refunding the cash received by it in respect of an apartment, with the interest amount, or it must pay the interest amount for each month of the delay till the ownership is fully handed over as per the demand of allottee. This section additionally contemplates the compensation amount to be fully paid to end users in certain cases where a real estate venture has any defective title of developer team do not discharge is obligations under the RERA.
Announcement to state rules adds to some clarity. For instance, the Rule 19 of Tamil Nadu (Regulation and Development) Real Estate Rules, 2017, recommends the timelines for repayment as well as lays down that this refund is given by developer team within ninety days from the time on that it turns into due. Hence, the default is said to happen at the end of ninety days from the demand date of refund of the interest amount turning into due.
Everything about financial debt
The financial debt is a term which is defined by Code. It is amended for including some amount increased by the developer team from the allotte under the real estate venture as well as these rates are actually deemed to include some commercial effect of borrowing. Hence, the transactions entered into by end users will developer team will fall under the description of a team ‘financial debt’ as well as default considered under RERA will enable end users to start proceedings under this Code.
After the beginning of insolvency proceedings in opposition to the developer team, the end users can submit the claim to a chosen interim resolution expert. Additionally, end users as the set of creditors are represented through the authorized agent at the events of Committee of Creditors. However the aim of this legislative process is a resolution as well as not a revival, it is likely for real estate development firm to go completely under the liquidation process. In this process, the spot of end users in liquidation waterfall is elevated, where they are treated on parity with other financial creditors.