Spend ₹25,000 to have your real estate firm’s CEO changed

Last week, the Supreme Court held that homebuyers were at par with any financial creditors and therefore, can initiate bankruptcy proceedings against a real estate company if it fails to deliver homes as promised.

Homebuyers need to pay a court fee of just ₹25,000 and file a petition to trigger the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT), which promises to resolve issues in a time bound manner. Lawyers say NCLT proceedings can deliver verdict in six months compared to several years in high courts.

The SC was hearing a petition from real estate companies that did not want the amendments to the (IBC) to be put to force. They argued that they were already covered under the Real Estate Regulation Act (RERA), the industry regulator which laid down several rules for the conduct of real estate companies two years ago.

The SC said that RERA was only an additional remedy and was meant to regulate the industry, whereas the IBC had overarching power over public and private limited companies. In short, in matters of default, the IBC will have a final say over other regulation. “This judgement will continue to push forward the ease of doing of business in the country as the IBC is a time bound process guaranteeing results to petitioners. Resolution is usually in months and not in years as in courts,” says Shohit Chaudhry, Advocate-on-record, Supreme Court of India, who represented 30 homebuyers.

Just as homebuyers will qualify as financial creditors, suppliers will be treated as operational creditors and they too can trigger the IBC by filing a petition against real estate companies. “Principally, I agree with the judgement. But,operationally we will need to figure out the modality of how the homebuyers will have to be organised to file such a proceeding. I am sure it will evolve,” said a senior executive with a housing finance company, who did no wish to be named.

The process is simple. The aggrieved home owner starts by filing a petition to trigger the IBC in one of the 13 cities where NCLT is currently available. It is not mandatory to engage a lawyer. The NCLT will then appoint a insolvency resolution professional (IRP) who will invite claims from all the corporate debtors to the real estate firm. In the interim, all transactions will be permitted only with the sanction of the IRP.  A committee of creditors will then replace the management of the company and run it until the issues are resolved, which will be done within 30 days of appointment of the IRP. “The intention of IBC is not to take down the real estate company but bring in a change in management to resolve issues petitioned before it,” says Chaudhry.

To avoid spurious and mischievous claims, the SC has put certain safeguards for companies. If the homebuyer did not pay their dues on time, the petition will be weakened substantially. If the homebuyer  is a speculative or corporate buyer who is trying to use the IBC in a fraudulent manner to coerce a real estate company, then the petition would not qualify. The court will also be lenient towards firms which have fulfilled most of their obligations.

The IBC code came into being in 2016 and the latest SC judgment brings into force a 2018 amendment to the Code. Since 2018, hundreds of homebuyers had filed petitions before the NCLT to trigger the Code but they were all stuck as the real estate companies had filed a case against the implementation of the amendment before the SC. A legal expert says that in the next 6-7 months, NCLT will hear these cases in the respective states and the amendment will be put to test.