Turning the table to home buyers’ favor, the Supreme Court has recently passed a historic judgement. In Pioneer Urban Land and Infrastructure Limited vs Union of India case, the SC has upheld the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, under which home buyers were brought within the ambit of ‘financial creditor’ under the Insolvency and Bankruptcy Code, 2016 (IBC).
The SC also held that the RERA has to be read harmoniously with the IBC and, in the event of a conflict, the IBC will prevail over the RERA. The ruling comes at a time when 220 projects with 174,000 homes are completely stalled in the top seven cities alone leaving buyers with an uncertain future.
What Is IBC?
Under the IBC, ‘financial creditor’ means any person to whom a ‘financial debt’ is owed and includes a person to whom such debt has been legally assigned or transferred to. In context of real estate, the SC emphasized the fact that since the amounts raised from home buyers contributes significantly to the financing of the construction of such flats/ apartments, home buyers are to be treated as financial creditors so that they can trigger the insolvency process under Section 7 of the IBC.
The SC also observed that the sale agreement between developer and home buyer would have the ‘commercial effect’ of a borrowing, which means that money is paid in advance for temporary use so that a flat/apartment is given back to the home buyer, Mondaq reported.
Not only this, home buyers being financial creditors are entitled to be represented in the Committee of Creditors (CoC) through their authorized representative.
In simple words, home buyers will be treated at par with banks and institutional creditors and will be given priority while recovering dues from bankrupt or insolvent real estate companies.
The SC ruling has dismissed the plea of over 200 real estate companies who were pleading that the IBC amendment was illegal and unconstitutional.
Previously, only financial institutions were recognized as financial creditors, giving them the sole power to decide on the future of the company under CIRP (corporate insolvency resolution process), completely ignoring the rights of home buyers
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