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Tribune Realty

Posted at: Jun 2, 2018, 12:13 AM; last updated: Jun 2, 2018, 12:13 AM (IST)

Legal leverage for homebuyers

Geetu Vaid

IF you are among thousands of prospective homebuyers who have deferred a decision to purchase a house for the fear of losing hard-earned money and savings because of delayed projects or “rogue” developers, then it’s time to breathe easy.  With the Cabinet approving the Ordinance amending the Insolvency and Bankruptcy Code 2016 (IBC) last week, homebuyers are on a firmer and stronger turf now.  Post this amendment, a homebuyer will be at par with banks and other creditors in case of recovering dues from  developers gone bankrupt. Effectively, the homebuyers are now in the category of ‘secured financial creditors’. Thus, a homebuyer stuck in an incomplete housing project or in a situation where the developer has declared bankruptcy will be able to participate equitably in the insolvency resolution process. “This is a great news for homebuyers. Previously, if any realty firm went through bankruptcy, the priority of recovering dues from the project was first given to financial creditors such as banks and institutions, followed by operational creditors such as vendors and employees. Homebuyers were widely regarded as merely consumers and did not specifically fall under the liquidation claim waterfall, placing them at a disadvantageous position and exposing them to significant risk upon investment in under-construction projects”, says Ramesh Nair, CEO & Country Head, JLL India. Till now for a homebuyer just had the lengthy litigation way to recover (if any) the money paid to a developer caught in a financial mess. “The banks were the first to ‘collect’ their dues till now. But now whenever the banks go to recover their dues from a bankrupt developer, they will have to sit with the homebuyers to negotiate a suitable amount that will then be recovered from the developers’ assets”, says Amit Modi, Vice-President CREDAI Western UP and Director, ABA Corp. Terming it to be another step towards a “buyer-friendly” realty sector NAREDCO Vice-Chairman Parveen Jain says, “The buyers will not be left in lurch and will have some guarantee or something to fall back upon in case the developer fails to fulfill his commitment to complete a project”.

Assymetrical gains

As the initial euphoria among homebuyers settles, there emerge a number of issues wherein there is still a lack of clarity.  “Even though the homebuyers will be a part of the Committee of Creditors, whether they will be able to get the equivalent relief which they are expecting is a question which will only be answered when any such resolution plan is approved or comes for approval”, says Manoj. 

While the homebuyers can rejoice, it is not a happy situation for lenders of developers.  Ind-Ra points out that the homebuyers’ sharing the same status with financial lenders can negatively impact the lenders as the recovery proceeds will now have another layer of distribution, which was not factored in at the time giving loan to the developer.  This would effectively increase the realised haircuts for the financers. In other words, without changes in probability of default, loss given default (LGD) could increase for the financiers. Considering the fact that in case of financial creditors like banks, the outstanding interest is also considered as part of 'debt' and any resolution plan should take care of it also unless the bank itself considers forgoing it or agrees to have a haircut on the interest portion. “However, in case of homebuyers, especially those who have taken loan from the banks to buy the property, whether the interest portion paid on the said loan will be considered as the debt is still not clear”, says Manoj. 

This move will affect the rights of the existing financial creditors also. As Manoj puts it — “Now they have to share the privilege they were enjoying as part of Committee of Creditors with Homebuyers also. It will further affect them if the proposal given by the Insolvency Committee to keep the percentage of approval in CoC as 66 per cent instead of 75 per cent”. 

The fact that most homebuyers are interested in getting the apartment rather than the money will also have to be factored in. “The amount repaid may not enable a buyer to purchase a house in the current market due to price appreciation so a number of buyers will prefer an arrangement wherein the developer is made to complete the project rather than moving under IBC”, points out Amit Modi. 

With homebuyers getting an equal status as banks/lenders the chances of lending yields getting repriced have also increased. Thus, the borrowing cost is likely to increase for the developers. And this may effect the real estate prices at a later stage.  Ind-Ra believes developers would absorb the likely incremental costs, with limited market readiness to absorb price rise as well as the existing inventory dynamics in most markets. This would also affect private equity financing, given their structure of funding.

The major benefit for the realty market would be that developers will be more wary of siphoning off funds from one project to another, and would focus on completing the projects in time. “With homebuyers now getting the opportunity to claim their dues from builders, there is an even stronger burden on developers to deliver on time. We will now see builders become more cautious while taking funds from financial institutions and banks, as they would now also be accountable to homebuyers as well as the financial institutions if their business goes belly-up”, says Anuj Puri, Chairman, ANAROCK Property Consultants.

What is ‘Form F’

On August 16, 2017 Industrial Investment Bank of India (IBBI) issued a new form ‘Form F’ for those creditors which fell neither under the category of financial creditors nor under the operational creditors. It was essentially released to cater to the interests of homebuyers. However, the lacuna of their priority order during the process of liquidation was not answered by this form and it is expected to be resolved by the latest proposed ordinance.

Impact on existing cases

The plight of homebuyers of Japypee Infratech projects after the developer declared bankruptcy has hit the headline much too often in recent months. The homebuyers of the Jaypee had approached the Supreme Court against the CIRP of Jaypee with the demand to stay the process as homebuyers would get nothing even if the resolution plan is approved or Jaypee goes into liquidation as in IBC there was no clarity as to which category of creditors they fell in. Whether the recommended amendment will salvage their investments or not is a major concern at the moment. According to Manoj Singh of Singh &Associates, “If the effect is been given retrospectively i.e. allowing the homebuyers to be part of the existing CoC of any corporate debtor going through CIRP then homebuyers of such corporate debtors, like in the Jaypee Infratech case, will also be part of the Committee of Creditors of Jaypee and they will have the say in the resolution plan which have to be accepted”.  

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