As the Supreme Court (SC) has upheld amendments to the Insolvency and Bankruptcy Code (IBC), giving the status of financial creditors to homebuyers and dismissing pleas of over 180 real estate companies, industry experts claim that this will see a major change in the behaviour of real estate developers as homebuyers can now initiate insolvency proceedings against them.
A group of real estate developers led by Pioneer Urban Land and Infrastructure had moved to the SC with petition that IBC amendment, which allows homebuyers to take a developer to a Bankruptcy Court was illegal and unconstitutional. They pleaded that remedies for homebuyers were there under the Real Estate (Regulation and Development) Act and the amendment to IBC only enables duplication.
“The SC has also ruled that genuine homebuyers can start insolvency proceedings against defaulting developers, further strengthening their position as creditors. This would mark the end of all developers who are not fully committed to serving homebuyers,” said Dhruv Agarwala, group CEO, Housing.com. According to rating agency ICRA, over 200 construction entities entered the resolution process under the IBC, 2016 till March 2019 and out of which only 59 entities have either achieved resolution or ordered liquidation.
There are 143 entities where the process was delayed due to the ongoing case. Now that the SC gave its verdict, it will speed up the insolvency proceedings against these developers.Agarwala said the SC verdict will not only ensure quicker resolution but also “make sure homebuyers get their due in case a development company is liquidated.
“The SC judgment upholding homebuyers’ status as financial creditors in insolvency proceedings against developers would act as a catalyst in changing India’s real estate sector for the better and shaping its future course. Because of the earlier position that placed homebuyers towards the bottom in the list of creditors waiting in line if a builder were to go insolvent, homebuyers challenged financial institutions’ move to drag developers to the NCLT,” Agarwala added
So far, financial creditors of 15 large companies, which entered the resolution process, have made claims worth Rs 1.3 lakh crore, according to ICRA. As of now, no resolution plan is in sight for all these large construction entities, which is likely to result in some of the companies being liquidated.
“In long term, this code may help in developing a structured financial model for the real estate industry where the interest of all the stakeholders will be guarded in all contingencies. We are hopeful that it will help in further strengthening the relationship between homebuyers and developers,” said Anshuman Magazine, chairman and CEO - India, South East Asia, Middle East & Africa, CBRE.