President okays ordinance, home buyers now have share in auctioned assets of bankrupt realty firms
Being treated as financial creditors brings home buyers at par with banks and other institutional creditors as they would now have a share in the proceeds earned by sale of assets of bankrupt real estate companies.
Homebuyers of insolvent real estate companies such as Jaypee infratech will get the status of a financial creditor as President Ram Nath Kovind on Wednesday promulgated an ordinance to amend the Insolvency and Bankruptcy Code — a move that protects them and their investments.
The move comes as a major relief to homebuyers who will now have a place in the Committee of Creditors (CoC) and be a part of the decisions on the future of the bankrupt real estate developer.
Being a financial creditor also empowers a homebuyer to take action against errant real estate developers, said a press release issued by the government.
“Whether they are secured or unsecured financial creditor, will depend on how the homebuyers fight their case,” said Injeti Srinivas, secretary, ministry of corporate affairs.
More than 31,000 homebuyers have been affected by insolvency proceedings against Jaypee Infratech and Amrapali. Their vulnerability stemmed from the fact that they were not recognised as creditors under the Insolvency and Bankruptcy Code (IBC) to protect their investment.
“But rules about the mechanism through which representatives of homebuyers will secure a position in the CoC are being worked out,” Srinivas said.
The ministries of housing and corporate affairs have been trying to find a way to protect homebuyers since August 2017, after the Allahabad bench of National Company Law Tribunal allowed insolvency proceedings against Jaypee. The move affected thousands of people who had bought apartments from Jaypee.
“This provision on homebuyers will only affect those builders whose projects began before RERA kicked in. With this amendment, homebuyers will now have a say in the insolvency proceedings that were largely the prerogative of the financial institutions so far,” said Saurabh Kalia, an insolvency expert.
The other change brought about by the ordinance is the amendment to section 29(A) of the Code, where a provision disqualifying existing promoters who have defaulted on loans from bidding for the company has been relaxed for small businessmen trying to keep their medium and small and medium enterprises (MSMEs) and financial institutions holding a non-performing asset (NPA).
The ordinance also lays down a procedure for withdrawing a case after it has been admitted for insolvency proceedings. And to encourage resolution of a bankrupt company within the stipulated time of 270 days, the ordinance has brought down the voting threshold for approving major decisions from 75% to 66%.
This ordinance was approved by the Cabinet on May 23 and is the second for the IBC that was enacted in 2016.