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Owning a home, for an average Indian, is a lifelong dream. There have also been numerous instances, where thousands of aspiring home buyers have suffered, owing to poor financial management on the part of developers, especially the unregulated ones. Insolvency proceedings initiated against such developers, also left home buyers in the lurch. As a result, a reform that was long overdue, was protecting the rights of house buyers, whenever a developer faced financial insolvency, as many developers relied on the funds collected from buyers to make progress on their projects. The funds collected from the home buyers, in fact, was the basic foundation on which several developers, who did not have access to credit and institutional investments, actually began work on the project.
The complexity arises, when there is a delay in the delivery of the apartment, leading to uncertainty for the anxious buyer. If this situation prolongs, which can potentially lead to an insolvency situation for the real estate developer, the buyers are their wits’ end. In order to protect the rights of the buyers, the government brought an amendment to the Insolvency and Bankruptcy Code (IBC), which put them into a category of creditors. It essentially means that the buyer will almost have equal rights, like any other creditor to the real estate developer. This new law is laudable, as it protects the rights of creditors. However, there are certain key points that buyers need to be cautious about.
1) The IBC law is still new
One must remember that the law is still new and one really does not know how it will actually come into force. While every legal case has a precedent, there is no example for this law which has come into force. There are also other specific laws, which govern the real estate sector. Hence, one does not know how this will have a bearing on the IBC.
2) Clarity on the legal status of various creditors under the IBC
Even though the buyers come under the umbrella of creditors, there is no clarity on what exactly their position will be. In short, it is not clear who gets the higher priority. There are already certain voices, which say that if the buyer is placed above the financial creditors like the banks, then, the sector may find it difficult to get funding.
3) The legal cost of cases under the IBC
While the law has been amended to protect the buyers, one must realise that the legal costs of deriving the benefit from the law, may turn out to be high. In legal cases, there are always expenses involved. Moreover, legal cases in the country are always a lengthy procedure. The other key point is that the battle is between the individual and a group, where the former is at a severe disadvantage in courts.
4) Other creditors coming into play
It is not possible that the IBC will be looked at, in isolation in the court of law. There will always be other laws, which will also come into force in a case. As the real estate industry requires the approval of multiple laws, it may not be a simple ‘open and shut’ case.
5) Availability of alternative consumer forums
It will also be important for the buyers to look at alternative forums that could provide similar relief, like the IBC. The consumer courts in the country are very active and have proved to be an important platform, to resolve the various grievances of consumers. This is an avenue that troubled apartment owners should actively explore.
(The writer is managing director, Salarpuria Sattva Group)