A Litmus Test for IBC and Homebuyer Protection: Supernova Insolvency
Siddharth Singh, Student, Dharmashastra National Law University, Jabalpur
Supernova Insolvency
One of the subsidiaries of Supertech Limited (“the Realtor”), the Supernova project (“the Project”) involves two thousand homebuyers out of which half have already taken possession.[1] In 2012, the Project sought financial assistance of Rs. 730 crore to develop the infrastructure from a consortium of Banks led by Union Bank of India. A loan of Rs.150 crore was disbursed by the Bank of Maharashtra, a part of the Consortium of Banks, for the development of flat and hotels within the Project. The Supertech Realtor was supposed to pay back the loan in installments over a decade period. However, the developer defaulted the payment of the Bank of Maharashtra. Owing to this, Bank of Maharashtra filed for Corporate Insolvency Resolution Process (CIRP) against the Realtor in order to recover the defaulted payment. The CIRP of recovery of Rs.168 crore was admitted by NCLT Delhi. The counsel for Bank of Maharashtra putforth that the Realtor has ‘failed to maintain financial discipline’ and defaulted, leading to accumulation of high outstanding. The same was acknowledged by the Realtor. However, the counsel for the Realtor stated that they have submitted a proposal (a One Time Settlement) to consortium of lenders for settlement of dues. Although this proposal was ‘principally accepted’ by the lead bank i.e. Union Bank of India, it remains under scrutiny and consideration of the consortium of lenders. Highlighting the ‘principal acceptance’ of Union Bank of India, the counsel for Realtor argues that there is no purpose of a CIRP against it. The NCLAT has stated that it is appropriate to await the decision of consortium of members regarding the OTS proposal.[2]
A broader homebuyer’s conundrum
In the recent years, numerous builders have defaulted and delayed the timely posssession to the homebuyers. Owing to this, homebuyers are renderred helpless having no choice but to get stuck in legal battles in forums.[3] In the Supernova Project, close to two thousand homebuyers had invested. Half of whom have been waiting for the possession for over a decade. This case highlights some of the pertinent issues around real estate projects and the role of IBC in context of homebuyers.
There existed a lack of clarity regarding the classification of homebuyers under the IBC. Whether they would fall under the definition of financial creditors or operational creditors, their right to initiate CIRP, representation on Committee of Creditors, etc. Through an amendment in 2018, IBC under section 5(8)(f) recognised homebuyers as financial creditors.[4] This empowered them to initiate a CIRP against defaulting developers allowing them to have a say in the resolution process. Although this amendment brought a paradigm shift, there exists issues. Eventhough the homebuyers are recognised as financial creditors, they are kept at fourth place in the waterfall mechanism under Section 53 of IBC 2016 as ‘unsecured creditors’.[5] For homebuyers, this is a disadvantageous position which leaves them sidelined in favour of institutional creditors like banks etc.[6] In cases when projects are liquidated, homebuyer’s investments may not be fully recoverable as other secured creditors are priortised. Even after being recognised as financial creditors, the homebuyers continue to face challenges by being sidelined as unsecured creditors especially in liquidation cases.
Owing to the 2018 amendment, the homebuyers were included in the Committee of Creditors giving them a say in the resolution process. However, homebuyers have limited voting power compared to institutional creditors as voting shares are determined by the financial exposure.[7] Due to this, banks and financial institutions dominate the decision making process renderring homebuyer’s concerns as secondary. While homebuyers do have representation in the decision making process, their position may not affect decisions that could prioritise their interests like completing the project rather than selling off assets through liquidation.
A common issue faced in the CIRP is of delay in completion of proceedings. While the statutory timeline is to complete the proceedings within 330 days, the CIRP relating to real estate often exceeds this timeline owing to complexities of the real estate sector.[8] Homebuyers who are already stuck amidst default of builder face additional delays in recovering their investment. This can be starkly seen in the Supernova case where homebuyers have waited for over a decade after investing in the Project and to this day, they have neither received the possession nor their investment back. This exacerbates the position of a homebuyer who is left without clarity on when or even if they will receive possession.
There also exists an issue of jurisdictional confusion between IBC and RERA (also aims to protect homebuyer’s interest). While IBC focuses on homebuyers being a part of insolvency process, RERA focuses on completing projects and safeguarding individual rights.[9] This created a doubt for homebuyers unsure whether to approach NCLT under IBC or RERA for redressal. However, in the cases of Vishal Chelan v. Debashis Nanda andTarun Ahuja v. Puri Construction Private Limited it was stated that seeking remedies under RERA would not affect homebuyer’s capacity as creditors under IBC.[10] It was also stated that IBC is a special law that is applicable over various sectors, while RERA is a sector specific law, and therefore, IBC, being the special law, enjoys supremacy over RERA having an overriding effect over it. This is also backed up by Section 238 of IBC which states that its provisions shall have effect notwithstanding anything inconsistent in any other law, including RERA.[11]
An amendment to IBC in 2020 imposed a minimum threshold limit to initiate the insolvency process by homebuyers.[12] This was done citing the reason that there maybe hundreds or even thousands of allotees, and allowing a single person to initiate CIRP has the capacity to jeopardise the interest of other allottees. So a minimum limit of hundred homebuyers or atleast ten percent of the total homebuyers, whichever is lower, are required to initiate CIRP against the builders. This amendment was backed up by Manish Kumar v. Union of India.[13] While this threshold has been judicially validated, there exists small projects where attaining such threshold is difficult. In such cases, aggrieved homebuyers cannot initiate CIRP. This results in jeopardising interests of such homebuyers in small projects in cases of default.
Measures for homebuyers
Homebuyers invest alot of capital in the projects in hopes of getting timely possession from the builder. However, above mentioned issues act as roadblocks in homebuyer’s way. Following are some suggestions for improving homebuyer’s position in relation to IBC framework.
Clearer guidelines as to prioritising homebuyers in the waterfall mechanism is necessary. As discussed earlier, mere representation of homebuyers in the insolvency process shall not yeild fruitful outcomes. The status of homebuyers as unsecured creditor has sidelined their position of repayment. The same must be addressed and the homebuyers should be provided with more guaranted priority in the insolvency process.
The completion of proceeding within timelines is crucial. And therefore, faster resolution timelines for real estate project is something that must be ensured given the precarious position of the homebuyers. About the jurisdictional confusions between IBC and RERA, the courts have clarified the stance to an extent. However, these clarifications are not enough. There must be a stronger integration between IBC & RERA to prevent jurisdictional overlaps and further confusions. This measure will ensure smoother resolution for homebuyers without creating unnecessary procedural confusion.
[1] Supernova insolvency case: NCLAT to wait for lenders’ decision on settlement offer from Supertech Realtors, The Economic Times.
[2] Ibid
[3] Bharti, S. and Chadda, J. (2024) Journey of home buyers under IBC, Bar and Bench – Indian Legal news.
[4] Saxena, A. (2023) Complete Guide for Homebuyers under IBC, SignalX AI.
[5] Gupta, H. (2024) IBC laws – waterfall mechanism: Basic structure of the insolvency and bankruptcy code, 2016, IBC Laws.
[6] Supra. Note 4.
[7] Garg, M. and Majumdar, A.B. (2024) The homebuyers conundrum in real estate insolvency, Insolvency Law Academy.
[8] Supra. Note 3.
[9] Supra. Note 3.
[10] Are home buyers financial creditors under the IBC? (2023) Majmudar & Partners.
[11] Section 238, Insolvency and Bankruptcy Code 2016.
[12] Network, L.N. (2022) Minimum threshold for homebuyers’ insolvency process against builder Shields Frivolous & Avoidable Applications : Supreme Court, Live Law.
[13] Supra. Note 3.