New Delhi: The Union Cabinet on Wednesday approved a proposal to classify home buyers as “financial creditors” at par with lenders to help them quickly get refunds from companies that have gone bankrupt.
Homebuyers, who largely belong to the middle income group, now have a hope of recovering some, if not all, of their investment in failed development projects in the housing sector. Financial creditors like banks get to recover their dues first when a company or its assets are auctioned. Until now, home buyers were at the end of the queue when it came to making recoveries. But after the proposed changes are incorporated in the Insolvency and Bankruptcy Ordinance, homebuyers will have legal rights to initiate a resolution process and get their money back like just any financial creditor.
It, however, was not clear if the home buyer will have a right over the unfinished property he or she had invested in after getting back a part of investment from the bankruptcy proceeds. Kalpesh Mehta, Partner, Deloitte India, said the Ordinance protects the interest of homebuyers and allows them to equitably participate in the insolvency resolution process. “The new amendment benefits all those who have invested in housing projects that remain unfinished or whose builders are facing bankruptcy,’’ explains Mehta.
The government brought the ordinance after the Union Ministry of Corporate Affairs received complaints against bankrupt real estate companies from homebuyers. In these cases, despite paying full amount for their properties, people were not handed over homes as these companies were facing financial hardship. Many realty firms such as Amrapali and Jaypee Infratech are facing insolvency proceedings.
It is understood that the home buyers will be a part of the committee of creditors that approves a resolution plan and their voting rights will be in line with their advances. However, the final contours of the code needs to be seen. Briefing reporters after the meeting of the Cabinet, Union Minister Ravi Shankar Prasad said, “it’s a new legislation…the Cabinet has approved it”. He, however, refused to divulge further details citing constitutional provisions.
However, the proposal could negatively impact the lenders. The other key amendment which has got the Cabinet’s nod will allow promoters of defaulting MSMEs to participate in the resolution process. This would provide small-scale bankrupt companies with a chance to make recoveries.
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