Impact on the Real Estate Industry and Consumers by the IBC Ordinance, 2018

By Vaibhav Gaggar

The recent ordinance dated June 6, 2018, has brought about some crucial amendments to the existing Insolvency and Bankruptcy Act, 2016 (hereinafter referred to as the ‘Insolvency Code’).

From a common man’s perspective, probably the most far-reaching and eagerly awaited amendment related to the provisions with respect to the rights of consumers in real estate projects. Being a hugely populist issue, by means of the amendment, the government has not only placed flat buyers in the bracket of ‘Financial Creditor’ as defined under the Insolvency Code, meaning thereby that they are to be treated as persons to whom a ‘debt’ is owed under the Insolvency Code in the nature of a loan, but has in fact taken it a couple of steps further.

In order to understand the impact of the ordinance, the author is dividing the same into two broad heads. The first part shall deal with the issue of who all are going to be impacted and therefore, entitled to take benefit of the amendment ordinance and the second part shall deal with the interplay between the rights of the consumers under RERA and the Insolvency Act. The present article shall deal with the first part of the issue and shall be followed up with interplay issue shortly. 

WHO IS IMPACTED

While the general perception and stated objective of this particular amendment was to provide respite to flat buyers, thus seeming to signify that its consumers as understood under the Consumer Protection Act who can take benefit of the present ordinance, however, a closer scrutiny of the various provisions would show that all purchasers of real estate as envisaged under Real Estate (Regulation and Development) Act, 2016 (16 of 2016) (hereinafter referred to as ‘RERA’) as juxtaposed from merely purchasers of real estate who bought the property for non-commercial purposes (under the Consumer Act) would get the benefit of this amendment. Succinctly put –

• buyers of commercial and industrial properties also seem to have been included within the definition of financial creditors along with flat buyers
• second buyers or properties which are purchased in resale are covered within the said definition and
• the rights of the allottees would not be restricted to just the flats or office/ commercial space but that right seems to have been extended to and includes common areas, development works, all improvements and structures thereon, and provision of all easement, rights, and appurtenances belonging thereto.

By virtue of the present ordinance an explanation has been added to to the definition of “financial debt” given under Section 5(8)(f) of the Insolvency Act, whereby ‘financial debt’ has been redefined to include ‘allottee‘ as defined under section 2(d) of RERA and ‘real estate project’[1] as defined in section 2(zn) of RERA. When one sees the definition of ‘real estate project’, ‘allottee’, ‘apartment’ and ‘building’ under RERA it becomes clear that –

• an ‘allottee’ means a person to whom a ‘plot’, ‘apartment’ or ‘building’ has been allotted. ‘Apartment’ itself has been defined under section 2(e) of RERA to include a flat, office etc whether for a residential or commercial purpose.
• Similarly ‘building’ under section 2(j) of the RERA has been defined to include any structure whether for residential or commercial use. The fact that the legislature has chosen to include the definition of allottee from RERA rather than any other legislation, would necessarily require that the terms contained in section 2(d) of RERA such as apartment, building etc would also have to be taken as defined in the RERA itself and not from any other legislation. It would clearly indicate therefore that residential as well as commercial properties are included within the meaning of the term allottee.
• Since the term ‘allottee’ as defined under section 2(d) of RERA itself provides that it includes a person who has subsequently acquired the said allotment through sale or transfer clearly suggests that second allottees or person buying it in resale are also to be considered as ‘financial creditors’ for the purpose of the Insolvency Act.
• A reading of the definition of ‘real estate project’ as defined under section 2(zn) read with section 2(d) of RERA seems to indicate that not only the apartment, plot or building but even the common areas, other development works, improvements, structures and easementary rights and appurtenances belonging thereto get included within the ambit of rights being protected for the allottees.

The fact that consumers can now approach the NCLT for insolvency proceedings or be treated as financial creditors’ in case an Insolvency Resolution Professional has been appointed is a huge step forward for safeguarding the interests of the consumers. Having said that, there is an interesting and complex relationship between the rights of the Allottees/ Consumers under Insolvency proceedings as compared to RERA and another issue that would need to be resolved is at what stage and under what circumstances would an Allottee be permitted to invoke the provisions of the Insolvency Code considering the definition of ‘default’ as provided under the Insolvency Code as compared to RERA. The author shall be tackling the said interplay between the two acts and their impact on consumers in the following chapter.

Vaibhav Gaggar is the Managing Partner at Gaggar & Associates.