Home Buyers are Financial Creditors

Author: Aastha Singh from Chanakya National Law University, Content Writer.

A financial creditor is person who provides loan to another person who is in debt and is legally bound to repay as result of legal transfer of funds.[1]The Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited vs. Union of India[2], upholding the constitutional validity of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Amendment Act) brought 'real estate allottees' (home buyers) within the meaning of financial creditors. In this context the Court relied on the recommendation made by the Law Committee and highlighted the significance of the contribution of these home-buyers in completing the construction of these flats and apartments.[3]

The Court re-affirms that he Amendments of 2018 does not infringe article 14 and 19 of the constitution of India along with article 300-A. As a result the home-buyers can too initiate proceedings on account of default on debt payments on part of the real estate developers.

Safeguards and burden of proof

Under section 7 of the Insolvency and Bankruptcy code (IBC) allottees of real estate are deemed as financial creditors and Home-buyers can plead change in the management of the developers and initiate insolvency. The amendment act of 2018 gave space to home-buyers to be represented by committee to safeguard their losses in cases of fraudulent acts for the real estate developers. senior Advocate Abhishek Manu Singhvi, argued that it would create a disbalance by giving powers to the home-buyers to initiate malicious suits against real estate developers. However, the bench comprising of comprising Justices RF Nariman, Sanjiv Khanna and Surya Kant rejected their pleas. Furthermore, the ruling may have upheld the law but had “at least read substantial safeguards for non-rogue builders in the IBC to enable them to take substantial and substantive defences and to preclude mischievous and trigger-happy home-buyers who may want to delay or sabotage a project by using the IBC as a threat”, Singhvi said.“This will give a huge arc of protection to builders whose defaults were involuntary or because of external incontrollable factors.

Section 5(8)(f) features the funds raised through the allottee to be deemed to have the commercial effect of borrowing. The court repaying on this, held that the contribution of the home-buyers cannot be neglected as their funds and advances acts as capital thus, they are deemed to be financial creditors.

However, the home-buyers do not have unprecedented power. A prima facie default case has to be established by the home-buyers and proved wherein it is seen that the default is related to amounts due and payable to allottee. Once the case is established it is the burden on the real estate developers to prove the accusation charges wrong. The developers have the defence to prove the lack of intention on part of the buyer to actually take the possession of the property and wrongdoer itself.

The Court further pointed out that the developers have the freedom to bring the attention of NCLT that the CIRP has been invoked maliciously and on fraudulent charges to check the frivolous accusation of the financial creditors i.e the Home-buyers on account of illustrations mentioned in section 65 of the IBC.[4]

The Supreme Court has held the IBC as a beneficial legislation that can be invoked by unsecure financial creditors. For the expeditors disposal of the cases the court also directed the government to provide adequate and required infrastructure to be established and appoint Adjudicatory officers and request authority in order to deal with the suits and appeal thereof.

In essence, the judgment re-affirms the rights of home buyers as financial creditors under the IBC. This might prove to be a genuine safeguards to the innocent home-buyers however, its validity is to be tested in the long run.

[1]See Section 5(7) of the IBC [2]Judgment dated August 09, 2019 in Writ Petition(s)(Civil) No. 43/2019 [3]Report dated March 26, 2018 of Insolvency Law Committee chaired by ShriInjetiSrinivas [4]

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