Dilemma of NCLT proceedings

Dilemma of NCLT proceedings
20/11/2017 , by , in EXPERT ZONE

It is essential for any regulation/code to take into consideration the fact that interest of all stakeholders is kept on an equal footing or at least an equitable resolution mechanism is envisaged. When the revised IBC was envisaged, real estate projects, particularly residential developments were not really in the thinking process. This is evident from the fact that homebuyers as a category have not found any mention under either financial or operational creditors. Considering the fact that the real estate sector is undergoing an upheaval due to regulatory changes and this is causing projects to default on loans and creditors are bringing in insolvency proceedings, the matter needs to be considered in a new light. While construction finance is involved, a residential project involves lifetime savings of a homebuyer and hence special consideration needs to be given in this context to their interest. Involvement of homebuyers on the resolution committee to protect their interests is a valid demand that has been upheld by the courts as well. This might also lead to most of the NCLT proceedings in such cases to be put on hold till the matter is suitably addressed and amendments made to the act accordingly.

The main issue as highlighted above involves the situation where homebuyers interest find no mention when insolvency proceedings are brought in case of a real estate project. There is thus a case that can be made for taking care of their interest as in the current scheme of the law, they have no rights during the resolution proceedings. Keeping in mind the fact that they have invested in the project, they should definitely have a share when the project is liquidated or have a say as to who should be brought in during the resolution proceedings as one having the ability and willingness to complete the project thus protecting their ownership rights.

There is a need for a fine balance here as creditors or primary lenders to the project have advanced a loan to the project under certain considerations where third party rights, as in the case of residential projects are being created. Primacy to homeowners can impair the ability of the lender to find an acceptable exit and is thus a business risk that might be factored in going forward when lending for real estate projects. This has the potential to impact the construction finance and lending market where lenders will have to be extra diligent.

A middle of the road solution is needed, though there is no doubt that homebuyers need to be defined as an interested party in insolvency proceedings concerning real estate projects so that their rights are adequately protected.

Other issue involving controlling the bidders to not include the original promoter and related parties also needs to be put in to context. Original promoters may be the only ones willing and ones with the ability to complete the project and at a time when homebuyers are looking to get their homes, the involvement of the promoter and related parties may be needed. A case by case basis or an evolving situation will determine the shape that the actual law takes, particularly in regards to real estate.

In the above context, the review committee’s role assumes great significance in regard to the cognizance of buyer rights that the courts have taken and the government is keen to protect.

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