Relief for homebuyers: Allotted flats will not be part of liquidation process

In a relief to homebuyers who had been given possession of their homes but were left in a lurch after the builder’s company was declared insolvent, the Insolvency and Bankruptcy Board of India, in its latest amendment, has said that assets in a real estate project that have been handed over to the allottees would be exempted from liquidation process.
The notification dated February 12 said: “For the purposes of clause (e) of sub-section (4) of section 36, wherever the corporate debtor has given possession to an allottee in a real estate project, such asset shall not form a part of the liquidation estate of the corporate debtor.”
This means that properties where the allottee has taken possession should be excluded from the liquidation estate. This means that a house already allotted/given possession to a buyer will remain with him even if the builder faces liquidation. Prior to this amendment, the buyer who had received possession of the property was bundled with buyers who had not in the event of the builder becoming insolvent and was left with no remedy except being entitled to a refund.
To iron out this anomaly, the IBBI has come up with these amendments that will ensure that such flats (for which possession has already been offered, but no conveyance deed has been executed or registered) are kept out of the liquidation estate. These regulations will apply prospectively and they will only apply if a company is undergoing liquidation, he explains.
Experts said that this amendment provides certainty to buyers that completed projects will not form part of liquidation. It takes care of buyers who have already received possession of their units. This may also lead to Resolution Professional (RP) inviting a separate resolution plan for each real estate project or group of projects of the corporate debtor, as it is often seen that some resolution applicants are not interested in all projects and want to undertake some specific projects.
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These amendments are important as thousands of homebuyers have in the past been stuck in a long-drawn and complicated legal battle after the builder went bankrupt.
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Real estate accounts for the second-highest number of insolvency resolution cases, according to the Insolvency and Bankruptcy Board of India (IBBI). The manufacturing sector has the highest share at 40 percent, real estate accounts for 21 percent, construction 11 percent, and trading sectors 10 percent.
Legal experts point out that the judicial pronouncements in case of real estate insolvency have been mixed. “This created problems that required immediate redressal,” said Bharat Sethi, Managing Partner, Sethi Law Chambers.
This was also part of the discussion paper that was floated by IBBI in November 2023. One of the issues in the discussion paper was exclusion of property in possession of homebuyers from the liquidation estate.
The cases detailed in the discussion papers included the matter of Tharuvai Ramachandran Ravichandran, RP JBM Homes Private Limited, NCLT Chennai Bench vide judgment dated 12th September, 2023 that has held that:
“Thus, in order to protect the interest of the homebuyers, and also in order to do complete justice and, keeping in view of the intricate and unique facts and circumstances of the present case, we are of the opinion that in the project ‘GRT Grand’, 71 flats that are sold, should be kept outside the purview of ‘Liquidation Estate’ (Excluded Assets) of both the Corporate Debtors.”
In another case dealing with M/s. Samruddhi Realty Ltd, several allottees (homebuyers) had entered into a sale agreement in 2011, making full payments, and had taken possession of the nearly-completed villas in 2016. These allottees filed an application to exclude the property in their possession from the Liquidation Estate and for its registration in their favor.
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Despite the fact that full payments were made by these allottees for these properties which were in their possession, NCLT ruled on May 25, 2023 that since no sale deed was executed, the property cannot be excluded from the Liquidation Estate. This was also affirmed by the NCLAT, highlighting that no security interest was created in favor of the applicants, and without a registered sale deed, they had no ownership rights, thereby denying them any relief.
Ambiguity concerning allottees who have taken possession of units before or during the corporate insolvency resolution process (CIRP) process has been resolved to a certain extent by this amendment, said legal experts.
“With this amendment, homebuyers rights are protected as the housing units that have received possession by the allottees would not be part of liquidation estate of the corporate debtor,” said Venkat Rao of the Intygrat law firm.
The challenge all along was that during the CIRP process, the resolution professional or the interim resolution professional could not alienate any property of a corporate debtor. There have also been instances wherein during the CIRP process, possession has been handed over to allottees by the RP/IRP but conveyancing could take place due to which the title of the units continued to rest with the corporate debtor, he explained.
The amendment to the liquidation process regulations of the IBBI carves out certain assets wherein the corporate debtor has already handed over the physical possession to the allottees in terms of their respective buyer agreements. “Typically, the possession of a built-up unit is handed over to the allottee after obtaining the occupation certificate of the constructed building, and the respective buyers having duly inspected their purchased units. Therefore, these amendments shall safeguard those categories of property buyers who are already in possession of their units, ”said Yudhist Narain Singh, Senior Partner, YNS and Associates.
The amendment is likely to benefit homebuyers who have been allotted the units/flats and are in possession of the same. Their interest shall not be impacted (even if possession is without registration with the registrar) and their units will not be made the part of the liquidation estate even if the corporate debtor/builder/developer goes into liquidation, explains Bharat Sethi, Managing Partner, Sethi Law Chambers.
“The regulation is in the nature of beneficial legislation and therefore it will have retrospective effect which means that the corporate debtor for which liquidation process is still on/ not completed as yet, the liquidator will have to re-draw the liquidation estate and exclude those flats that are in possession of the allottees, ensuring that the homebuyers cannot be asked to give up their flats,” he said.
In the current real estate scenario, it has become commonplace for builders to give possession to the allottees without actually executing the conveyance for the same. In this twilight period, if the builder goes into insolvency, such allottees are in a precarious position as the asset does not belong to them. In the event of the company going into liquidation, a homebuyer is left with no remedy and is at best entitled to a refund.
To iron out this anomaly, the IBBI has come up with these amendments that will ensure that such flats (for which possession has already been offered, but no conveyance deed has been executed or registered) are kept out of the liquidation estate. These regulations will apply prospectively and they will only apply if a company is undergoing liquidation, said Abhirup Dasgupta, Partner (Insolvency & Restructuring), HSA Advocates.
“The amendment is universally applicable, encompassing both current and future corporate debtors. Its implementation date is set for February 12, 2024, rendering it retroactively effective. Consequently, this amendment extends its impact to all individuals in the housing sector currently navigating matters under the Insolvency Code,” said Asha Kiran Sharma, Partner – Real Estate, King Stubb & Kasiva, Advocates and Attorneys.
This is indeed a much needed amendment to protect the interest of allottees but it should be extended to all the allottees whether or not to whom possession has been offered or not, said Aditya Parolia, partner, PSP Legal.
This issue has already been highlighted by NCLAT judgments as the value of these assets might not be much to the secured creditors but to an allottee it means his/her entire life savings. Hence, all attempts must be made to protect the interest of the homebuyers and also see that stuck projects are completed.
“Liquidation process cannot be at the cost and interest of investments made by homebuyers. Haircuts can easily be absorbed by financial institutions and they can secure their interest from other assets of the company,” he said.
The amendment must not be misused by defaulting developers who may hastily call on property buyers to take possession of their unfinished units, especially when these units have not been completed as per the specifications promised to the buyers. “This is an existing issue in most Indian real estate markets. The corporate debtor may attempt to segregate these assets as per their own requirements, if insolvency proceedings are initiated against them, which may lead to property buyers being shortchanged,” warns Yudhist Narain Singh, senior partner, YNS and Associates.