The misery of homebuyers, late filing of claims, and their validity.

The author is Akash Gulati, third year student, at Dr. Ram Manohar Lohiya National Law University, Lucknow.

Introduction

Out of 5,258 proceedings of insolvency admitted by the NCLT between the 1st of January and the 31st of March 2022, 1,051 were of real estate developers, out of which almost a quarter ended up in liquidation. The data, thus, suggests the huge quantum of grievance that exists in the said sector, and inarguably, out of all the stakeholders, the homebuyers remain the most vulnerable ones immediately after the workmen, and the quantum of investment of the homebuyers accentuates their peril in case of default by the real estate developers. Though the grievances of the homebuyers are redressable by the state specific RERA and Consumer Protection Act, there exists a third mechanism with the homebuyers to redress their problems, that is, by making use of the insolvency proceedings pursuant to their recognition as a financial creditor in Chitra Sharma v. Union of India followed by the 2018 Amendment, although at least 10% or 100 homebuyers of a particular project are needed to initiate insolvency proceedings against a real estate developer.

At the initiation of CIRP when a public notice is issued under Section 15, claims of creditors are invited; but in some scenarios in real estate cases, homebuyers are often unable to take note of the public announcement of CIRP owing to different factors. Additionally, in some cases, homebuyers, though being financial creditors and even in the knowledge of both the Resolution Professional and the debtor, are left out of the resolution plan. Hence, the situation of filing late claims arises. In this piece we look at the validity of late claims and whether they amount to extinguished claims.

Validity of late claims by homebuyers

The NCLT, Mumbai bench, in March 2023, in the case of Shankar Sawant & Anr Vs Mr. Arun Kapoor, dealt with the grievance of the homebuyers where the Resolution Professional had denied them inclusion in the Resolution Plan on the ground that their claim has extinguished on the ground that the Resolution Plan has been approved by the members of the Committee of Creditors (CoC) of the Corporate Debtor and presented to the tribunal for approval.

However, the tribunal iterated that since the presented plan to the tribunal still awaits adjudication, the claim of the petitioners is still acceptable, relying on the Supreme Court’s Judgement in 2021 in Ghanshyam Sharma v. Edelweiss Asset Reconstruction Co. Ltd., wherein, the court finalized the position holding that claims under resolution plan are only frozen when the resolution plan is approved by the adjudicating authority, wherein claims not part of the resolution plan stand extinguished.

In another recent case, the NCLAT, New Delhi, in June 2022, in Puneet Kaur v. KV Developers (“P uneet K aur”), tackling the question of extinguishment of claims upon expiry of the notice period, the tribunal opined that as long as the adjudicating authority has not approved the Resolution Plan, the claims of creditors cannot be said to be extinguished. Even if a claim is filed late and after the resolution plan is approved by the CoC, the finality of the same is to be determined by the Adjudicating Authority.

The tribunal went on to iterate that in absence of the inclusion of all the liabilities of the Corporate Debtor in the Information Memorandum, a CIRP would not be legitimate and complete. The whole idea of a resolution under the IBC is to take cognizance of the liabilities that burden the entity going through insolvency in order to effect just and fair payment to the creditors in case of liquidation.

Inclusion of debt from homebuyers as a liability by the resolution professional, an obligation or a discretion?

Although the Resolution Professional is not obligated to include homebuyers who have not filed their claims in the list of creditors, Regulation 36 of the IBBI obligates the Resolution Professional to include all the details of the corporate debtor regarding assets and liabilities in the information memorandum. It is the purpose of CIRP that all assets and liabilities of the corporate debtor are determined. Herein, it becomes obligatory upon the RP to include the homebuyers as well in the information memorandum, given that the legitimate records of liabilities towards the homebuyers (in terms of delivering possession against the money taken) exist with the builder.

The ease with which such liabilities are skipped from a resolution plan might be indicative of the foul objective of excluding homebuyers from the final list of creditors and reducing immediate liabilities of the debtor upon liquidation. The public notice of the CIRP is also often not able to bring to the notice of homebuyers that a corporate debtor is going insolvent owing to the logistical factors in play which were also discussed in puneet kaur wherein it was acknowledged that since homebuyers reside in areas away from the one where the public notice is being issued, it is very probable that the announcement of the insolvency is unreceived & unnoticed by the homebuyers.

Dealing with this very problem it was directed in puneet kaur that the inclusion of debt from homebuyers as payment for possession of flats shall also be included in the information memorandum and then consequently in the resolution plan.

Conclusion

Given the quantum and proportion of the insolvency cases of real estate developers amongst other classes of businesses going through insolvency, we see a peculiar yet common problem in resolution with regard to the bona fide claims of homebuyers. The current position of law sees homebuyers as financial creditors capable of initiating insolvency proceedings under Section 7 of IBC. However, keeping in mind the position and vulnerability of this class of creditors, it is pertinent that their claims be accommodated justly and their incapability of filing claims timely due to the reason of not being informed of the insolvency process be taken cognizance of.

The issue of not including the homebuyers in the information memorandum leads to the scenario of late claims in the first place. Hence, inclusion in the information memorandum would lead to the timely filing of claims by the homebuyers and the whole process would be expedited. A more careful approach on the part of the Resolution Professional would go a long way in expediting the process as a whole since the prospective claims by the homebuyers would be adjusted at the earliest.

Hence, it is upon the resolution professional to include the debt from the homebuyers toward the debtor in the information memorandum, so that when the resolution plan is being prepared, cognizance of all the liabilities is dealt with.