The recently introduced Insolvency and Bankruptcy Code, 2016 (IBC), has been put to a real test with the admission of corporate insolvency resolution proceedings (CIRP) against Jaypee Infratech for defaulting on a loan from IDBI Bank.

The IBC aims to remove the bottlenecks and expedite the CIRP, with a paradigm shift from “debtor in possession” to “creditor in possession”. Caught between the conflicting interests of the debtor and creditors are a large number of home buyers, who are trying to identify their rights under the IBC. Classifying home buyers as “financial creditors” or “operational creditors” is important, as these creditors have varied rights both before and post CIRP.

Few home buyers have tried to invoke the IBC’s provisions against the errant builders. In Nikhil Mehta & Sons (HUF) & Ors v M/s AMR Infrastructure Ltd, the flat buyers sought to initiate CIRP under section 7 of the IBC as financial creditors. The National Company Law Tribunal (NCLT) dismissed their application, holding that the flat purchasers would not come under the category of financial creditor and arrears on “assured returns” would not fall under the definition of a “financial debt”.

Upon appeal the National Company Law Appellate Tribunal held that only the home buyers who had been guaranteed assured returns would fall under the category of “financial creditors” and their investments would be categorized as “financial debt” for the purpose of section 5(8) of the IBC.

Whether home buyers are classified as “operational creditors” was considered by the NCLT in Col Vinod Awasthy v AMR Infrastructure Ltd. The NCLT held that an operational debt would be confined to the four categories specified in section 5(21) of the IBC, i.e. goods, services, employment and government dues. It further held that since the debt owed to the home buyer had not arisen from any goods, services, employment or dues which were payable under any statute to the central or state government or a local body, the home buyers could not be classified as “operational creditors”.

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, enacted under the IBC, provide for the manner of filing of claims with the insolvency resolution professional. In the Jaypee Infratech case there was a lot of confusion on characterization of the home buyers and the form which was required to be filed by them. The home buyers argued that the builder was required to pay a penalty for the delayed possession and therefore they were entitled to returns on their investments, thus classifying them as “financial creditors”.

On 18 August this year, the 2016 regulations were amended to provide for submission of claims by creditors other than financial creditors and operational creditors in a new form (Form F) but the new form also did not provide for interest calculation.

It is largely a settled legal position that a home buyer is a consumer and not a creditor. The IBC characterizes creditors as “financial creditors”, “operational creditors” and now “other creditors”, but “other creditors” have almost no rights during CIRP and a much lower priority for repayment of dues.

Instead of dividing creditors into these three categories, the legislators could have broadened the definition of operational creditors. Currently section 3(10) of the IBC provides an inclusive definition of “creditors”. Defining “financial creditor” and then defining “operational creditor” as a creditor who is not a financial creditor would have eliminated a lot of the confusion which surrounds the characterization of creditors currently.

The first liquidation of a real estate company under the IBC has raised a lot of questions which lawmakers need to address, such as:

• Whether the third category of creditors includes home buyers;
• Whether creditors in the third category are entitled to initiate the insolvency process or be part of the creditors’ committee;
• Whether the assets (i.e. homes) purchased by home buyers will be included or excluded when the assets of an insolvent real estate company are liquidated;
• In the event of liquidation, what will be the priority for repayment dues to the third category of creditors in the waterfall under section 53 of the IBC;
• In the event that home buyers are treated as consumers only, whether the funds advanced by them and assets purchased by them from the real estate company will be covered under section 36 of the IBC?

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Rahul Sud is an of counsel. Satish Anand Sharma is a senior associate and a qualified resolution professional.