Stuck in an ‘Assured Return’ real estate scheme? The Insolvency Code could help you

The builder community has for long been engaging in an ingenious mechanism of financing construction projects, by offering the public attractive ‘assured return’ schemes as flat / commercial real estate purchases. There are multiple cases of builders having raised large amounts of capital from buyers on the pretext of providing them such assured returns and subsequently being unable to meet repayment obligations. In this context, the Insolvency and Bankruptcy Code, 2016 (IBC) has been a real game changer.

The IBC is a forum meant to revive unviable borrower enterprises by allowing the market / lenders to redistribute the assets and resources of such businesses to other financially solvent businesses. In this regard, a builder who has raised funds from public (or causing them to take home loans to be used by the builder) by assuring them an attractive return under a real estate investment scheme will become a debtor to such people. Such buyers would qualify as financial creditors under the IBC since they would have essentially provided money to the builder at a fixed rate of interest, payable on monthly or annual terms or for an assured sum repayable within a certain time frame. The inability of a builder to repay such a buyer would make the builder a defaulting debtor under the IBC. The concerned judicial forum under the IBC has upheld this principle in multiple such cases in the recent past. Further, the recent amendments to the IBC that cover homer buyers within the definition of a financial creditor has also added to the protection to buyers in such assured return schemes.

Buyers in real estate projects who qualify as financial creditors can avail the options under the IBC to ensure that their funds are safeguarded, and amounts recovered to the extent possible. But, prior to initiating any action for default, they should ensure that they have the following in order:

  • all the relevant agreements and paperwork documenting the legal obligation of the builder to provide them the assured return on a regular basis;
  • proof of payments made to the builder entity undertaking the project;
  • the bank account to which funds were transferred was under the name of the builder entity executing the project;
  • clarity regarding the exact dates on which builder was due to make payments and dates of default by the builder (amount should be in excess of INR one lakh);
  • identify if builder has undertaken any large financing from institutional lenders for its project.

The concerned buyers should be mindful that lack of appropriate paper work could jeopardise their ability to recover or protect their investments. Once the above basic diligence is completed, the buyer can file an application before the concerned National Company Law Tribunal (NCLT) in whose jurisdiction the builder entity has its registered office. The application is essentially to declare the builder entity as insolvent i.e., being unable to repay its debts to the buyers. The effectiveness of the IBC in such situations comes from the fact that the promoters / management of the builder entity in question would lose control of the entity and the specific project, once the NCLT admits the application against the builder entity. Under the IBC an independent professional, selected by the concerned buyer, is required to take control of the errant builder’s company and project. Thereafter, a committee of the financial creditors, including the concerned buyer, would decide the fate of the builder’s business and project. The potential threat of losing control over the business or likely distressed sale of the business would certainly ensure that a wilfully defaulting builder will resolve the repayment concerns of the buyers. It is important to note that the IBC is not a forum for recovery of disputed claims or amounts. But, it is certainly the best forum to address repayment concerns of buyers arising due to wilfully defaulting, but otherwise financially solvent, builder entities.

Ajay Joseph

Partner, Veyrah Law

This article was first published in DNA Property. Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.