MCA looking to set minimum threshold for homebuyers initiating insolvency

The government is looking into setting a minimum threshold of allottees for homebuyers to be able to initiate insolvency proceedings against real estate developers according to a senior government official. Under the Insolvency and Bankruptcy Code (IBC), homebuyers are classified as financial creditors, which means that even a single homebuyer may be able to initiate insolvency proceedings against a real estate developer.

Corporate affair secretary Injeti Srinivas said on Tuesday that the ministry of corporate affairs had receive representations that there were a number of cases in the western and northern region " of some otherwise fairly well functioning real estate companies have been pulled to insolvency proceedings by single homebuyers who want to claims refund.

"If when there are 10,000 homebuyers ... a single person is able to dislocate a project when there is otherwise no issue then you may have to look at some threshold said Srinivas, speaking on the sidelines of an event commemorating the three-year anniversary of the Insolvency and Bankruptcy Board of India.


Srinivas said that the insolvency law committee would look into the issue adding that the companies act already provided for a 5% threshold for the inititation of a class action lawsuit and a threshold of 20% of shareholding for the initiation of a case of mismanagement or oppression of minority shareholders and that these thresholds may be used as a guide

"We may look at a threshold to build in those checks and balances by way of regulations or if necessary by way of amendment" said Srinivas.

Experts have welcomed this potential move stating that the current position of homebuyers gives speculative investors inordinate leverage of real estate companies

"One or two homebuyers should not be able to drag a full project comprising of hundreds of homebuyers into insolvency." said Manmeet Singh, partner at law firm L&L partners adding that there were cases in where construction was ongoing but single homebuyers had taken real estate companies to insolvency proceedings for delays of a few months.

Singh said that given the downturn in the real estate market some homebuyers had initiated proceedings in the hope of extracting refunds.

"While the developer must be penalised for the delay but the solution is not IBC" said Singh.