The recent Supreme Court order could bring relief to homebuyers whose real estate company is facing insolvency proceedings
Recently, the Supreme Court, in an order which could bring relief to homebuyers whose real estate company is facing insolvency proceedings, has ruled that the Noida Authority would be treated as an operational creditor, and not as a financial creditor, unlike homebuyers in the Insolvency and Bankruptcy Code (IBC) proceedings.
The Bench of Justices K M Joseph and Hrishikesh Roy in its 186-page verdict rejected the plea of the New Okhla Industrial Development Authority (Noida) seeking the status of financial creditor in the IBC proceedings in case the builder defaulted in paying the amount to it as per the lease agreement.
The authority had approached the apex court after both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) rejected its plea.
What Are Financial Creditors?
According to the real estate legal experts, a financial creditor is basically any person to whom a financial debt is owed, which among others, includes monies borrowed from banks and other financial institutions. Since June 2018, the dues of homebuyers (allottees) have been brought under the purview of ‘financial debt’.
Notably, under the Insolvency and Bankruptcy Code, 2016, a “creditor” means any person to whom a debt is owed, and includes among others, a financial creditor, an operational creditor, a secured creditor, and an unsecured creditor.
“We would think that having regard to the fact that both the NCLT and NCLAT have proceeded on the basis that the appellant (NOIDA) is an operational creditor, we need not stretch the exploration further and pronounce on the questions, which may otherwise arise,” the Bench of Justices K M Joseph and Hrishikesh Roy said in their verdict.
“We would proceed on the basis that, while the appellant is not a financial creditor, it would constitute an operational creditor,” it said, while dismissing the appeals.
What are Operational Creditors?
An operational creditor is a person to whom ‘operational debt’ is owed, which inter alia includes dues arising out of business transactions. “Like other financial creditors, the homebuyers can initiate corporate insolvency resolution process as per the terms of the IBC, and have identical rights,” says Harsh Arora, partner, Phoenix Legal, and a real estate lawyer.
In Which Category Homebuyers Fall?
Dhrupad Vaghani, associate partner, Economic Laws Practice, said that in light of the Supreme Court judgment in the case of Chitra Sharma v Union of India, homebuyers are classified as financial creditors, and accordingly, the amending act of 2018 made amendments to the definition of financial debt.
It should also be noted that while Section 5(7) defines ‘financial creditor’ as a person to whom a financial debt is due, besides an assignee or transferee from such person, Section 5 (20) defines the word ‘operational creditor’, which means a person to whom an operational debt is owed, and includes any person to whom such debt has been legally assigned or transferred.