Can Indemnity bond protect buyers if the company declares bankruptcy

Brief background:
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I am a flat owner in a low budget apartment complex in Bangalore falling under STRR planning authority which was previously named as "Anekal Planning Authority" from which builder got "Commencement Certificate" and approval for the project. 
The sale deed has been executed as per company's act 1961 and also, it is a RERA approved project. Also, there is one "RajKaluve issue" on the property for which builder has got stay order from high court and also, agreed to give indemnity bond to the association after it is be formed. But builder has not given any valid OC or CC from "STRR" and given OC from Panchayat and no "Completion Certificate" at all.
The builder is in a hurry to form an association and handover the property to association mainly because he is unable to collect maintenance charges to continue to provide basic services properly. The builder claims that the company hasn't made any profit from the entire project after selling all flats and he has no money to do maintenance and all accounts are audited. So I fear that the company might declare itself as bankrupt to discharge all liabilities putting all flat owners at risk. So I have a couple of questions. 

Questions:
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1.Will the indemnity bond still work and protect buyers if builder declares itself as bankrupt in future after association is formed or can the share holders be held personally liable to collect the compensation amount?

2.Can buyers force builder to give personal guarantee to be mentioned in the indemnity bond considering the current situation? If yes, then what documents we need to collect from the share holders?

3.Can a company simply declare itself as bankrupt to discharge all his liability or any legal action can be taken against the board of directors and share holders to protect buyers?

4.Even though if the company doesn't declare bankrupt, can the company give the reason that it has not made any profit and hence, can't compensate the loss for indemnity bond?

5.Can the buyers force the builder not to form any association on this ground since builder himself is unable to collect and do maintenance properly?

6.Builder is asking flat owners to collect maintenance charges or else he is telling that basic services can be affected for even for buyers who have paid maintenance charges. What action can be taken?

7.Can we force the builder to give separate indemnity bond for OC and CC due to lack of valid OC or CC from STRR? 

8.The builder will give indemnity bond to association for RajKaluve issue, but I fear that the association registration might be cancelled in future by which the bond might become null or void and hence, can I force the builder to issue separate indemnity bond only for my flat considering the current scenario along with personal guarantee documents of shareholders?

9.Finally, what actions can be taken immediately to protect buyers from any future unfavorable circumstances?

Asked 4 years ago in Property Law

Religion: Hindu

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4 Answers

1) if builder is declared insolvent you would not be able to recover compensation amount

2) you have to lodge your claim with official assignee if builder is an individual or insolvency professional for company

3) shareholders are not personally responsible

4) builder would refuse to give any personal guarantee

5)merely because project has not made any profit does not absolve the builder

6) builder is bound to form association

7) separate indemnity bond for your flat would not be issued by builder

8) once cooperative housing society is formed then society has to recover maintenance from members

Ajay Sethi

Advocate, Mumbai

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1. If the builder files an insolvency petition and declared insolvent as a result then this indemnity bond may not come to your rescue to recover money from him.

2. There is no provision for an indemnity bond to be accompanied with a personal guarantee.

3. With the recent spate of builders filing for bankruptcy in the National Capital Region, buyers have been left in a turmoil about the status of their under-construction homes.

If a builder is declared insolvent, IBC provides two options – resolution or liquidation. The resolution process will involve an analysis of the builder’s financial position to see if the business can be rescued or revived. If the first option is not viable, the builder’s assets will be liquidated and the proceeds will be used to clear the creditors’ claims.

It should be noted that IBC is aimed at protecting the rights of operational and financial creditors, and buyers are considered neither. The legislation does not have any clauses pertaining specifically to the rights of homebuyers when a developer becomes bankrupt.

4. The company cannot give any such flimsy excuse, it would not be legally acceptable.

5. It is the duty of the builder to form an association.

6. If the builder is bound to provide maintenance services till the formation of the association, he cannot escape the liability.

He can collect the maintenance amount from the owners.

7. No separate indemnity bond can be expected.

8. Indemnity bond for individual owner may not be entertained by the builder.

9. Formation of association may protect the interests of the flat owners.

T Kalaiselvan

Advocate, Vellore

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Respected Advocates,

Thank you for the answers. My next set of questions will be regarding "Occupancy Certificate(OC)" and "Completion Certificate(CC)". There is a lot of uncertainty because of change of the planning authority and after RERA came into effect during construction of the project. So I will appreciate if you can provide specific provisions and sections of acts for reference.

1.As per RERA definitions, in chapter 1, subsection p,q,zf, the OC and CC must be collected from "Competent authority" and in our case, STRR should be the "Competent authority" since builder took approval from "Anekal Planning authority(APA)" which is now called as STRR and the "Commencement Certificate" is from APA. Am I correct in understanding? I mean is STRR the "Competent authority" for our project as per law?

2.Builder has provided only OC from local Panchayat written in local language(Kannada) and hence, my question is "Is it possible to have 2 "Competent authority" for the same project at the same time"? I mean can local panchayat be our "Competent authority" while the project is still under STRR?

3.I already filed RTI to RERA and STRR. But RERA has rejected the RTI and I am waiting for STRR RTI reply. Is there any other way to confirm the validity of the OC and CC by visiting STRR office or something like that?

4.Can we force the builder to provide the order/notice/memo from STRR to ensure the validity of the OC received from Panchayat?

5.Are there any latest rules/laws relating the to above subject which can provide more information/clarity about OC and CC?

6.Do you have any other suggestions or advice which can be followed to ensure the OC and CC to be valid?

Asked 4 years ago

1) your understanding is correct

2) there cannot be 2 competent authority

3) you can visit competent authority office

Ajay Sethi

Advocate, Mumbai

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Talk to Advocate Ajay Sethi NOW!

1. If the APA and the STRR are one and the same then what is your doubt it?

2. Local panchayat cannot issue OC or CC.

The competent authority to issue is the STRR, hence you may insist the OC from the actual authority and not from the body which is not authorised to issue such certificates.

3. You can very well get the confirmation from the competent authority either filing an application through RTI act or by making a personal visit to the office concerned.

4. The OC issued by panchayat is not valid, hence you may reject the same if the builder thrusts it.

5. You can visit the government websites for relevant clauses.

6. An occupancy certificate is a document that is issued by a local government agency or planning authority, upon the completion of construction of a new project. The certificate is proof that the project has been built, by adhering to the applicable building codes, relevant regulations and laws.

The gram panchayat is not empowered to issue CC or OC.

T Kalaiselvan

Advocate, Vellore

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Talk to Advocate T Kalaiselvan NOW!

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Can Indemnity bond protect buyers if the company declares bankruptcy

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