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Just a short while ago, the government passed the Bankcruptcy Act. Now, the banks or the companies themselves can declare themselves bankrupt and seek the help of the courts to resolve the situation.
Generally, it works like this – the bank (lenders) will go to court and seek bankruptcy proceedings against defaulters. The court appoints a person to go about how best to structure a deal within 90 days so everyone’s interest is best taken care off. If there is no solution within that time, then the company is liquidated.
Now, here’s where it gets interesting. Once the company’s assets are liquidated, the order in which various stakeholders have a right to the money from the liquidation is as follows:
- Workmen’s wages.
- Financial institutions dues.
- I am not sure about this one, but I think it is govt. dues.
- Home buyers.
The list goes on but I will stop at no.4. This means that the home buyers in a project are considered as ‘unsecured creditors’. In my opinion, if a builder had enough money to pay the workmen’s wages, loan EMIs to the financial institutions and govt. dues, they would not be declared bankrupt in the first place!!
So, there is almost no chance of recovery of the money paid to a builder if he goes bankrupt. Here I would like to bet that these guys would go bankrupt only after all the flat buyers have paid up more than 90% of the flat cost!!
The court recently passed an order that a restructing plan cannot be accepted without the consent of the home buyers. However, they still come 4th in the ‘rights’ list.
I have spoken to several friends of mine and invariably, the argument is “But I’ve invested with such a big builder and there is no chance he will go bankrupt!”
I know of a very well known builder who is advertising constantly for magnificient projects – there are full page ads in newspapers and ads on the radio. Sources have told me that the debt is above 4000 cr. Assuming the debt is at an ridiculously low interest rate of 12% per annum, he needs to make a profit of Rs. 40 cr per month, just to pay the interest. Add up the fixed costs, the advertising costs, profit margins, etc, and he has to have total sales of at least 100 cr, month after month. Not possible, at least in this market.
So, what’s the solution? Find out the company’s debt. That is not possible generally. So, go in for ready properties. Avoid under construction ones.
If you have to go in for under construction properties, then go in for companies which are listed. You can go on the internet and find out how much loans the company has taken. They have to declare it to the Registrar of Companies.
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(This document is regularly updated)
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