NEW DEAL - Escrow account: The silver bullet
The Greater Noida Industrial Development Authority (GNIDA) has asked developers to open an escrow account for each of their projects, to ensure that they spend money collected from homebuyers on the construction of those projects alone and not divert them.
The main objective of this is to regain confidence of homebuyers and investors, who have stopped paying instalments to developers owing to the delay in delivery of their flats, much beyond the scheduled dates.The usage of funds in the escrow account would be monitored by GNIDA.
The Delhi high court, on September 2, ruled on the same lines and asked Unitech and the buyers in its projects to work out a formula under which the developer uses 90% of the funds collected from buyers to construct the projects, if a majority in each of them vote in favour of completion.
The high court said that henceforth, the money collected from buyers for project completion must be deposited in an escrow account and only 10% of the corpus may be used to refund payment to those who want to opt out. The decision is expected to expedite the execution of projects.Under the scheme worked out by the court, Unitech will open an escrow accounts for each of its housing projects, where all the money collected from existing homebuyers or proceeds from fresh sales would be deposited. A representative of the buyers in each project will be one of the signatories of the account and funds would be used only in the construction of the respective projects.
A designated refund account would be set up for each project in which 10% of the proceeds from the customers will be transferred. The refund will be made over a period of 12 months from the date of approval of the scheme.
The scheme of arrangement will be monitored by the registrar of the court. A meeting of the buyers of each project will be convened by the firm under the chairmanship of a lawyer appointed for the purpose.
The court gave this judgment to protect the completion of projects from refund seekers--who sought liquidation of the company. The court said, “An order of liquidation of the company at this stage would not serve the interest of any stakeholder, including those homebuyers who have got a decree in their favour.“
The Delhi high court noted that homebuyers, who obtain a decree, would have to stand in the queue of unsecured creditors for seeking execution of the decree, as their priority and rights to secure execution of decree as unsecured creditors would stand much below workers, statutory creditors, or the secure creditors who have stronger claims on the company.
Considering the impact of liquidation, and the feasibility of the homebuyers getting possession of flats as promised by the developer, the court said it would be in the interest of homebuyers to work out a scheme through which the project is completed and handed over to buyers.
The court also doubled the penalty that was agreed at the time of sales if the project is delayed by over two years. If the delay is less than two years, the penalty has been pegged at 1.5 times of the agreed amount.
In order to reduce uncertainty, the court also said that all execution proceedings pending or which may be filed against the company before different forums, in respect of the projects of the company, would be kept in abeyance till further orders. However, cases in which directions have been issued or may be issued in future by the Supreme Court of India to the firm in this regard would stand exempted from the scope of this order, the high court said. The court appointed the registrar of the court to monitor the implementation of the scheme.
Rakesh Yadav, the CMD of Antriksh India, said that a similar provision should be included in the scheme of GNIDA as well, so that a person or a firm can't go to the court and get the escrow account confis cated, affecting the whole lot of buyers who have paid into the escrow account for the completion of their project.
“An idea to open escrow account for each project can certainly bring in fresh funds into the market. With an escrow account in place, the builder will not be able to draw money without the consent of the authority--GNIDA,“ Yadav said.
The scheme will help in the completion of projects. The revival of the real estate sector in the Delhi NCR, at present, may depend on this alone.