Govt likely to amend insolvency code to enable project-wise resolution in real estate sector: Officials

Real estate accounts for the second-highest number of insolvency resolution cases, according to the Insolvency and Bankruptcy Board of India (IBBI).

The government is likely to amend the Insolvency and Bankruptcy Code (IBC), 2016, to enable project-wise resolution of real-estate companies. Discussions are currently on with the law ministry, senior government officials said.

“There is no project-wise resolution for real estate. Why should completed projects get into insolvency? It is part of the IBC amendment,” a senior government official told Moneycontrol.

“Real-estate companies have been there for 20-40 years. People are living in them. If projects under construction go into insolvency, all projects in which people are living can’t go into insolvency. In real estate, if project-wise resolution is not done, then projects in which people are living will go into insolvency. This should not happen,” he said.

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A case in point is the Supertech project in Noida. In May 2023, the apex court allowed a project-wise resolution of one of the projects in Supertech, Noida, which is facing insolvency. The Supreme Court (SC), however, permitted continued construction of other Supertech projects within the same compound under the supervision of an insolvency resolution professional (IRP).

The proposed IBC amendment is being finalised by the Ministry of Corporate Affairs, in discussion with the law ministry and other concerned ministries, another senior government official said.

The IBC amendment will help increase the chances of successful resolution because the focus will be on specific distressed assets rather than on the broader segment.

The proposed changes in the IBC allow a more targeted and efficient resolution of financially distressed real-estate companies. By allowing proceedings to be initiated only against specific projects that have defaulted, it could help to minimise the disruption to the company's operations and potentially preserve value for stakeholders.

Project-wise insolvency or reverse insolvency not a new idea

The concept of project-wise insolvency, or reverse insolvency, is not new in the real estate sector. This approach has already been adopted by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) in numerous matters. Protecting homebuyer interests have been the primary reason for this, considering their position in the number of creditors.

The Supertech case is an example.

Real estate accounts for the second-highest number of insolvency resolution cases, according to the Insolvency and Bankruptcy Board of India (IBBI). The resolution rate of real-estate cases is among the lowest, according to a joint report by property consultants Anarock and law firm Khaitan & Co.

The manufacturing sector has the highest share at 40 percent, real estate 21 percent, construction 11 percent, and trading sector 10 percent.

The IBC, which came into force in 2016, provides for a market-linked and time-bound resolution of stressed assets. The code has already undergone various amendments since then.