MC EXCLUSIVE Project-wise insolvency in real estate may get statutory backing in new IBC draft bill

There is a pressing need for the IBC to include provisions to maintain consistency in real estate insolvency rules and regulations, officials say.

Keeping in mind the observations of the Supreme Court (SC) and to ensure consistency among legislation and regulation, the central government may include provisions of project-wise insolvency in the real estate sector in the revised draft of the new Insolvency and Bankruptcy Code (IBC), Moneycontrol has learnt from sources.

On September 12, the SC, in its Mansi Brar judgement, had directed the Insolvency and Bankruptcy Board of India (IBBI) to frame specific guidelines to ensure real estate insolvency cases are examined on a project-specific base as a "matter of rule".

"Because, there is no statutory backing of the project-wise concept in IBC, a blanket approach can’t be applied to all cases. Even if regulations or judicial directions permit it, the same can be challenged in courts, because IBC doesn’t recognise project-wise insolvency in real estate," a source familiar with the deliberations told Moneycontrol.

"That’s why, there is a pressing need for the IBC statute to include such provisions to maintain consistency in the law, the regulations, and court directions," another person said.

At present, according to IBC rules, if any project of a real estate company is declared insolvent, the whole company is dragged into the insolvency process. This was seen in the case of Jaypee Infratech and Amrapali Group.

However, due to judicial interventions, there have been cases where project-wise insolvency proceedings were directed by courts, even when the full company was pushed into the process. In the 'Supertech vs Union Bank of India' 2024 case, the National Company Law Appellate Tribunal (NCLAT) directed the resolution professional (RP) to constitute the Committee of Creditors (CoC) specifically for the “Eco Village-II” project.

Additonally, in 2024, the IBBI had brought in a regulation, which had clarified that the RP, with the approval of CoC, may invite a separate resolution plan for each real estate project or group of projects of the corporate debtor (or real estate promoter).

But since the IBC doesn’t permit this categorically, this concept has been frequently challenged in court proceedings, sources said. "This is precisely why a need for uniformity is needed in rules, pertaining to real estate insolvency," the first person quoted above said.

"IBC, as an Act of Parliament, carries greater legal authority and shields the process from judicial challenges that could arise if such a substantive change were introduced merely through regulations," notes Kalpit Khandelwal, Partner, Aekom Legal.

"Codifying it in law will create a uniform, stable framework which is vital for protecting creditor and homebuyer confidence," he said.

‘Disagreement’ within the government

That said, there are sections within the government, which don’t agree with the inclusion of project-wise insolvency in real estate in the statute, as they feel the RERA Act, 2016, contains sufficient clauses to deal with this issue.

Since the real estate sector is, to an extent, associated with financial irregularities and black money, some officials feel that giving a statutory backing to project-wise insolvency might give fraudulent promoters an easy way out to push their bankrupt projects towards the insolvency process, which will later grant it legitimacy.

"The IBC shouldn’t be used to grant legitimacy to a project, which might have been built through black money. Since RERA (Real Estate Regulatory Authority) is already dealing with completion of stalled projects, why should IBC be dragged into it,” a third source told Moneycontrol.

Section 8 of RERA Act, 2016, allows the authority to come up with a plan, in consultation with the government, to complete the remainder of the construction and development work of a stalled real estate project. In August 2022, UP RERA reported the completion of Jaypee Greens Kalypso Court, making it India’s first successful project under Section 8.

Some experts, however, say that project-wise resolutions entail strict deviation from the current collective framework of creditors, assets, liabilities, and distribution, as it is posed with many operational challenges, such as requirement of separate COC constitution, identification of separate asset/liability structures, etc which strike at the root of such fundamentals.

“These challenges also invite vulnerability to other central Acts, with which IBC has an interplay with, like RERA and Prevention of Money Laundering Act (PMLA); and hence a statutory backing to the asset or project-wise resolution idea is instrumental to the efficient implementation of the guidelines or regulations,” said Anjali Jain, Partner, Areness – a Delhi- based law firm.

FAQs

What is IBBI?

It is the apex body responsible for implementing the IBC. It regulates the entire ecosystem, including the processes (like Corporate Insolvency Resolution Process - CIRP) and the professionals (Insolvency Professionals - IPs). It lays down the regulations, enrolls IPs, and ensures the smooth and ethical functioning of the insolvency framework.

What is CoC?

It’s a committee primarily comprising financial creditors of the corporate debtor. The CoC holds the ultimate commercial wisdom in the process. Their key functions include: (a) appointing the Resolution Professional (RP), and (b) approving the Resolution Plan (or deciding to liquidate), with a 66% majority vote.

Q. Who is resolution professional?

An individual who is appointed to manage the affairs of the corporate debtor during the insolvency resolution process. The powers of the company's Board of Directors are suspended and vesed in the RP.