To provide relief to homebuyers whose projects are stuck, the Insolvency and Bankruptcy Board of India (IBBI) discussion paper has proposed keeping properties that are in the possession of homebuyers from the ambit of liquidation. It has also proposed mandatorily registering projects under the Real Estate Regulatory Authority. The other three proposals include operating a separate bank account for each real estate project, executing registration/sublease deeds with the approval of the Committee of Creditors (CoC) during the resolution process, and allowing the CoC to examine and invite separate plans for each project.
Public comments have been sought from the public on these proposals until November 28.
Proposals expected to provide certainty and lead to early resolution of pending cases
Legal experts say that these proposals are well intended and well suited to serve the dual purpose of expediting the process while simultaneously being beneficial to innocent homebuyers. This discussion paper, inviting comments from stakeholders, in effect seeks to implement the recommendations made by the committee chaired by Amitabh Kant in relation to such stalled real estate projects.
Formal guidance from IBBI is expected to provide certainty and lead to uniformity in practice, which in turn may lead to value maximisation and early resolution of pending cases. Data shared by IBBI has shown that while manufacturing made up close to 38 percent of cases admitted for insolvency until September 2023 since the code came into existence in 2016, only 48 percent of the cases reached a resolution. Real estate, meanwhile, accounted for 21 percent of the admitted cases but only 15 percent of the resolved ones.
Stalled real estate projects create a three-pronged problem for homebuyers. In the absence of a fully constructed apartment, the homebuyer is required to pay his rent, EMI to his banker for his incomplete flat, and he is also required to be constantly negotiating with the builder to complete his flat. This discussion paper seeks to implement the recommendations made by the panel on stalled real estate projects chaired by Amitabh Kant. This essentially stems from the logistical impediments and shortcomings of the statutory framework faced by the insolvency processes of real estate companies, explained Abhirup Dasgupta, Partner (Insolvency & Restructuring), HSA Advocates.
Mandatory registration of projects with RERA to lead to greater transparency
The mandatory registration and extension of projects with RERA and the operation of separate bank accounts for each project will lead to greater transparency and efficacy in the entire process. The proposals for the execution of sale or lease deeds during the insolvency process and the exclusion of properties in the possession of homebuyers from the liquidation estate will provide a huge fillip to the rights of aggrieved homebuyers.
Lastly, as regards project-wise insolvency or reverse insolvency, it was always recognised by judicial precedents, but if the proposals are accepted and put to paper, they will also have statutory recognition, which was missing till now. All these proposals are well intended and well suited to serve the dual purpose of expediting the process while simultaneously being beneficial to the cause of innocent homebuyers, he added.
According to Ramakant Rai, Partner, Trilegal, who had handled the Jaypee case in the past, this is a positive development for homebuyers because it “gives them certainty and direction that completed projects will not form part of liquidation. It takes care of buyers who have already received possession of their units. To date, there has been no legislative backup for reverse insolvency, but guidance from IBBI will formalise the process and lead to uniformity.”
With this proposal, the Resolution Professional (RP) may invite a separate resolution plan for each real estate project or group of projects of the corporate debtor, as it is often seen that some resolution applicants are not interested in all projects and want to undertake some specific projects, the discussion paper said.
Finding project-wise buyers will bring about more flexibility. “With more than one buyer, there will also be competition. This may potentially result in value maximisation and early resolution,” he said.
As per the proposal by the IBBI, the RP is to hand over the property to the allottees through transfer during the resolution process with the approval of the CoC, which constitutes 60 percent of total votes, where the allottees are required to pay all applicable charges or do all the compliance as per the terms of sale.
This is a positive move, as currently, the moratorium restricts the transfer of any asset by the corporate debtor. "Currently, there is confusion about whether transferring the flat at a time when the moratorium is in force amounts to a violation of the moratorium or not. This proposal seeks to give certainty to buyers as it allows for registration to take place in favour of homebuyers,” said Rai.
“Real estate insolvencies are particularly tricky to resolve, which negatively impacts the most vulnerable section of the stakeholders in the process – the homebuyers. Allowing the RP to hand over the project to homebuyers in specific circumstances prescribed is a step in the right direction,” said Aashiesh Agarwaal, Senior Vice President - Research and Investment Advisory, ANAROCK Capital.
Additionally, inviting project-specific resolutions will help get superior outcomes for all stakeholders, as different projects may be in different stages of development, or worse, in different cities and states. This prevents local developers from actively pursuing projects that may be situated in geographies outside their comfort zone, while developers operating at a national scale may not wish to engage in smaller or contentious projects, he said.
Further, a key hindrance to optimal outcomes in the resolution process is the lack of clarity on approvals from local government bodies. We believe that if the IBBI were to incorporate enabling provisions or guidelines to direct adjudicating authorities to actively cooperate with the RP by providing the requisite information, it would go a long way in positively impacting all the stakeholders, he added.
The proposed clarification in Regulation 36 A(4) for project-wise resolution would encourage many takers, as many times bidders are interested in a particular project of a real estate company instead of taking over the company as a whole. The concept of a project-wise Corporate Insolvency Resolution Process (CIRP) is not alien, as the National Company Law Appellate Tribunal (NCLAT) has allowed the same previously.
Even though the tenability of this proposition of project-wise resolution is under consideration before the Supreme Court, the proposed amendment comes at an appropriate time and would give statutory recognition to this principle.
The other changes suggested are in alignment with the objective to ensure the security of the flat purchasers, who have found it difficult in the insolvency regime to establish their rights under their allotment letter/sale agreement before RERA, in view of the moratorium placed, adds Sourasubha Ghosh, Partner, INDUSLAW.
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