MC Explains: Will allowing registration of completed flats during insolvency process bring relief to homebuyers?

In what may bring relief to lakhs of homebuyers, the government is planning to bring in a proposal to allow registration of flats in real estate projects that are completed but undergoing insolvency proceedings.

In what may bring relief to lakhs of homebuyers, the government is planning to bring in a proposal to allow registration of flats in real estate projects that are completed but undergoing insolvency proceedings.

This is among the proposed amendments to the Insolvency and Bankruptcy Code (IBC), people aware of the matter said.

The corporate affairs ministry had floated a consultative paper on the issue in January this year and invited suggestions for it.

MC Explains

The consultative paper said, “It is observed that allottees may, during a CIRP or a project specific resolution process as being considered herein, request ownership and possession of a completed unit of the real estate project, which cannot be permitted during the moratorium under the Code. To benefit such allottees, it is being considered that section 28 of the Code may be amended to enable the RP to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the CoC.”

It should be noted here that homebuyers like banks are treated as financial creditors and, hence, form part of the Committee of Creditors (CoC). Authorities are considered operational creditors.

Legal experts said that if full payment for a completed housing unit has been received, registration of the flat in favour of the homebuyers should be permitted. If the Code is amended and transfer of ownership or registration is permitted with the permission of the CoC, it would bring relief to lakhs of homebuyers and the much-needed cash flows to the insolvent real estate firm.

For example, a homebuyer may have paid Rs 1 crore (which may be the entire cost of the housing unit) after he was assured by the builder that his unit would be registered within a month but unfortunately, insolvency proceedings against the developer begin as soon as he paid up the amount. There may be another buyer who may have paid Rs 40 lakh for an apartment in a project by the same builder where construction may not have begun yet.

“Both buyers are in the same boat once insolvency proceedings begin against a developer. Both have to wait it out for the entire insolvency process to be completed before they can get their units. An amendment to this effect wherein transfer of ownership is allowed during the moratorium phase will help buyers who have paid the entire amount,” explained Venkat Rao of Intygrat Law Offices LLP.

Another legal expert said in majority of the cases homebuyers may not want their money back but a roof above their heads. “Insolvency can take place at any stage – while the project is at an advanced stage, plinth level or when the offer of possession is due. If the Code is amended to allow transfer of ownership of property following approval of the CoC, buyers who were to receive their offers of possession when insolvency was declared will not have to wait until the entire IBC process is complete,” he said.

The authorities will also receive revenue through the collection of stamp duty, he said.

Another legal expert said while this is a ‘good’ proposal, it should have further relaxations. “It is a settled proposition under the law that if the insolvency Resolution Professional (RP) for keeping a company as a going concern during insolvency has to carry out day-to-day activities (which in real estate include registration of conveyance/sale deed), he should be able to do so without the consent of CoC,” said Piyush Singh of PSP Legal.

In one of the earlier cases, the National Company Law Tribunal (NCLT) principal bench had directed the RP to execute the sale deed for plot holders for a company that was under Corporate Insolvency Resolution Process (CIRP). Therefore, the provision of 66 percent consent of CoC should also be done away with, he added.

However, some experts see a few challenges.

“Even if this amendment were to go through, getting consent from 66 percent of the committee of creditors would be required for transfer of ownership to homebuyers. It may be a challenge if the majority does not comprise homebuyers,” said Surendra Raj Gang, Partner, Recovery and Reorganisation, Grant Thornton Bharat.

Other financial creditors such as banks and other financial institutions, which may be part of this committee, may not agree to give consent for the transfer of ownership unless their dues are completely paid off or the matter is resolved, he added.

A recent report by Grant Thornton has said that real estate cases admitted comprise nearly 23 percent of the total insolvency cases filed (518 out of 2,298). While the average of resolution plans approved in the real estate sector is about 13 percent of total approved cases (78 out of 611 cases have been resolved), the success rate has been low due to various challenges peculiar to the real estate industry.

The IBC was enacted in 2016, and in six years, it has evolved as stakeholders dealt with a large number of CIRP cases. Various revisions have been introduced, including the ones specifically catering to the challenges faced in distressed cases of the real estate sector, the report said.