What Are IBBI’s Proposals To Improve Real Estate Firms Insolvency Resolution?

The Insolvency & Bankruptcy Board of India (IBBI) released a discussion paper with several proposals in order to amend the Insolvency & Bankruptcy Code (IBC) to enhance the insolvency resolution of real estate companies.

The insolvency regulator is seeking public comments on the proposals and the draft regulations by 28 November, according to the discussion paper posted on the IBBI’s website.

The discussion paper deals with the following issues being faced in insolvency processes of real-estate projects:

• Mandatory registration and extension of projects under Real Estate Regulatory Authority (RERA)

• Operating a separate bank account for each real estate project

• Execution of registration/sublease deeds with approval of committee of creditors (CoC) during corporate insolvency resolution process (CIRP)

• CoC to examine and invite separate plans for each project

• Exclusion of property in possession of homebuyers from the liquidation estate.

Committee Report On Real-Estate Projects

The IBBI said a committee formed under the chairmanship of Amitabh Kant on issues related to the legacy stalled real estate projects recommended that “the IBC needs to be reformed to better accommodate the complexities of the real estate sector.

Some of the recommendations related to reforms in the IBC are:

• Project Wise CIRP

  All projects need to be pre-registered with RERA. Since RERA registration is project-wise, this can be adopted under IBC.

• Transfer Of Ownership/Possession To Allotees

  The committee proposed that the IBC may enable resolution professionals (RPs) to transfer the ownership and possession of a plot, apartment, or building to the allottees during the resolution process. An option may also be given to allotees to acquire such units on ‘as is where is’ basis or on payment of balance required to complete the unit during the process. Houses which are under possession of allotees should not be included in the IBC process.

• Registration/Transfer of Ownership Where Possession Transferred

  Where possession of a plot, apartment, or building to the allottees have already been transferred, these transactions must be formalized through registration during a CIRP or a project-specific resolution process under the IBC.

The Colloquium on Functioning and Strengthening of the IBC Ecosystem in November 2022 recommended improving outcomes in real estate cases.

It recommended that the IBC may provide that a resolution mechanism tailor-made to address the needs of the real estate sector be specified with necessary variations from the CIRP, including project wise admission and resolution, delivery of completed house to homebuyers during CIRP and allowing homebuyers to become resolution applicants.

THE RATIONALE

The rationale was that a large number of real estate cases have remained unresolved for long period of time as the current framework of CIRP is not conducive to address the issues specific to the sector.

In real estate cases, corporate debtors have multiple projects that are at different stages of construction and several experiments have been attempted by courts to address these issues through reverse CIRP and project-wise resolution, according to the discussion paper. Thus, there’s a pressing need to have a separate resolution mechanism for real estate sector, it said.

The IBBI said these recommendations should be dealt through regulations to address the issues in insolvency processes of the real estate projects.

KEY PROPOSALS

Mandatory Registration & Extension Of Projects Under RERA

• Insolvency resolution professional (IRP)/resolution professional (RP) must register all real estate projects under RERA or to extend the registration of the real estate project under RERA, wherein the registration is expired or about to expire.

Separate Bank Account For Each Real Estate Project

• IRP/RP should operate a separate bank account for each project undergoing CIRP, in line with the RERA provisions for maintaining separate accounts for each project and to ensure transparency in the process.

Execution Of Registration/Sublease Deeds

• Allow RP to handover the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process, with the approval of CoC.

• RP, with the approval of the CoC, may also be permitted to hand over the possession of units to the allottees on ‘as is where is’ basis or on payment of balance amount, if any, after taking in to account the funds due and funds required for completing the unit in order to avoid delays due to unnecessary holds-ups.

Coc To Examine & Invite Separate Plans For Each Project

• CoC on examination, may direct the RP to invite separate plan for each project. It would also encourage the association of allottees of a real state project to bring their own resolution plan and resolve issues in a specific project.

Exclusion Of Property In Possession Of Homebuyers From Liquidation Estate

• Proposal to modify the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 for exclusion of assets, which are in possession of the allottee, from the liquidation estate.

The public can submit their comments on the IBBI’s website by 28 November.

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