Changes Needed In Real Estate Sector IBC
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced with the aim to bring transformation in the insolvency and bankruptcy regime of India through timely resolution of the financially stressed entities. This was a much-needed reform as the earlier legislative framework was not only fragmented but also time consuming. At the time when IBC was legislated, aggrieved homebuyers across the country were facing difficulties in, getting the possession of their homes on time or executing decrees of consumer courts granting them damages. IBC together with Real Estate (Regulation and Development) Act, 2016 (“RERA”) brought a glimmer of hope for such homebuyers who could use it to put pressure on the developers for ensuring timely completion of projects. However, the struggle of homebuyers for getting the possession of their dream homes has not been easy and is not over yet. Initially, the status of homebuyers as financial or operational creditor was not clear. However, pursuant to some judicial interventions, an amendment was brought in IBC in 2018 whereby, the homebuyers were classified as financial creditors. Subsequently, to allay the fears of real estate industry and to avoid a situation wherein a single disgruntled homebuyer could approach NCLT for initiating corporate insolvency resolution process (“CIRP”), the IBC was amended to introduce a higher threshold of at least 100 allottees or 10 per cent of the total allottees whichever is less for initiating CIRP. Meanwhile, the NCLAT in Flat Buyers Association Winter Hills case came out with a new concept of ‘Reverse Insolvency’, wherein the CIRP was restricted to a particular project and the promoter of the corporate debtor was allowed to participate in the process as lender to complete the project. Recently, NCLAT had restricted the CIRP of Supertech to a single project. Due to frequent changes and the persisting confusion with respect to CIRP of real estate companies, the IBBI has invited suggestions from public for effective and expeditious resolution of real estate projects. Some of the suggestions that can be incorporated in the CIRP of the real estate projects are discussed below. The NCLAT in Winter Hills case came out with innovative idea of ‘reverse insolvency’ and restricting the CIRP to a single project. This would help in timely completion of the other projects which are not affected by delays. However, there are situations wherein within a single project, there are multiple towers (buildings) and some towers are ready for possession while others are not completed due to some reasons. In such cases, it needs to be seen if CIRP can be restricted to those specific towers only. Once the CIRP is initiated with respect to some towers, the resolution professional may consult with the management of the builder company and its promoters and take their help in completion of the project either by using the available funds for the project or the promoters may lend some money as happened in Winter Hills. Any profit generated through this may be used for paying other creditors and the rest may be given to the promoters. In case, the promoters are not in position to complete the project, the resolution professional may invite resolution plans for the project/tower and the selected resolution applicant should be given control and right to use the available funds in separate RERA accounts as provided under section 4(l)(d) of RERA and balance funds payable by homebuyers. Further, it may infuse its own funds for completion of the project. In case of excess funds, the remaining funds after the completion of project can be distributed amongst the creditors and the resolution applicant as per the resolution plan. In case of CIRPs that are limited to certain projects/towers, a legal issue that would be required to be resolved is pertaining to the claims of financial creditors other than allotees. In such cases, the claims can be limited to the loans availed by the corporate debtor for the specific project undergoing CIRP. Some concerns might be raised by banks and financial institutions in cases where the resolution plans do not provide for full payment of claims and/ or the banks have a floating charge over the entire assets of the real estate company. It is important to ensure that during CIRP, no homebuyer is allowed to back out from his commitments and must be made to pay full balance amount. In case any homebuyer refuses to pay the balance amount, their deposited amounts shall not be refunded as the refusal by homebuyers to pay the balance amount can prove catastrophic for the project. Further, in case there is any unsold inventory, the resolution applicant should have the right to sell it and the profits can be distributed amongst the creditors and the resolution applicant as per the resolution plan. In order to ensure that the resolution applicants complete the projects in timely manner, a clear timeline should be included in the resolution plan and in case the timelines are not followed, the resolution applicant shall be punished in terms of section 74 of the IBC. This would ensure strict compliance with the resolution plan and the timely completion of the project.
Tags : Aman Choudhary Associate Sarthak Advocates & Solicitors Real Estate Sector IBC The Insolvency and Bankruptcy Code 2016 (“IBC”) corporate insolvency resolution process (“CIRP”) Real Estate (Regulation and Development) Act 2016 (“RERA”)