Corporate insolvency resolution process of stressed real estate developers could see an overhaul with the Insolvency and Bankruptcy Board of India (IBBI) toying with the idea of putting in place a separate regulatory framework for home-buyers under the Insolvency and Bankruptcy Code (IBC). 

IBBI has now sought public suggestions and inputs by July 5 for effective and expeditious resolution of real estate projects. The objective is to give a better deal to home-buyers, and protect their interests in insolvency situations.

The insolvency regulator’s latest move comes in the wake of representation that real estate projects require different dispensation than normal projects and the resolution of real estate firms should be looked differently than other companies

It maybe noted that despite the IBC amendment in 2018 to clarify the status of allottees of a real estate project as ‘Financial Creditors’, there are now large number of real estate projects under IBC. 

Re-looking the regulations

IBBI has now invited suggestions on the need for a separate regulatory framework for home-buyers or what modifications can be brought to the existing regulations within the current framework under the IBC.

Shailesh Poria, Partner, Economic Laws Practice, said that home-buyers have long been at the receiving end of developers being admitted into insolvency. “While the SC elevated their status as Financial Creditors, thereby giving home-buyers a seat on the COC, there was much left to be desired, particularly given the inherent complexities involved in the corporate insolvency resolution of a real estate developer,” he said.

The NCLAT, being alive to the realities, coined the Reverse CIRP in the matter of Umang Realtech to protect home-buyers by limiting CIRP to individual projects. Unfortunately, NCLTs have been averse to adopting the Reverse CIRP, as seen in the most recent ruling by NCLT Chennai in the matter of N Kumar vs. Tata Capital Housing Finance Ltd, where the NCLT found that the IBC does not provide for reverse CIRP and that the approach of NCLAT in Umang Realtech was too fact specific. 

“In light of such developments, it is indeed encouraging to see IBBI as the sector regulator taking note of the urgent need to devise separate framework for real estate projects.”

Resolution of realty firms

Kumar Saurabh Singh, Partner, Khaitan & Co, said it is the need of the hour that the resolution of real estate firms are looked differently than other class of companies.

Ashish Gupta, Partner, Chadha & Co, a law firm, said the IBBI move is a long overdue one to protect the interest of home-buyers, given the fact that many real estate projects are either delayed considerably or abandoned by builders, leaving home-buyers high and dry. 

A definitive timeline for resolution of home-buyer’s issues must be set and strictly followed, as real estate companies would try to delay the process. The resolution process under IBC should also be aligned with the disputes raised by home-buyers under the RERA Act or with orders that may have been passed by RERA, Gupta added. 

Other concerns

The issue of land title should also be addressed, as home-buyers sometimes find themselves confronted with disputes with landowners, with whom they may not have any privity of contract. “It remains to be seen how far IBBI will go to protect the interest of home-buyers,” he said.

Singh said this is also required because of the multiple projects that a real estate company undertakes in the ordinary course of business and each of which have independent set of consumers/buyers associated with them who contribute significantly to the cost of the project. 

“Even RERA regulates real estate companies project wise and resolution of these firms in insolvency should also keep this aspect in mind. Another aspect, critical to such resolutions, is that completion of project and delivery of flats/units to home-buyers is the only resolution that meets their interest. So NCLT and the RP/CoC need to take utmost care to expedite the project during CIRP and through eventual resolution,” Singh said.

In order to achieve this, strengthening the arms of home-buyers in CIRP may be useful and would possibly lead to greater monitoring by lenders of real estate projects, so that they know if the company goes into insolvency, they would also need to work with home-buyers for any decision making on the project and its resolution, he added.

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