Background
On 06.11.2023, the Insolvency and Bankruptcy Board of India (IBBI) has released a discussion paper dealing with the issues being faced in insolvency processes of real estate projects. In relation to the stalled real estate projects, this discussion paper seeks to implement the recommendations made by Amitabh Kant's Committee and also by a Colloquium on Functioning and Strengthening of the IBC Ecosystem. It has been recommended by the committee and colloquium that the IBC needs to be reformed to better accommodate the complexities of real estate sector. There exists a pressing need to have a separate resolution mechanism for real estate sector. Therefore, a resolution mechanism tailor made to address the needs of real estate sector may be specified with necessary variation from CIRP.
With this discussion paper, IBBI is considering to implement the recommendations made by Amitabh Kant's Committee and Colloquium, to address the issues in insolvency process of the real estate projects.
This article aims to analyze the impact of the changes proposed by IBBI.
Key highlights of the discussion paper
Following are the key highlights of the discussion paper suggesting, broadly, five proposals dealt through amendments in resolution process and liquidation process regulations:
- Mandatory registration and extension of projects under RERA;
- Operating a separate bank account for each real estate projects;
- Execution of registration/sublease deeds with the approval of CoC during CIRP;
- CoC to examine separate plans for each real estate projects; and
- Exclusion of property in possession of homebuyers from the liquidation estate.
Impact Analysis of Proposed Changes
These proposed changes by IBBI aim to address issues faced in the insolvency process of real estate projects. An analysis of IBBI's proposed changes are summarized below:
1. Mandatory Registration and extension of projects under RERA
Legal Background: Section 17(2)(e ) of the IBC which deals with the management of affairs of the corporate debtor, provides that IP is responsible for ensuring compliance with the requirements under any law for the time being in force. As per section 3 of the Real Estate (Regulation and Development) Act, 2016, all real estate projects are required to be registered with respective state's RERA, where the area of land proposed to be constructed exceeds 500 square meter or the number of apartments proposed to be constructed exceeds 8.
IBBI's Proposal: It is proposed to expressly mandate the IRP/RP to register all real estate projects under RERA or to extend registration under RERA, where registration is expired or about to expire.
Impact: Mandatory registration under RERA will enhance transparency and accountability, which in turn enhance the prospects of a successful resolution.
Analysis: Registration of real estate projects under RERA is a pivotal step in fostering transparency and accountability, essential for a more efficient and successful resolution process. However, there are certain practical challenges in implementing this proposal in CIRP. Generally, registrations under RERA are done by the companies themselves as they can not start any project without registration. Its only seeking extension of registration under RERA which would be required to be done by IRP/RP. For registration under RERA, there are lots of documents required for registration, which would be very very difficult for IRP/RP to collect and compile. Also, there are charges which are required to pay in addition to the documentation challenges. Moreover, the registration is usually for one year. Therefore, seeking extension of registration will be an recurring cost. Furthermore, post registration under RERA, there will be lots of compliances annually and quarterly under RERA required.
In view of these challenges, it may be suggested that there should be a deemed registration under RERA during CIRP period. Further, if at all registration or renewal of registration is mandated, the cost should be part of CIRP cost.
2. Operating a separate bank account for each real estate projects
Legal Background: Under RERA, each project is registered separately and given a unique identification number. The approvals, filings etc. all done on a project basis. RERA registration facilitates systematic record keeping and mandates project wise separate accounts.
IBBI's Proposal: In line with RERA provisions and to ensure transparency in the resolution process, it is proposed that IRP/RP should operate separate bank account for each project undergoing CIRP.
Impact: For real estate projects during CIRP, operating a separate bank account for each real estate project would record all receipt and payments of the individual projects. This will facilitate information about a particular project which may be useful for project wise insolvency or for inviting separate resolution plans for particular real estate project.
Analysis: As per the discussion paper, following amendment is proposed to be made in CIRP Regulations:
"4E: Opening project wise account:
The interim resolution professional or the resolution professional, as the case may be, shall operate a separate bank account for each real estate project."
The above proposed provision may result in ambiguity considering that a separate account needs to be maintained under the provisions of RERA. To avoid any conflict between the RERA and CIRP regulations, the construct of Regulation 4E should clarify that the separate account as mandated by RERA shall be operated by the IRP/RP. Further, there will be an issue of bifurcation of costs amongst each accounts of different projects. Therefore, for common costs, a common account may be maintained.
3. Handover of unit's possession to homebuyers
Present Scenario: Managing continuity in a business undergoing Corporate Insolvency Resolution Process (CIRP) often involves acquiring and selling inventory. However, the real estate sector poses a distinctive challenge. In certain instances, creditors have fulfilled their contractual obligations, and the corporate debtor (CD) has completed construction, yet formal ownership transfer remains pending. Currently, some courts have utilized their inherent powers to authorize ownership and registration transfers for select projects during CIRP.
IBBI's Proposal: To facilitate the smooth handover of occupied units or where possession has been transferred to home buyers, IBBI has proposed to allow IRP/RP to handover the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process. Before doing so, the approval of the Committee of Creditors (CoC) has to be obtained, by not less than 66% of the total votes. Further, to avoid delays due to unnecessary holds-ups, it is also proposed that with the approval of the CoC, RP 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.
This provision, which is aimed at safeguarding the homebuyers' interests, is sought to be introduced vide insertion of Regulation 4F in the CIRP regulations.
Impact: This proposal will potentially reduce the disputes. Further, the transactions will be formalized through the transfer of such units during the resolution process with the approval of the CoC.
Analysis: It seems that the proposal to handover possession and register in the name of allottees during the IBC process, where the allottees have fulfilled their obligations, on 'as is where is' basis, will bring relief to the home buyers, who need not wait till the resolution is over. However, units which are in possession of buyers, but pending registration of the sale deed, cannot be made part of the insolvency/ liquidation estate – duly acknowledging their ownership rights. The ability of the buyers to even accept partly finished units on as-is-where-is basis can ameliorate the financial woes and uncertainty of a large section. Giving statutory recognition to project- wise resolution certainly will expedite the whole process and foster over-all improvement. handing over 'as is where is basis' will create lots of issues. This will allow handover of even incomplete projects which is violation of the provisions of RERA and Consumer protection Act. Therefore, this amendment should go away altogether.
4. CoC to examine and invite separate plans for each projects
Present Scenario: Generally, the CD which is associated with real estate has multiple projects that are at different stages of construction. Some projects have been completed and some are partially completed, or some are at the initial phase of construction. However, investing in all projects by one resolution applicant requires huge capital, and thus limits the number of resolution applicants.
IBBI's Proposal: The IBBI has proposed to clarify that CoC on examination, may direct the RP to invite separate plan for each project. The same will be in the form of a clarification added to Regulation 36A(4) of the CIRP regulations.
Impact: Inviting separate plans for each real estate project is expected to widen the pool of prospective resolution applicants considering that it would not be feasible for them to invest in all projects.
Analysis: Such a clarification would definitely enhance the participation of resolution applicants. This is a need of the hour. It may however, be suggested that there may be separate COCs also for each project. Moreover, there should be little safeguards in it.
5. Exclusion of property in possession of homebuyers from the liquidation estate
Legal Background: Section 36 of the Code defines 'Liquidation Estate' which states that for the purpose of liquidation, the liquidator shall form an estate of the assets which will be called the liquidation estate in relation to the corporate debtor. Section 36(4) states a list of assets which shall not be included in the liquidation estate and not be used for recovery in liquidation. Section 36(4)(e ) further provides power to the Board to specify any other assets which shall not form a part of the liquidation estates of corporate debtor.
Present Scenario: There is some confusion in the market as to whether properties where, the allottees have taken possession but a registration with any authority of the transfer is pending, are to be included in the liquidation estate or not. Jurisprudence also laid down different pronouncements. Inclusion of properties of homebuyers when they have fulfilled their part of the obligation would create several difficulties.
IBBI's Proposal: It is proposed to modify the Liquidation process regulations to make following changes:
"Regulation 46A.
Exclusion of Certain Assets from the Liquidation Estate
For the purposes of Section 36(4)(e), wherever an "allottee" as defined under clause (d) of section 2 of the Real Estate (Regulation and Development) Act, 2016 is in possession of the unit, it shall not form a part of the liquidation estate of the corporate debtor."
Analysis
By insertion of Regulation 46A in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, it is proposed to exclude units under the possession of allottees as defined under RERA from the liquidation estate of the corporate debtor.
Under Section 36(4) of the IBC, certain assets are excluded from the liquidation estate. Consequently, such assets will not be used for recovery in liquidation. Sub-section (e) to the said Section empowers the Board to specify any other assets for such exclusion and in the exercise of this power, the proposed regulation is sought to be introduced.
The IBBI adjudged it to be necessary to exclude units under the possession of allottees from liquidation estate in light of the conflicting judicial pronouncements in this regard and to ensure that bona fide homebuyers do not end up suffering on account of the insolvency proceedings.
This is a very controversial proposed amendment, which need more deliberation before getting notified.
Conclusion
Sector wise amendments in CIRP is needed especially in case of real estate insolvency. The changes proposed in the Discussion Paper try to provide clarity on several aspects and attempt to mitigate certain practical complications faced in CIRP which can result in making the process more robust, and effective. To have a customized and tailor-made approach to resolve each project is a welcome move and will facilitate relatively faster targeted resolution. If one project is defaulted, it makes no sense to drag the entire company into CIRP. However, the amendments proposed by IBBI may impose administrative challenges even as it attempts to deal with important issues in the real estate insolvency resolution process, especially if a real estate company has multiple objects at various stages of development. It may complicate the overall insolvency process, as coordinating multiple resolution plans, and involving various stakeholders for each projects can be challenging. This could potentially lead to inconsistent results, with some projects being resolved more efficiently than others. Although this would facilitate faster resolution under IBC, it may also require amendments in other laws for smooth execution.
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