Real Estate Insolvency
IBBI's Key Proposals for a Transparent IBC Process
Real Estate Insolvency
1. Introduction
On November 07, 2024, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper addressing crucial issues within real estate insolvency cases under the Insolvency and Bankruptcy Code (IBC). This initiative seeks to enhance efficiency in the Corporate Insolvency Resolution Process (CIRP) for real estate companies, especially by integrating perspectives from various stakeholders, such as homebuyers, land authorities, and insolvency professionals, in a more structured manner. Below is an overview of the major proposals and issues addressed in the paper:
2. Inclusion of Land Authorities as Special
Invitees
in CoC Meetings for Real Estate CIRPs
Issue
In CIRPs involving real estate companies, land authorities play a critical role but lack formal representation in the Committee of Creditors (CoC), where only financial creditors currently participate. As operational creditors, land authorities’ perspectives on land-related issues and regulatory requirements are often overlooked, leading to potential delays or challenges in implementing resolution plans.
Given the importance of land assets and regulatory compliance in real estate projects, establishing a formal channel for land authorities to provide input could enhance the viability of resolution plans without impacting financial creditors’ decision-making authority.
Proposal
The paper proposes amending Regulation 18 to mandate that land authorities, as ‘Competent Authorities’ per the Real Estate Regulation Act, 2016 (RERA), are invited to CoC meetings as special invitees. Although they would not have voting rights, their inclusion could allow for critical insights and smooth coordination on land matters, reducing potential delays in real estate project resolutions.
3. Mandatory Reporting of Pre-Insolvency Land Allotment Cancellations for Enhanced CoC Decision-Making
Issue
Instances where land allotments are cancelled before the Insolvency Commencement Date (ICD) create uncertainty, as the primary asset (land), may no longer be available. There is no specific provision in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to address this issue.
Proposal
The paper proposes that insolvency professionals should be required to report any pre-ICD cancellations and repossessions to both the CoC and the Adjudicating Authority. This reporting enables the CoC to make informed decisions, such as considering early liquidation, withdrawal, or continuation of the CIRP.
The proposed amendment aligns with Regulation 40D of CIRP regulations, which lists factors for the CoC to consider before deciding on liquidation, such as non-operational status, asset absence, or lack of value as a going concern. Timely reporting of land allotment cancellations will enable the CoC to assess project viability and make decisions that protect all stakeholders’ interests in the insolvency process.
4. Enhancing Allottee Associations’ Participation in Real Estate Insolvencies through Flexible Eligibility and Deposit Requirements
Issue
Associations of allottees are significant stakeholders in real estate insolvencies but may struggle to meet eligibility criteria to participate as resolution applicants. Ambiguities around eligibility, earnest money deposit, and performance security requirements hinder genuine allottee associations from participating effectively.
Proposal
To support the active involvement of allottee associations, the IBBI proposes clarifying that the CoC may relax eligibility and deposit requirements for associations representing at least 10% or 100 allottees (whichever is greater). This flexibility could lead to more active participation of homebuyer associations, potentially resulting in outcomes more aligned with allottee interests.
5. Proposal for Uniform Application of 8% Interest Rate in Homebuyers’ Claims and Voting Shares
Issue
Homebuyers, recognised as financial creditors under the Insolvency and Bankruptcy Code (IBC), 2016, encounter inconsistent treatment regarding notional interest in claim calculations. Regulation 16A(7) of the IBBI (CIRP) regulations specifies an 8% annual interest rate to determine voting shares, reflecting the opportunity cost of funds disbursed by homebuyers, akin to fixed deposit or home loan rates (typically 7-11%).
However, inconsistencies arise as some insolvency professionals apply this rate solely to voting shares rather than actual claims. This inconsistency often drives homebuyers to seek redress from forums like RERA or Consumer Forums, leading to increased litigation. Clarity is needed to ensure uniform application of the 8% rate to claim calculations and voting shares, as noted in the IIIPI report.
Proposal
To address these discrepancies, IBBI proposes that the 8% interest rate be applied uniformly to voting shares and claim valuations under Section 53 of the Code. The amendment aims to reduce litigation, ensure fair representation of homebuyers, and provide a clear standard for CIRP claim calculations by harmonising the interest rate application.
6. Representation of Large Creditor Classes through Facilitators
Issue
Each creditor class in CIRP is currently limited to one Authorized Representative (AR), regardless of class size. When the creditor class is large, one AR may struggle to communicate effectively with all members, risking insufficient representation.
Proposal
The IBBI suggests allowing facilitators to aid ARs in communication and representation for extensive creditor classes. Facilitators could enhance communication, streamline processes, and ensure better alignment among large creditor classes, particularly in real estate cases with numerous allottees.
7. Dissemination of CoC Meeting Minutes to all Creditors in Real Estate Projects
Issue
In real estate insolvencies, the minutes of CoC meetings cover project updates, financial decisions, timelines, challenges, applications before courts, voting outcomes, and CIRP costs. Regulation 25(5)(a) mandates that the RP circulate these minutes within 48 hours to all participants. The Authorized Representative (AR) must also share them with the financial creditors they represent, as per Section 25A(2) of the Code. Additionally, Regulation 16A(10) requires the AR to review the minutes and ensure homebuyers can access necessary information. However, in some real estate cases, there is a lack of communication between the AR and homebuyers, leading to insufficient updates on CoC discussions.
Proposal
The IBBI has proposed to require Resolution Professionals (RPs) to upload CoC meeting minutes to a secure platform accessible to all creditors in the real estate project. This would increase transparency, reduce misinformation, and allow homebuyers to remain informed about their investments.
8. Proposal for Allowing of Transfer of Ownership of Completed Units During CIRP with CoC Approval
Issue
The IIIPI Report emphasised the need for clarity in possession handover proposals for real estate projects undergoing CIRP. Real estate companies often face the challenge of completed units where the formal handover is pending despite creditors fulfilling obligations. Courts have allowed ownership transfers and registration during CIRP, as seen in the NCLAT ruling in Alok Sharma & Ors. Vs. M/s. I.P. Constructions Pvt. Ltd. and Hon’ble Supreme Court’s order in NOIDA Vs. Lotus 300 Apartment Owners Association & Ors. These rulings highlight the importance of protecting homebuyers’ interests while maintaining business continuity.
Proposal
To resolve these issues, the paper has proposed allowing RPs to transfer ownership of completed units to allottees during CIRP, with CoC approval. If allottees have already paid or are in possession, the handover can proceed to avoid delays. This amendment would support business continuity for real estate companies, remove completed units from the CIRP pool, and prevent unnecessary hold-ups.
9. Conclusion
In conclusion, the IBBI’s proposals aim to streamline and enhance the real estate insolvency process under the IBC, ensuring greater stakeholder engagement and more efficient resolutions. These reforms seek to balance the interests of all stakeholders, reduce litigation, and provide smoother resolution processes, ultimately promoting a more effective and transparent real estate insolvency framework.
