IBBI recently introduced a discussion paper on issues related to real estate dated November 07, 2024, to enhance the efficiency and effectiveness of real estate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

 

The paper proposes several key measures, including the inclusion of land authorities in Committee of Creditors (CoC) meetings, handling cancelled land allotments, empowering CoC for allottee associations, and clarifying the inclusion of interest in homebuyers’ claims. These proposals are designed to address practical challenges and improve coordination between IBC and the Real Estate (Regulation and Development) Act (RERA). The details are provided herein-below:

 

  1. Inclusion of Land Authorities in Committee of Creditors (CoC) Meetings:
    • Issue: Land authorities play a crucial role in real estate insolvencies, but currently lack mandatory representation in CoC meetings (being operational creditors), leading to insufficient consideration of crucial and relevant perspectives on land-related issues, regulatory requirements and feasibility of Resolution Plans.
    • Proposal: Adding a new sub-regulation to Regulation 18 to mandate the inclusion of ‘Competent authorities’ (as defined in the RERA 2016) as invitees to CoC meetings without voting rights, enhancing transparency and co-ordination.
  2. Handling Cancelled Land Allotments in Real Estate Insolvency Cases:
    • Issue: Cancellation of land allotments before the Insolvency Commencement Date creates uncertainty in the Corporate Insolvency Resolution Process (CIRP), as the real estate Corporate Debtor’s primary asset ceases to be available.
    • Proposal: IBBI recommends amending the IBBI (Insolvency Resolution Process for Corporate Persons) regulations 2016 to require Insolvency Professionals (IPs) to report cancelled land allotments to the CoC and Adjudicating Authority, enabling informed decision-making. This is also in line with Regulation 40D of the CIRP Regulations, which outlines the relevant factors to be considered by the CoC when taking decisions.
  3. Empowering CoC to Facilitate Participation of Associations of Allottees as Resolution Applicants:
    • Issue: Ambiguities concerning CoC’s authority to relax eligibility criteria for participation in the CIRP may result in exclusion of legitimate stakeholder groups, such as allottee associations. This is particularly concerning in in real estate insolvencies, whereallottees having the most direct interest in the completion of the project.
    • Proposal: IBBI suggests to amend the CIRP Regulations to clarify that the CoC can relax eligibility criteria, earnest money deposit, and performance security requirements for qualified allottee associations, where they represent at least 10% of allottees or 100 allottees, whichever is higher.
  4. Clarification about Inclusion of Interest in Homebuyers’ Claims in CIRP:
    • Issue: While many Insolvency Professionals use the statutorily declared 8% interest rate in calculating voting shares of homebuyers in the CIRP and in claim calculations, some have been observed to apply the interest rate solely to voting shares, neglecting its application in the actual claim calculations. This inconsistency leads to increased litigation in Consumer forums and RERA.
    • Proposal: Clarify that the provision of interest at 8% per annum should be included in the claim amount for resolution plans and distributions under Section 53 of the IBC, aligning voting rights with claim valuation and reducing litigation.
  5. Representation of Large Numbers of Creditors through Facilitators:
    • Issue: A single Authorized Representative (AR), as currently permitted under the IBC and the CIRP Regulations, may encounter challenges in effectively representing and communicating with large classes of creditors.
    • Proposal: Allow the appointment of facilitators for large classes of creditors to improve communication and representation
  6. Dissemination of CoC Minutes to All Creditors in Real Estate Projects:
    • Issue: Lack of communication between ARs and homebuyers in real estate insolvency cases leads to information asymmetry with respect to COC minutes of meetings circulated by the RP.
    • Proposal: Facilitate access to CoC meeting minutes for all creditors in real estate projects through publication on the website with all the CIRP related information and a secured login system, enhancing transparency and countering misinformation
  7. Streamlining Possession Handover in Real Estate Projects:
    • Issue: Delays in formalizing the handover of completed units to homebuyers during CIRP. While the Hon’ble NCLAT and the Hon’ble SC have sometimes exercised their inherent powers to permit ownership transfer during CIRP, there is still a lack of a uniform handover process.
    • Proposal: Allow RPs to hand over ownership of units to allottees during the resolution process with CoC approval, ensuring smooth handover and avoiding unnecessary delays. This can also be on an “as is where is” basis or on payment of balance amount, if necessary.

The proposed measures in the IBBI Discussion Paper aim to enhance transparency, coordination, and efficiency in real estate insolvency proceedings, significantly benefiting stakeholders. Homebuyers will receive fairer compensation and timely possession of their homes, while land authorities’ inclusion in CoC meetings ensures that their crucial perspectives are considered.

 

Additionally, allottee associations gain empowerment to participate as resolution applicants, representing their interests in project completion and Insolvency professionals will have clearer guidelines for handling cancelled land allotments, aiding informed decision-making. Overall, these proposals foster a more balanced and effective resolution process for all involved.

Authors & Contributors

Partner:

Abhishek Swaroop

 

 

Associates:

Bhawana Sharma

Shreya Chandhok

Kirti Talreja

Rounak Doshi

Bharath Krishna