An Insight of IBBI’s Discussion Paper on Real Estate Insolvency

Introduction

The insolvency resolution processes of real estate projects under Insolvency and Bankruptcy Code 2016 have been a topic of concern and discussion due to the unique challenges they pose. In a recent discussion paper dated 6th November 2023, published by the Insolvency and Bankruptcy Board of India (IBBI), various issues related to the Corporate Insolvency Resolution Process (CIRP) of real estate projects have been addressed. The paper aims to invite public comments and suggestions on the proposed solutions to these challenges.

Contents of the Discussion Paper

The discussion paper addresses various issues in the insolvency processes of real estate projects. It covers topics such as mandatory registration under Real Estate Regulatory Authority (RERA), separate bank accounts for each project, execution of registration deeds during CIRP, separate plans for each project, and exclusion of homebuyers' property from liquidation.

Additionally, it mentions the recommendations of the Amitabh Kant Committee on reforming the IBC for the real estate sector, including project-wise CIRP and transfer of ownership to allottees.

The Amitabh Kant Committee

• In March 2023, the Union Housing and Urban Affairs Ministry established a 14-member committee, chaired by former NITI Aayog CEO Mr. Amitabh Kant, to address issues with stalled real estate projects.
• The committee included officials from the Union Finance Ministry, representatives from the state governments of Uttar Pradesh and Haryana, the IBBI, the National Housing Bank, and the RERA of Haryana and Uttar Pradesh.
• The committee submitted its report on 21st August 2023, with recommendations for completing and delivering these projects to homebuyers in a timely manner. The brief recommendations of the committee are as follows-
  • Since the RERA registration of Real Estate projects is made project-wise, the CIRP can also be initiated project-wise.
  • The IBC shall enable the Resolution Professional (RP) to either transfer the ownership or possession of a plot, apartment or building to the allottees while the CIRP can still proceed or give them the option to acquire their plot or apartment on “as is where is” basis or after giving balance payment required for completion of such unit during CIRP period.
  • It also recommends that the houses which are already under the possession of the allottees shall not be included in the IBC process.
  • The committee also suggested that homebuyers should be eligible to act as Resolution Applicants during the CIRP process.

Proposals made under the Discussion Paper

Following the recommendations put forth by the Amitabh Kant committee, the IBBI has released a Discussion Paper proposing amendments to the CIRP and Liquidation Regulations. The key points of the Discussion Paper are as follows: -

• Mandatory registration and extension of existing registration under RERA during CIRP period-
  • The discussion paper suggests that the Insolvency Resolution Professional (IRP)/ Resolution Professional (RP) must ensure the RERA registration of any real estate project belonging to the corporate debtor that is required to be registered under the RERA Act.
    • Additionally, if any existing registration is expired or is about to expire, the IRP/RP must extend the RERA registration as a mandatory requirement.
  • The proposed changes will be brought by inserting a new provision “Regulation 4D” to the existing CIRP Regulations, 2016.
• Separate bank account for each project period-
  • The discussion paper suggests that the IRP/RP must ensure to operate separate bank accounts for each real estate project belonging to the corporate debtor who is undergoing insolvency process under IBC.
  • The proposed changes will be brought by inserting a new provision “Regulation 4E” to the existing CIRP Regulations 2016.
• Execute the registration/sublease agreements with Committee of Creditors (CoC)’s approval-
  • The discussion paper suggests that the IRP/RP must be allowed to either transfer the ownership or possession of a plot, apartment, or building, during the CIRP period, to the allottees who have obliged to their part of the agreement or give them the option to acquire their plot or apartment on “as is where is” basis or after giving balance payment required for completion of such unit.
    • The IRP/RP shall exercise this function only after obtaining prior permission of CoC with minimum 66% voting in favor.
    • In addition to that, it is also proposed that any units of the real estate project which is already under the possession of the allottees shall not be included in the assets of the Corporate Debtor.
  • The proposed changes will be brought by inserting a new provision “Regulation 4F” to the existing CIRP Regulations 2016.
• Invitation of separate Resolution Plans for individual or a group of real estate projects-
  • The discussion paper suggests that the CoC may direct the IRP/RP to invite separate Resolutions Plans for individual real estate projects or a group of projects which belongs to the Corporate Debtor.
  • The proposed changes will be brought by inserting a clarification provision under “Regulation 36A(4)” of the existing CIRP Regulations 2016.
• Exclusion of properties from Liquidation Estate-
  • The discussion paper suggests that the properties under a real estate project which are already in the possession of the allottee shall not be included in the Liquidation estate for the purpose of Liquidation of the Corporate Debtor who has allotted such property to the allottee.
  • The proposed change “Regulation 46A”s will be brought by inserting a new provision under the Liquidation Regulations, 2016.

Key Takeaways

In conclusion, the proposals outlined in the Discussion Paper, influenced by the recommendations of the Amitabh Kant committee, hold the promise of delivering substantial benefits to homebuyers. By mandating RERA registration, ensuring separate project bank accounts, and facilitating the execution of registration/sublease agreements, these amendments aim to provide greater justice and protection to homebuyers during the insolvency process.

If implemented, these changes have the potential to bring about a more equitable and transparent resolution framework, ultimately empowering and safeguarding the interests of homebuyers in the real estate sector.

References:

• https://www.foxmandal.in/weighing-the-impact-of-ibbis-proposals-for-the-real-estate-sector/#:~:text=On%20November%206%2C%202023%2C%20the,processes%20of%20real%20estate%20projects.
• https://ibbi.gov.in/uploads/public_comments/Discussion_Paper_Real_Estate_November2023_Final.pdf