By - King Stubb & Kasiva on May 19, 2023
The Insolvency and Bankruptcy Code (IBC) has played a crucial role in resolving insolvency cases across various sectors in India. However, the real estate sector presents unique challenges that necessitate the creation of a separate mechanism for insolvency resolution. This blog explores the need for a dedicated framework for the real estate industry within the IBC, addressing the sector's vulnerabilities, information asymmetry, and proposing recommendations for a more effective resolution process.
The NCLAT has recognized the need for a special mechanism for the real estate industry in the context of Corporate Insolvency Resolution Process (CIRP). In the case of Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd., it acknowledged that most financial creditors in real estate projects lack the necessary business acumen to evaluate the viability of a corporate debtor. This observation led to the development of the "reverse insolvency/project-wise insolvency" approach, allowing insolvency proceedings to be filed on a project-by-project basis. However, legislative reforms are essential to establish a specific procedure for the insolvency of real estate projects.
Further, in the recent case of Puneet Kaur v. KV Developers (P) Ltd., the National Company Law Appellate Tribunal (NCLAT) acknowledged the long-standing legal principle that creditors not allowed to file a claim after the resolution plan has been approved by the Committee of Creditors (CoC). This case raised the issue of delayed claims by homebuyers. However, to provide relief to homebuyers who had filed their claims belatedly, the NCLAT indirectly permitted such claims to be considered after the CoC had approved the resolution plan.
The current IBC framework lacks clarity regarding the rights of secured and unsecured homebuyers. Legislative amendments should address this ambiguity and provide clear guidelines for the treatment of secured and unsecured homebuyers in the insolvency resolution process.
The real estate sector's distinct challenges necessitate a dedicated framework within the Insolvency and Bankruptcy Code. Addressing vulnerabilities, information asymmetry, and procedural limitations will lead to a more effective resolution process. By implementing substantive and procedural amendments, such as tailored project-wise insolvency, wider public announcements, specialized NCLT benches, and recognizing homebuyers as financial creditors, the resolution process can be streamlined, protecting the interests of all stakeholders involved.
The Insolvency and Bankruptcy Code is applicable to the real estate sector, but there is a need for substantive and procedural amendments to address the unique challenges specific to this sector.
The amendments to the Insolvency and Bankruptcy Code should require the IRP/RP to proactively contact homebuyers and inform them about the commencement of CIRP. Public announcements should extend beyond newspapers to news channels and other means to ensure wider dissemination of information.
Yes, creating specialized NCLT benches for real estate insolvencies would ensure faster and more efficient outcomes, improving the overall efficiency of the insolvency resolution process.
Company Appeal (AT) (Insolvency) No. 926 of 2019 (“Umang Realtech”)
Company Appeal (AT) (Insolvency) No. 390 of 2022
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