By - King Stubb & Kasiva on March 1, 2023
One of the most sought-after sectors for investment by investors in India is real estate. However, in recent decades, it has been observed that the real estate sector has witnessed huge stagnation due to delays in property possession to the homebuyers and decreasing confidence of the buyers in housing investments.
In view of the above phenomena, Real Estate IBC resolution process in India involves CIRP or Corporate Insolvency Resolution Process for real estate developers in India which was introduced by the Insolvency and Bankruptcy Code, 2016 that governs the insolvency resolution of companies, partnership firms and individuals. According to this, a Real Estate insolvency resolution under IBC of a company would be subject to the process of CIRP in case it is unable to pay off its debts and pay off its creditors.
The process of CIRP in reference to a real estate company revolves primarily around appointment of an interim resolution professional also known as IRP who performs a detailed analyses of company’s financial position, list of assets and liabilities and financial position and draws up a plan for winding up of the company.
The National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 possesses the power to initiate Corporate Insolvency Resolution process for real estate developers under IBC. The home buyers who are aggrieved by the pendency of the process by the real estate developers have theoption to approach the NCLT to decide whether the home buyers classify as operational or financial creditors. The National Company Law Appellate Tribunal has also held that home buyers can be classified as “financial creditors” as there is an express contract of assured returns where the seller must pay assured returns to the investor until the possession is finally handed over.
There are various benefits of Real Estate IBC resolution process in India and the amendment which has been introduced in January 2023 which helps the homebuyers. Initially, there has been a fast-track resolution process wherein technological intervention along with the use of digital platforms would enable greater ease of CIRP which has been filed against any corporate debtor, who in this case may be any executive of the real estate company.
Secondly, one of the major benefits of Real Estate IBC resolution process in India that has been resultant of the amendment is that the hardships that have been faced by the home buyers and the allottees of the project have been reduced to a great extent including the trouble for claiming possession and the subsequent legal proceedings. Moreover, along with the procedure of insolvency resolution, the projects in conflict or default can be dealt as a separate entity from the main project which does not hinder other ventures or projects of the company and enable the company to deliver other ventures without causing any disturbance to the other commitments of the company.
The third feature of this amendment which has benefitted both the buyers as well as those setting up the project is that after the separation of legal entity of the regular project from the project in conflict, better and more project-specific solutions can be figured out which enable both the parties to get their disputes settled effectively and amicably.
The Real Estate Regulatory Authority or RERA is one of the reformative set of laws that have been enacted to regulate the informal real estate sector in order to get a proper solution for real estate disputes. According to Section 8 of the RERA Act, the Real Estate Authority possesses the ability to take over any project subject to the approval of the State government or cancel its registration.
There are various benefits of the takeover – the provision by RERA that includes a supervisory role of the project developers by RERA, the possibility of a collective complaint provision that can be made by the homeowners to the real estate authority and an easy and straight forward method of filing of complaints to the RERA authority which can be done easily without any legal assistance. This enables the house owners to get better empowered in their pursuit to own and invest in real estate and take legal recourse in case of default in delivery.
However, there are various drawbacks to this provision also which are as follows:
In the present structure of resolution process of real estate companies under IBC, the homebuyers possess identical roles and privileges as equivalent to financial institutions against the real estate developers when an insolvency proceeding takes place. The homebuyers also form a part of the Committee of Creditors also known as CoC which is a body to empower the creditors and homeowners of the project.
In addition to this, the difference between financial creditors and home buyers is that the financial creditors may prefer repayment of the money invested or advanced whereas the home buyers insist on the possession of the property.
During the Corporate Insolvency Resolution Process or CIRP, the committee has the choice to either resolve the debtor company or sell the assets of the liquidator company to repay the loans. In case there has been no decision regarding the same, the liquidation process leads to payment of secured creditors followed by resolution process fees and additional costs associated with the process.
The process of liquidation also involves the appointment of a liquidator along with other formalities and payments as associated with the Insolvency and Bankruptcy Code, 2016.
The resolution for Real Estate Companies under IBC involves structural and fundamental compliances under the project specific CIRP regime. After the CIRP system, it has become systematic and project specific to regulate the resolution processes and focus on the specific andexpeditious resolution without disturbing the framework of the company as a whole.
The process has also reduced the burden upon the courts and other bodies for resolution process and increased the speed of resolution, benefitting all the stakeholders. The new amendment has also added to the loopholes and drawbacks of the liquidation process and therefore became more efficient and effective.
An application for initiation of corporate insolvency needs to be filed against the corporate debtor by at least 100 such allottees under the respective real estate project or at least 10% of such allottees.
There are various steps which are involved in the resolution process for the real estate companies which include application to NCLT, appointment of IRP, verification of claims and acceptance of resolution plan among other steps.
Real estate companies can prepare for the impact of the IBC by working on deadlines for projects, having proper documentation, preparing for insolvency, etc.
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