By: Anand Vardhan and Piyush Raj Jain
On 6th of November 2023, the Insolvency and Bankruptcy Board (hereinafter ‘IBBI’) released its discussion paper which deals with the Insolvency process of Real-estate projects proposing amendments to Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter ‘CIRP Regulations’) and Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2022 (hereinafter ‘Liquidation Regulations’). The need for it arises as the burden of pending cases in the real estate sector is increasing due to lacunae in the current framework.
As the need for a sector-specific resolution process in the real-estate sector arises, this post analyses attempts to uncover the essential aspects of the proposal, the lacunae in the proposal and the need to address such issues.
PROPOSED AMENDMENTS
To deal with the issues being faced in the insolvency process of real-estate projects, a total of 5 proposals for amendments have been made in the Discussion Paper by the IBBI. These aim to remove the bottlenecks in the CIRP of real estate projects.
The first proposal provides for the requirement of the RP/IRP to comply with the provisions of the Real Estate (Regulation and Development) Act, 2016 (hereinafter ‘RERA Act’). It requires the IRP/RP to get all the real estate projects of the Corporate Debtor under RERA or to extend the registration of the same if required under the RERA Act.
The second proposal, along the lines of the first proposal requires the IRP/RP to maintain separate accounts for each real estate project of the Corporate Debtor as is required under the RERA Act. Both the proposals are aimed at ensuring transparency in the real estate-related CIRP.
The third proposal is a very important one as it aims to protect the interests and rights of the home buyers by allowing the transfer of property by the IRP/RP with the approval of the Committee of Creditors (hereinafter ‘CoC’) to the homebuyers who have paid the full amount which has been permitted by the courts in their inherent powers. The proposal is based on the order of NCLAT in the matter of Alok Sharma & Ors. v. M/s. I.P. Constructions Pvt. Ltd. which allows the same. Further, the proposal for protecting the rights of the homebuyers goes a step further to even permit taking possession of the unfinished properties on an ‘as is where is’ basis by the homebuyers on the approval of the CoC.
The penultimate proposal provides for the discretion to the CoC that it may even call for a separate Resolution Plan for each of the real estate projects undertaken by the Corporate Debtor for the purposes of doing away with the problem of the Resolution Applicant to invest in all the projects of the Corporate Debtor which requires very huge capital, thereby aiming to maintain the company as a going concern through the proposed amendment.
The final proposal proposes an amendment in the Liquidation Regulations, thereby intending to insert in Regulation 46A of the said Regulations for excluding property in possession (even without any registration) of an ‘allottee’ as defined u/s 36(4)(e) of the RERA Act, from the liquidation estate. This intends to remove the confusion related to whether properties, where the homebuyers have taken possession but a registration with any authority of the transfer is pending, are to be included in the liquidation estate or not, as the same is not even clear through the judgments of the NCLAT. Although the NCLAT in Pradip Kumar Chaudhuri v. Dagcon (India) (P) Ltd, Alok Sharma & Ors. v. M/s. I.P. Construction Pvt. Ltd, and the Supreme Court in Bikram Chatterjee & Ors. v. Union of India & Ors. has ruled in favour of the homebuyers to not to include such properties in liquidation estate but in the matter of M/s. Samruddhi Realty Ltd. it has ruled differently, i.e., without a registered sale deed, homebuyers had no ownership rights, thereby denying them any relief.
DISSECTING THE IMPLICATIONS OF THE PROPOSED AMENDMENTS
The real-estate sector CIRPs have been very controversial owing to the disputes involving a large number of stakeholders including the normal middle-class homebuyers whose hard-earned money during their whole lives has been at stake as they were unable to possess their dream homes.
The implications of these proposals are mainly aimed at protecting the interests and rights of homebuyers. Specifically, the 3rd proposal and the 5th proposal are a very crucial advancement towards this object of protecting the homebuyers. The proposal to facilitate the smooth transfer of the possessed homes, even on an ‘as is where is’ basis, will potentially reduce the disputes at Adjudicating Authority’s () end as well and will benefit the common homebuyer as they have a strong case for the transfer, considering the plight and vulnerability of the homebuyers. Also, the proposed amendment to exclude the property in possession of homebuyers from the liquidation estate will further strengthen the homebuyers as it will ensure that the properties in possession of homebuyers that aren’t registered in their names are not liquidated and the possessors are not deprived of their properties thereby safeguarding their rights.
Further, another important implication of the proposed amendments to invite separate plans for each project of the Corporate Debtor is that it will lead to a greater number of resolution applicants. This will ensure that multiple bidders for different projects would yield better value than a single bidder for the entire business and this proposed amendment will lead to a higher rate of resolution because investing in all projects by one resolution applicant requires huge capital which may not be practically possible in certain cases; also, some resolution applicants are not interested in all projects and want to undertake only specific projects. This will lead to the eradication of the problem of slow resolution rate faced by real estate firms.
The proposal to make the provisions of the RERA Act related to the registration and extension of projects under RERA, as well as operating a separate bank account for each real estate project will further ensure that the process becomes more transparent, accountable and efficient, because RERA registration facilitates systematic record-keeping and mandates project-wise separate accounts. Further, all receipts and payments for each real estate project would be tracked by maintaining a different bank account. This will make information about a specific project easier to obtain, which could be helpful in the event of project-specific insolvency or when inviting different resolution plans for a specific real estate project.
Overall, these proposals will ensure that the homebuyers are protected and the real estate related CIRPs have higher and faster resolution rates.
THE SUBSISTING LACUNA
The proposal failed to address one of the crucial issues faced by the Homebuyers who fail to file their claim after public announcement under Section 13(2) and Section 15 of IBC. After the appointment of Interim Resolution Professional, a public announcement is to be made in one English and one regional newspaper as given under Regulation 6 of the CIRP Regulations for filing of claim, and the resolution plan is then made considering only such claims.
If the Resolution plan is approved under Section 31 of IBC, it is binding and the only manner to alter is to make an appeal under Section 32 of IBC to the NCLT which is limited by the grounds mentioned under Section 62 of the IBC. Thus, if the powerless home buyers failed to file their claim, who may reside all over the country or even outside, and had spent a considerable amount of money in buying the property, they are left with no other option but at the mercy of the judicial process, to which also they are the party more vulnerable than the promoter or the builder.
To address this lacuna which would still subsist after the proposed amendments are implemented, an amendment could be made and a provision can be inserted that in Real Estate CIRPs, the homebuyers who have failed to file their claim are equally placed with persons who filed their claim, and they can be considered from the account maintained the Corporate Debtor and must not be excluded entirely.
CONCLUSION AND THE WAY FORWARD
The proposed amendments aim to increase the resolution rates in the real-estate sector which faces a very slow rate of resolution, and at the same time to protect the rights and interests of the homebuyers. But, as discussed earlier, there is a lacuna related to the plight of the homebuyers who fail to file their claim after public announcement under Section 13(2) and Section 15 of IBC which needs to be addressed. The way forward entails addressing the identified lacuna and at the same time implementing the proposed amendments for reforming the Real Estate CIRPs, which will then definitely turnout as IBBI’s step to protect homebuyers and to safeguard their hard-earned money that they have invested in buying their dream homes.
(Anand Vardhan and Piyush Raj Jain are law undergraduates from Gujarat National Law university, Gandhinagar. The authors may be contacted via mail at anand21bal010@gnlu.ac.in)
Cite as: Anand Vardhan and Piyush Raj Jain, Reforming Real Estate CIRPs: IBBI’s Step to Protect Homebuyers, 5th April 2024, <https://rmlnlulawreview.com/2024/04/05/reforming-real-estate-cirps-ibbis-step-to-protect-homebuyers/> date of access.
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