The Insolvency and Bankruptcy Board of India (IBBI) has proposed reforms to streamline the insolvency process for real estate companies and enhance protection for stakeholders. The seven proposals on which IBBI is seeking public comments include one that allows the handover of the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process.
In its 'Discussion Paper on Issues Related to Real Estate', to facilitate the smooth handover of occupied units or where possession has been transferred to home-buyers, IBBI proposes to allow the resolution professional (RP) to handover the ownership with the approval of the committee of creditors (CoC). "Further, to avoid delays due to unnecessary holds-ups, it is also proposed that with the approval of the CoC, RP may also be permitted to hand over the possession of units to the allottees on 'as is where is' basis or on payment of balance amount, if any, after taking in to account the funds due and funds required for completing the unit."
The board has proposed amendments to enhance the efficiency and effectiveness of real estate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) rules.
In a discussion paper, IBBI says one of the major proposals is the inclusion of land authorities in CoC meetings as invitees without voting rights. Other proposals in the discussion paper include handling cancelled land allotments in real estate insolvency cases and empowering the CoC to facilitate the participation of associations of allottees as resolution applicants.
IBBI also issued a clarification about the inclusion of interest in home-buyers' claims in CIRP while proposing to allow the representation of large numbers of creditors through facilitators. One proposal is to disseminate CoC minutes of the meeting to all creditors in a class of real estate projects.
In corporate insolvency resolution processes (CIRP) involving real estate companies, IBBI says land authorities play a crucial role but currently lack mandatory representation in the CoC. At present, financial creditors are included in the CoC, while land authorities, generally being operational creditors, are not. This absence may lead to insufficient consideration of land authorities' perspectives on land-related issues and regulatory requirements, potentially causing delays or complications in implementing resolution plans due to unforeseen challenges.
Moreover, valuable input from land authorities that could enhance the viability and feasibility of resolution plans is often missed, reducing coordination between the insolvency proceedings and land-related matters, the board says.
IBBI says, "By providing competent authorities, including the land-owning authorities, with the opportunity to offer input and raise concerns during the CIRP while preserving the decision-making authority of the CoC, the proposed changes address a significant issue in the regulatory framework. From a stakeholder perspective, the presence of such competent authorities in CoC meetings can enhance transparency and build confidence among homebuyers and other stakeholders in the resolution process."
According to the board, there have been instances where the allotment of land has been cancelled and the authorities have taken back possession before the insolvency commencement date (ICD). This situation creates uncertainty in the CIRP as the primary asset of the CD may no longer be available. Currently, there is no specific provision in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations (the Regulation) to address this issue.
"By ensuring timely reporting of land allotment cancellations, the CoC will be better equipped to assess the viability of the real estate project and make decisions that best serve the interests of all stakeholders involved in the insolvency process," IBBI says.
In real estate insolvencies, allottees constitute a significant stakeholder group as financial creditors. The current regulatory framework allows associations of allottees to participate in the CIRP as resolution applicants. While these requirements are designed to ensure serious participation, they may inadvertently exclude genuine stakeholder groups like allottee associations from the resolution process, particularly in real estate insolvencies where allottees have the most direct interest in project completion.
IBBI's proposal aims to amend the CIRP regulations to expressly provide that the CoC may approve relaxations to the eligibility criteria, earnest money deposit (EMD) and performance security requirements for allottee associations or groups that represent at least 10% of allottees or 100 allottees, whichever is higher.
IBC recognises home-buyers as financial creditors, granting them a significant role in the CIRP. However, an issue exists in the treatment of notional interest for home-buyers' claims. The average rate of 8% specified in regulation 16A(7) of the Regulation is seen as fair for calculating the allottee's claim amount.
However, in practice, there are inconsistencies. While many insolvency professionals use this 8% rate for claim calculations, some apply it only to determine voting shares and not for the actual claim. This situation frequently leads home-buyers to seek orders from other forums such as RERA or consumer forums, where the orders would include the amount of such interest.
IBBI says its proposed amendment would create consistency by aligning the calculation of voting rights with the valuation of claims, resulting in a more coherent framework within the insolvency process and potentially reducing litigation by providing interest within the insolvency framework.
The current provisions in the IBC and CIRP regulations allow for only one authorised representative (AR) per class of creditors, regardless of the class size. This can potentially lead to inadequate representation of diverse interests within the class and communication bottlenecks.
To address this issue, IBBI proposes allowing the appointment of facilitators for large classes of creditors, primarily to improve communication and representation.
The minutes of meetings in a real estate project undergoing insolvency contain discussions and decisions about the project status updates, financial decisions affecting the project, timelines for project completion, issues or challenges faced in the resolution process, any application filed before a tribunal or court by stakeholder, voting outcomes on critical decisions and CIRP cost.
In the normal CIRP cases, since creditors are represented in the CoC, they have access to discussions and minutes of meeting. In case of real estate cases, the home-buyers, who are financial creditors, are represented by the AR. The AR should brief the home-buyers about the discussions in the CoC. However, there are cases where there is a lack of communication between AR and home-buyers.
IBBI proposes to facilitate the RP in placing the minutes of the CoC meeting on the website where all the CIRP-related information is published and uploaded by the RP. The minutes shall be provided through a secured login system to the allottees, it says.
