Streamlining Real Estate Insolvency: IBBI’s Blueprint for Transparent, Inclusive Resolutions

Introduction

On 7-11-2024, the Insolvency and Bankruptcy Board of India (IBBI), the regulatory authority that oversees insolvency in India, released a discussion paper on issues related to real estate insolvency.¹

The discussion paper, based on the findings and recommendations² of a study group formed by the Indian Institute of Insolvency Professionals of ICAI (IIIPICAI), focused on enhancing the real estate resolution framework while aligning real estate insolvency with the Real Estate (Regulation and Development) Act, 2016 (RERA)³. IBBI has identified seven key issues in its Discussion Paper after consultation with resolution applicants (RA), insolvency professionals (IP) and other key stakeholders to enhance the efficiency and effectiveness of the real estate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC)⁴.

Real estate insolvency involves the resolution of distressed real estate companies engaged in the business of managing, buying, selling, investing and developing properties. It differs from the standard corporate insolvency resolution process (CIRP) as it presents unique challenges due to its involvement of numerous homebuyers, ongoing construction of projects, etc. It also differs because the primary objective of allottees or homebuyers is not merely debt recovery but the construction of the project units.

Further, the recent innovation of “project-wise insolvency” by Supreme Court of India in Flat Buyers Assn. v. Umang Realtech (P) Ltd.⁵, where it allowed filing of an insolvency application against the company for a particular project rather than the whole real estate company creates a major differentiating factor from other sectors insolvency process.

In this article, the author will try to analyse why, in the first place, there is a need to bring these reforms, what key proposals and solutions are given by the IBBI and the author analysis of these reforms.

Need for reforms

Since its enactment, IBC has been crucial in reviving stalled real estate projects.⁶ As of June 2024, 1400 companies were admitted into insolvency, among which 645 companies were rescued and 261 companies were liquidated. According to the Economic Survey 2023-2024⁷, IBC is preferred by homebuyers over the Consumer Protection Act, 2019⁸ and RERA.

Considering the importance of IBC in rescuing real estate companies IBBI in its paper has recognised critical gaps such as the inclusion of land authorities in the Committee of Creditors (CoC), the mechanism for handling cancelled land allotment, relaxation of eligibility criteria for the association of allottees (AoA) to participate as RA among others.

This paper mainly tries to make real estate insolvency proceedings more inclusive and transparent towards different stakeholders, especially home buyers or allottees who are recognised as financial creditors within the IBC.⁹

Key proposals and solutions

A. Inclusion of land authorities in CoC meetings

Land authorities are one of the important stakeholders and play a crucial role in the resolution of real estate insolvency and are treated as operational creditors, which prevents them from participating in CoC meetings. This exclusion often leads to delays and regulatory hurdles in implementing resolution plans.

Proposed reform: The IBBI has suggested adding a new sub-regulation in Regulation 18 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016¹⁰ (CIRP Regulations, 2016) to ensure mandatory inclusion of land authorities as a “competent authority” as defined under RERA. This will ensure the inclusion of land authorities in the CoC as an invitee without voting rights. Further, it will ensure that their inputs are considered during the CIRP, improving the viability of the resolution plan.

B. Handling of cancelled land allotments

In certain cases, land allotments are cancelled and possession is taken back by authorities before the insolvency commencement date (ICD), disrupting the CIRP process since land is one of the primary assets of corporate debtors (CD).

Proposed reform: An amendment to the CIRP Regulations to include provisions that will require the insolvency professional to inform the CoC and adjudicating authority (AA) about such cancellations. This aligns with Regulation 40-D of the CIRP Regulations¹¹, which outlines factors considered by the CoC for liquidation. It will enable the CoC to make informed decisions or consider alternatives such as withdrawal, early liquidation or continuance to CIRP, as it will be better equipped to assess the viability of real estate projects.

Additionally, IBBI has proposed the introduction of Regulation 30-C in CIRP Regulations to mandate the resolution professionals to submit a detailed project status report and permission required for completion of the project to CoC and then to AA along with the opinion of CoC within 60 days of ICD, allowing CoC to make informed decisions regarding project viability.

C. Relaxation in eligibility criteria for participation of the association of allottees as resolution applicants

The AoA is one of the most important stakeholders in the insolvency process of real estate companies. Although they are recognised as financial creditors and allowed to participate as an RA, stringent eligibility criteria prevent them from effectively participating as resolution applicants.

Proposed reform: An amendment to introduce an Explanation to Regulation 36-A(4) of the CIRP Regulations¹², empowering the CoC to relax eligibility requirements for the qualified AoAs to submit resolution plans. This will provide an alternative to external bidders and enhance the chance of successful project completion.

D. Inclusion of interest in homebuyers’ claims in CIRP

Regulation 16-A(7) of the CIRP Regulations, 2016¹³ provides for the calculation of voting shares based on financial debt with an 8% per annum interest rate. According to the IBBI, there are inconsistencies in the application of this interest rate by insolvency professionals. In some cases, they consider the interest rate for the determination of voting shares, while not considering it when calculating the claim amount. This leads to increased litigation as the homebuyers reach the RERA or consumer forums to include the amount, which is inclusive of the interest rate, in determining the claim amount.

Proposed reform: IBBI proposed adding Regulation 8-A(3) to clarify that the interest should be included in determining both the voting share and the claim amount for the resolution plan and distribution of claims under Section 53 of the IBC¹⁴.

E. Appointment of facilitation to assist authorised representatives

Presently, only one authorised representative (AR) represents the entire class of creditors, regardless of size. This leads to inadequate representation as the AR is unable to communicate effectively with all the creditors due to the large number.

Proposed reform: Suggested to insert sub-regulation (3-D) in the CIRP Regulations to allow the appointment of up to five facilitators to assist ARs in communicating with creditors in the insolvency process.

F. Dissemination of CoC minutes of the meeting to all classes of creditors

The minutes of the meeting of the CoC contain important information related to the CIRP of CD. Regulation 25(5)(a) of the CIRP Regulations¹⁵ mandates RP to disseminate minutes of meetings to all participants within forty-eight hours through electronic means. Further, as per Section 25-A(2) of the IBC¹⁶ the AR is required to share the minutes of the CoC meeting with the financial creditors it represents and also required to review the minutes prepared by the RP and facilitate the allottees to have access to any document or information to form an opinion on issues discussed as per Regulation 16-A(10) of the CIRP Regulations¹⁷. All these layers create a communication gap between AR and homebuyers which ultimately affects the effectiveness of the insolvency process and creates transparency issues for homebuyers, who rely on ARs for updates.

Proposed reform: IBBI has suggested introducing Regulation 25(5) in the CIRP Regulations to bridge this gap by providing direct access to minutes of meetings of the CoC through a secured login system for all creditors, including homebuyers. This will reduce information asymmetry and improve stakeholder engagement in decision-making.

G. Streamlining possession handover

In real estate insolvency, the main business of the real estate company is to construct and sell constructed units, which ensures that the CD continue as a going concern.

The issue arises when the creditors i.e. allottees/homebuyers and CD, both have completed their obligations, but formal handover by a registered sale deed is still pending, CD has entered into insolvency and a moratorium under Section 14 of the IBC¹⁸ was imposed which halts all the recovery and other actions that affect the CD financially.

Although the National Company Law Appellate Tribunal (NCLAT) in Alok Sharma v. I.P. Constructions (P) Ltd.¹⁹ and the Supreme Court of India in its order dated 27.09.2024 in the CIRP of Hacienda Projects Private Limited in New Okhla Industrial Development Authority (NOIDA) v. Lotus 300 Apartment Owners Assn.²⁰ exercised their inherent powers to allow the transfer of possession to allottees, stating that the housing unit is not an asset of the CD as the sale of these helps the CD to run as a going concern and would not violate the moratorium under Section 14 of the IBC.

Proposed reform: IBBI has suggested introducing Regulation 4(E) in the CIRP Regulations that will allow the transfer of immovable property to allottees who have fully paid for their units, subject to a minimum 66% votes by CoC for approval. Additionally, IBBI has also suggested that those properties which are in technical possession of allottees should not be included in the insolvency proceedings.

Author’s view

Through this paper, IBBI is trying to resolve the ambiguities or challenges faced during real estate insolvency. As discussed, real estate insolvency is different from normal insolvency as it is more difficult to run it as a going concern because the main assets or rather the business, that is construction and sale of units, becomes the reason for the dispute and affects the insolvency proceedings.

In the author’s view, there is a strict need to recognise real estate insolvency as a separate class of insolvency under IBC, as it is more complicated to resolve, and the land on which these units are constructed is leased from the land authorities, who own debt under the lease agreement. This non-payment of debt affects the registration of the property in favour of homebuyers, which further leads to loss of revenue and ultimately insolvency of the company.

The paper tries to resolve this by formally including land authorities, which are operational creditors in the CoC without voting rights, to facilitate smoother resolution and getting the inputs of land authorities for resolving the disputes mutually. This, in turn, will help in the sale of units and realisation of profits to run the corporate debtor as a going concern and help in the success of the resolution plan.

Further, provisions for intimation of cancellation of land allotment to determine the course of action will also be materialised in the presence of land authorities, as they are able to discuss the plan of action with the CoC. Additionally, the proposed inclusion of multiple facilitators is a commendable change brought by IBBI to fill the communication gaps between authorised representatives when the CD has multiple projects, protecting the interests of all stakeholders.

However, considering cases like Jaypee Infratech case²¹ where 20,000 homebuyers were involved, limiting the number of facilitators to five may not suffice. Rather, a more dynamic approach where the number of facilitators is determined based on the project size and complexity would be more attractive.

Additionally, the proposal to provide homebuyers direct access to CoC minutes is a significant step towards transparency. However, its effectiveness depends on ensuring that homebuyers have the necessary resources to interpret and act on the information provided.

Conclusion

This discussion paper once again ignited the debate on much-needed reforms in real estate insolvency, which tried to tackle the procedural complexity that arises in real estate insolvency. The proposed reforms aim to streamline real estate insolvency by making the procedure more inclusive, transparent efficient. The paper addresses the critical gaps prevalent in existing frameworks, especially concerning the interplay between IBC and RERA, these changes have the potential to ensure project completion, protect homebuyers, and enhance overall confidence in the insolvency process. If implemented effectively, these amendments will strengthen the real estate resolution ecosystem, benefiting all stakeholders involved.