Defaulting real estate developers have presented a unique challenge to insolvency proceedings in India, with nearly 1,200 such cases pending under IBC (Insolvency and Bankruptcy Code). Resolution has been difficult because the interests of homebuyers, who pay in advance and seek completion of their homes, are usually in direct conflict with those of lenders who want quick liquidation of assets to recover their dues.
When lenders initiate insolvency proceedings against realty companies, projects get stalled, putting homebuyers in jeopardy. In some cases, lenders seek to recover their dues from almost-complete projects, when the actual default has occurred in early-stage ones. The Supreme Court of India and the High Courts have been passing judgments for better protection of the interests of homebuyers in IBC cases. With much litigation around this, it is good that the Insolvency and Bankruptcy Board of India has now floated a discussion paper that seeks to codify the essence of these rulings into law. Its main thrust is to adopt a project-wise resolution process for real estate cases, instead of the company-level resolution applied to other industries. Three key changes are proposed. Resolution Professionals will need to get real estate projects registered individually under RERA (Real Estate Regulation and Development Act), once a company is under IBC. The Committee of Creditors (CoC) will be asked to evaluate resolution plans for individual projects, rather than for the company. Properties where buyers are in possession of homes or those where they have paid in full, will be left out of liquidation.
Such a changed resolution process confers clear benefits for homebuyers. Buyers will be able to take possession of their flats if fully completed or on an as-is-where-is basis after making payment — subject to the CoC’s approval. The buyer deserves a better deal because real estate in India is a rare industry where they fund working capital requirements of the developer by making advance payments. The requirement to maintain separate bank accounts for each project supervised by the Resolution Professional, is pragmatic too. It can pre-empt diversion of funds by the developer. The project-wise approach is also in sync with RERA, which requires developers to sequester funds project-wise, so that allottees’ payments are not co-mingled.
But the flip side of this approach is that it runs counter to Section 29A of the IBC, which expressly bars promoters of a defaulting company from involving themselves in operations or resolution, once a case is filed. The promoter may have to infuse funds to complete and hand over units to homebuyers. Giving homebuyers first claim on half-completed projects, will also shrink the pool of assets available for other financial creditors. Now that homebuyers too have a seat on the CoC, the prevailing tug-of-war between them and other financial creditors may continue.