IBBI likely to bring out discussion paper on real estate insolvency

Increased involvement of the Real Estate Regulatory Authority, or RERA, could also be proposed in the upcoming discussion paper

The Insolvency and Bankruptcy Board of India (IBBI) is expected to bring out a comprehensive scheme of insolvency resolution in the real estate sector for public discussion soon, according to sources. 

The proposed changes in consideration under the Insolvency and Bankruptcy Code (IBC) includes a carve out for houses, which have already been handed over to homeowners, to be kept outside the purview of the resolution process, another official source said. 

This can be done through an existing provision in the law. Section 18 of the IBC, which deals with duties of the insolvency professional, gives powers to the government to exclude certain assets from the resolution process in consultation with a financial sector regulator. 

Increased involvement of the Real Estate Regulatory Authority (RERA) could also be proposed in the upcoming discussion paper. 

Since the start of IBC, real estate has been a sector, which has faced its own unique challenges.

For instance, experts feel that the behaviour of home buyers is starkly different than that of conventional financial creditors, who could take a sub-optimal economic decision.

Homebuyers are represented through authorised representatives on the committee of creditors (CoC). 

Separately, the Ministry of Corporate Affairs (MCA) has also proposed a slew of changes for real estate insolvencies, including project-wise insolvency. It will enable the resolution professional to transfer ownership and possession of a plot, apartment or building to the allottees with the consent of the CoC.

MCA, along with the ministry of housing and urban affairs, has also been consulting with representatives of the RERA on the issue of project-wise insolvency. 

Here’s what the MCA has proposed; “When an application is filed to initiate the corporate insolvency resolution process (CIRP) in respect of a corporate debtor, who is the promoter of a real estate project, and the default pertains to one or more of its real estate projects, the adjudicating authority, at its discretion, shall admit the case but apply the CIRP provisions only with respect to such real estate projects, which have defaulted.” 

This has raised concerns of misuse by some developers to exit projects, which they don’t consider viable.