Home buyers likely to get some relief from insolvency proceedings

Home buyers who have purchased and occupied a house without completing the necessary paperwork may get exempted from suffering in insolvency cases, a report by Mint said.

According to the Insolvency and Bankruptcy Code (IBC), these homes are currently seen as a part of the builder's inventory and are therefore subject to resolution.

A person aware of the matter told Mint that the government was preparing a special carveout within IBC to exclude such homes. Customers in some cases got possession but not occupation certificates, as the developer failed to pay the local authority for the land, he added.

The change would prevent circumstances in which a home buyer who has taken possession of the house and has been living there for years faces concerns about his eligibility for the full value of the house while other creditors have to take a haircut as part of the builder's debt resolution as that house is still deemed to be the builder’s inventory, the person told Mint.

“Land value in the real estate sector is very high, and the payment period for the builder is lengthy. If the builder does not make timely payments, approvals may be delayed," he added.

The move is intended to reassure home buyers while also providing a tailored debt resolution regime for the real estate sector, a large employment-generating industry that is struggling.

According to data from the regulator Insolvency and Bankruptcy Board of India, real estate makes up about a fifth of all companies that end up in bankruptcy tribunals.

Experts said while the move would benefit consumers, the process may become complicated.

Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co, said that it is novel idea to approach insolvency resolution in the real estate sector on the basis of specific projects rather than corporate entities.

Given the complexity and often conflicting interests of creditors involved, rules would need to be put in place to ensure that there is no confusion or ambiguity when carrying out this process, he added.

Meanwhile, media reports also suggest that developers owe several thousands of crores of rupees to the Noida, Greater Noida, and Yamuna Expressway authorities against the plots allotted to them for construction.

A second area of emphasis in the proposed amendments to IBC is the new regime for dealing with insolvency of business groups for which a new chapter will be added to the IBC, said the person quoted above.

He added that IBC currently only deals with debt resolution for individual legal entities, not groups, which is far more complex. The new group debt resolution regime will be based on the government’s previous experience resolving debts for Infrastructure Leasing & Financial Services Ltd (IL&FS) group outside IBC.

Rawat further said that a regime to handle the group's insolvency could result in much better outcomes of debt resolution by co-ordinating the process at the level of different downstream entities rather than attempting their resolution individually.

The proposed regime is likely to apply only to those entities in a group that are in distress, rather than the group's solvent members. Under this, a lender could file joint bankruptcy applications against multiple group entities, he added.