Customised insolvency and bankruptcy resolution in work for realty sector

The government is planning to make changes in the IBC to allow 'customised resolutions' in residential real estate projects

The government will probably make changes in the insolvency law to enable “customised resolutions” of bankrupt residential real estate projects to ensure quick delivery of flats to homebuyers in stressed housing projects, according to a report in The Economic Times (ET).

The planned changes to the Insolvency and Bankruptcy Code (IBC) would permit resolution depending on the nature of the projects, instead of imposing a rigid framework on the entire real estate sector.

Sources familiar with the matter said that the move will prevent the erosion of the value of stressed housing projects. This is part of a number of other changes that the government is planning to bolster the corporate insolvency resolution process under the IBC.

"After comprehensive discussions with stakeholders, it is felt that we can’t have one standard method for resolution of stress in real estate where issues are much complex and sensitive unlike many other sectors,” a source told ET.

The source added that there could be enabling provisions for innovative, and customised resolutions for this sector.

However, such resolutions may have to follow the basic IBC structure. Also, these resolution formats may require clearance from the National Company Law Tribunal (NCLT).

Some analysts said the real estate sector warrants a “unique resolution process”.

Anoop Rawat, partner, insolvency and bankruptcy, Shardul Amarchand Mangaldas & Co, a law firm, said that issues of financing, construction and completion of real estate projects are different.

“It is, therefore, apt to have project-specific insolvency processes for realty except where the entire company is in stress and defaults have taken place across all or in most of the projects,” he said.

Rawat said that procedural issues such as the role of the resolution professional and the management, and the calculation of resolution costs need more clarity.

Officials had previously reported that the government was considering a multi-pronged approach to resolve stress in housing projects to ensure faster delivery of homes to buyers. Therefore, an innovative IBC mechanism for housing will help in such cases.

In January, the Ministry of Corporate Affairs had invited suggestions on a special regime for the real estate sector, proposing that the process be restricted to insolvent projects and not extended to an entire company, according to the ET report.

Manmeet Kaur, working at law firm Karanjawala & Co, said, “A suitably-tailored resolution can be achieved based on the status of the real estate project and the objectives of the relevant stakeholders."

She stated that certain safeguards are needed to protect the specialised framework from getting misused by the stakeholders.