Safeguards for project-wise insolvency in real estate on the cards

Concerned about the possible misuse of its proposal to allow project-based insolvency resolution for real estate companies, the Ministry of Corporate Affairs (MCA) is trying to work out certain “speed breakers” to ensure there are checks and balances in the law, government sources said.  

The ministry in its consultation paper on Insolvency and Bankruptcy Code (IBC) amendments had proposed that “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”.

The MCA said such projects will be recognised as distinct from the larger entity for the limited purpose of resolution.

While the National Company Law Tribunal (NCLT) may be given the power to decide the cases where the insolvency of a real estate project has to stay limited to the project in default, the government is also discussing whether there is a need for a completely different mechanism to deal with real estate insolvencies.

“In real estate project insolvency, no one size can fit all. We have to come up with a robust system with adequate restrictions in place,” a senior government official said.  The MCA, along with the housing and urban affairs ministry, has also been consulting the representatives of the Real Estate Regulatory Authority (RERA) on this matter. One of the proposals is to allow project-wise insolvency only to those registered with RERA.

“IBC proceedings do not distinguish between RERA and non-RERA projects. That the process should be confined to the project in question is sensible. This change in law would give legal backing to some of the NCLT orders,” Rajive Kumar, chairman, RERA - Uttar Pradesh.

On the concerns of misuse, the government is also considering putting some safeguards such as due diligence before admission to ensure that there is no unauthorised diversion of funds.

“RERA should be allowed to examine whether a project can be resolved before the NCLT takes a decision,” Kumar added.   

Since the start of IBC, real estate has been a sector which has faced its own unique challenges. Global professional services firm Alvarez & Marsal said the behaviour of homebuyers is starkly different from conventional financial creditors and may take a sub-optimal economic decision. “Absenteeism, activism and individual voting preferences of homebuyers tend to delay key decision making or alter the decision by present and voting creditors,” the firm said in its recent paper on IBC.

The proposed changes to IBC also include enabling the resolution professional to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the CoC.