Experts seek project-wise insolvency for real estate in IBC

Even as the Insolvency and Bankruptcy Board of India (IBBI) is overseeing project-wise insolvency process in the real-estate sector, a facility not available to other sectors, experts say that there is a need for a detailed framework, with statutory backing, to make it more effective.

The Insolvency and Bankruptcy Code (IBC), 2016 would require to be amended for this pupose, they feel.

The government is likely to table the IBC-amendment Bill in Parliament during the winter session, but it may not feature any provision related to project-wise insolvency. Official sources say that since IBBI has already introduced such provisions, through tweaking clause 36A(1) of the CIRP Regulations, there is no requirement as such to bring in an amendment to the Code itself.

“The regulations provide the government the flexibility to change the norms, if there are instances of errant developers taking undue advantage of the rules,” an official said. “However, an amendment in IBC would be difficult to change once introduced.”

To expedite and aid the resolution process, IBBI tweaked CIRP Regulations in February, which allowed the resolution professional (RP), after taking approval from the Committee of Creditors (CoC), to invite separate resolution plans for each real-estate project or group of projects of the concerned corporate debtor (CD). Prior to this rule, the RP used to invite resolution plans for the entire company unless allowed by NCLTs to seek resolution plans for individual projects.

The amendment (in February) provided a regulatory backing to project wise insolvency resolution of real estate companies, say experts. But, this is not enough, as the risk of regulatory changes brought through the amended regulations of IBBI, being challenged on grounds of being over and above the scheme of IBC would remain and may deter bidders from coming forward to bid/resolve such assets, noted Kumar Saurabh Singh, Partner, Khaitan & Co.

“We have seen past instances wherein changes in CIRP Regulations were contested on the ground that such amendments introduced by IBBI suffers from ‘excessive delegation’ and that such a right/amendment could only be made by way of an amendment to IBC,” Singh said.

The Ministry of Corporate Affairs, vide its discussion paper dated 18 January 2023, took note of the various judicial experiments undertaken to adapt CIRPs to the unique consideration of real estate companies.

The paper envisaged introducing substantive modifications to the IBC, involving a comprehensive sets of rights and liabilities of all the stakeholders involved in the process, including in relation to: the manner of initiating CIRP process on a project-wise basis; extent of judicial discretion in conducting project-wise CIRP; manner of submitting resolution plans for project wise insolvency etc.

Therefore, considering the nature of the substantive changes that are envisaged to be introduced to aid resolution of distressed real estate companies/projects, it is advisable for this regime to be introduced in terms of an amendment to IBC, duly approved by an act of parliament, say experts.

Sumant Nayak, senior partner, Desai & Diwanji said the ideal approach going forward would be to introduce the relevant provisions in the IBC. “This would also provide the leg-up in curbing multiplicity of litigations by the allottees and will provide the much needed succour to the financial viability and solvency of real estate projects of the CDs,” he said.

In the latest IBBI newsletter, the body’s Chairman Ravi Mittal said that among nearly 1,400 real estate/construction companies that were admitted into the corporate insolvency resolution process (CIRP) so far, 645 were “successfully rescued”, via resolution or closure, and 261 were liquidated. He noted that the number of rescued companies has been 2.5 times those liquidated.

Stating that the insolvency code provided a structured mechanism for resolving insolvency, Mittal noted that insolvency resolution of real estate companies presents a unique set of challenges for the standardised Corporate Insolvency Resolution Process. “With the help of measures as introduced from time to time, several real estate companies have been successfully resolved under the IBC,” he said.