Customised IBC resolutions in the works for real estate

The government would probably change the insolvency law to permit "customised resolutions" of insolvent residential real estate projects to assure prompt delivery of flats to homebuyers in troubled housing projects, according to a media report by the Economic Times (ET).

The proposed revisions to the Insolvency and Bankruptcy Code (IBC) would permit resolution depending on the nature of the projects rather than imposing a rigid framework on the whole real estate sector, people familiar with the matter said to ET.

According to them, the action will aid in halting the value erosion of distressed housing projects. It is one of a number of adjustments the government is preparing to strengthen the corporate insolvency resolution procedure under the IBC.

"After comprehensive discussions with stakeholders, it's 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," one of the persons told ET. "So, there could be enabling provisions for innovative, customised resolutions (in addition to other provisions) for this sector," the person said.

Such resolutions might, however, be required to follow the fundamental IBC structure. Additionally, according to the sources, such settlement formats might need approval from the National Company Law Tribunal (NCLT).

Some analysts said the real estate sector, being unique in nature where homebuyers are also financial creditors under the IBC, warrants "unique resolution process", said ET in its report.

Anoop Rawat, partner, insolvency and bankruptcy, at law firm Shardul Amarchand Mangaldas & Co, pointed out that issues of financing, construction and completion of each real estate project 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 to ET.

However, procedural issues, such as the role of the resolution professional and the management, calculation of resolution costs, and intermingling of funds and operations across projects, need to be clearly spelt out, Rawat said, according to ET.

Officials had previously stated that the government was considering a multi-pronged approach to reduce stress in housing projects in order to ensure faster delivery of homes to buyers. This approach would include using the Real Estate Regulatory Authority and the Swamih (Special Window for Affordable and Mid-income Housing) Fund for last-mile financing, in addition to the IBC. Therefore, a creative IBC housing mechanism will be useful.

The corporate affairs ministry had requested suggestions on a special regime for the real estate industry in January, suggesting that the process be limited to bankrupt projects and not extended to a complete firm, including other solvent projects.

"A suitably-tailored resolution can be achieved based on the status of the real estate project and the objectives of the relevant stakeholders," said Manmeet Kaur of law firm Karanjawala & Co. "Further, this will ensure that the solvent projects are not stalled post-commencement of insolvency."

Certain safeguards are, however, required to ensure that the specialised framework is not being misused by the stakeholders, she added.