[Analysis] Real Estate Project Insolvency Processes in India – IBBI’s Proposals

Table of Contents

1. RERA Registration and the Road to Resolution Success
2. IBBI Proposes Dedicated Bank Accounts for Real Estate Projects in CIRP
3. IBBI’s Proposal Streamlines Real Estate Handovers During CIRP
4. CoC to examine and invite separate plans for each project

The Insolvency and Bankruptcy Board of India (IBBI), on November 6^th, 2023 has released discussion paper dealing with the certain issues being faced in insolvency processes of real-estate projects. The key highlights of the discussion paper include:

1. RERA Registration and the Road to Resolution Success

1.1 Legal provisioning as per RERA

According to section 3 of the Real Estate (Regulation and Development) Act, 2016, (RERA Act), all real estate projects are required to be registered with the respective state’s RERA where the area of land proposed to be constructed exceeds 500 square meters or the number of apartments proposed to be constructed exceeds 8.

1.2 IBBI’s Proposal

The IBBI is now planning to require the IRP/RP to register all real estate projects under RERA or to renew the registration of real estate projects where it has expired or is nearing expiration.

1.3 Impact

Registration of real estate projects under RERA is a pivotal step in fostering transparency and accountability, essential for a more efficient and successful resolution process. This sector-specific legislation significantly bolsters the prospects of a favorable outcome.

2. IBBI Proposes Dedicated Bank Accounts for Real Estate Projects in CIRP

2.1 Legal provisioning as per RERA

Under RERA, each project is registered separately and given a unique identification number. The approvals, filings, etc. are all done on a project basis. The RERA registration facilitates systematic record-keeping and mandates project-wise separate accounts. Developer/Management is required to maintain and provide detailed records related to the project.

2.2 IBBI’s Proposal

In line with the RERA provision for maintaining separate accounts for each project and to ensure transparency in the process, IBBI has now proposed that IRP/ RP should operate a separate bank account for each project undergoing CIRP.

2.3 Impact

Establishing dedicated bank accounts for each real estate project will comprehensively document all financial transactions, providing invaluable data for project-specific insolvency proceedings and the facilitation of distinct resolution plans for individual real estate projects.

3. IBBI’s Proposal Streamlines Real Estate Handovers During CIRP

3.1 Present Scenario

Managing continuity in a business undergoing Corporate Insolvency Resolution Process (CIRP) often involves acquiring and selling inventory. However, the real estate sector poses a distinctive challenge. In certain instances, creditors have fulfilled their contractual obligations, and the corporate debtor (CD) has completed construction, yet formal ownership transfer remains pending. Currently, some courts have utilized their inherent powers to authorize ownership and registration transfers for select projects during CIRP.

3.2 IBBI’s Proposal

To facilitate the smooth handover of occupied units or where possession has been transferred to home buyers, IBBI has now proposed to allow RP to handover the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process, with the approval of CoC.

Further, to avoid delays due to unnecessary holds-ups, it is also proposed that with the approval of the CoC, RP may also be permitted to hand over the possession of units to the allottees on ‘as is where is’ basis or on payment of balance amount, if any, after taking in to account the funds due and funds required for completing the unit.

3.3 Impact

This proposal will potentially reduce the disputes. Further, the transactions will be formalized through the transfer of such units during the resolution process with the approval of the CoC.

4. CoC to examine and invite separate plans for each project

4.1 Present Scenario

Generally, the CD which is associated with real estate has multiple projects that are at different stages of construction. Some projects have been completed and some are partially completed, or some are at the initial phase of construction. However, investing in all projects by one resolution applicant requires huge capital, and thus limits the number of resolution applicants.

4.2 IBBI’s Proposal

The IBBI has proposed to clarify that CoC on examination, may direct the RP to invite separate plan for each project.

4.3 Impact

This proposal would also encourage the association of allottees of a real state project to bring their own resolution plan and resolve issues in a specific project.