IBBI announces new rules to protect healthy real estate projects from developer insolvency | Today’s news
NEW DELHI: India’s insolvency regulator has opened the door to shielding financially sound real estate projects from bankruptcy proceedings against their developers, potentially sparing homebuyers the consequences of defaults elsewhere in the developer’s portfolio.
As per regulations notified by the Insolvency and Bankruptcy Board of India (IBBI), the Committee of Creditors (CoC) can recommend that individual projects be excluded from the corporate insolvency resolution process (CIRP), even if the developer as a whole has entered insolvency proceedings. Any such disqualification will require the approval of creditors holding at least 66% of the voting rights and approval from the National Company Law Tribunal (NCLT), as per the October 30 notification.
Mint reported on October 2 that the regulator discussed the proposal at a board meeting at the end of August and is preparing to announce changes authorizing creditors to recommend the exclusion of financially sound projects from insolvency proceedings.
The announcement represents the culmination of several months of deliberations on the project’s insolvency.
According to the current framework, when a developer is admitted to the CIRP, all of his projects will enter the insolvency process. This can leave buyers in completed or financially sound projects exposed to maintenance disruptions, registration uncertainty and other delays, even if their projects are not responsible for the developer’s financial woes.
In a statement on Saturday, the regulator said the new rules “are aimed at facilitating a more informed and viable resolution of real estate projects, increasing transparency and accountability, and strengthening the interests of homebuyers and other stakeholders in the insolvency resolution process”.
Regulations take effect immediately, which usually means that they apply prospectively. Cases received prior to notification may not automatically qualify for the new framework.
However, legal experts expect the courts to determine the exact applicability of the changes through court rulings.
The move has significant implications for the insolvency process, with real estate accounting for 22% of cases going through resolution, making it the second largest sector after manufacturing at 36%.
Several developers or their subsidiaries, including Raheja Developers, Supertech, Today Homes and Ajnara, are currently facing bankruptcy proceedings. The Insolvency and Insolvency Act, amended in April, also includes project insolvency.
Under the new framework, a problem-solving professional must present project-related information to the CoC at its first meeting. This will include details of registration with the Real Estate Regulatory Authority, stage of construction, ownership and occupancy status and number of completed and unfinished units.
Based on this information, the CoC may recommend that one or more projects be excluded from the CIRP if the proposal is approved by creditors representing at least 66% of the voting rights. The recommendation must be accompanied by reasons and submitted to the NCLT for approval.
The idea of project insolvency has been debated for years. The latest framework draws from a discussion paper published by IBBI in late June.
The regulations also seek to strengthen financial oversight by requiring a separate bank account for each distressed developer’s real estate project.
The Problem Solving Specialist must submit receipts, payments and other financial information related to the project to the CoC on a regular basis. The insolvency process must also ensure compliance with the requirements for utilization of funds under the Real Estate (Regulation and Development) Act (RERA).
“This ensures that the funds provided for the project will be used for that project,” the regulator said.
The changes also give the CoC more flexibility in approving homebuyers’ applications to own their plots, flats or buildings and make it easier to register them.
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Independent evaluations
The new rules require the CoC Support Troubleshooter to appoint one or more independent experts to assess each project’s technical status and cost of completion.
The assessment must be completed before potential resolution applicants are invited for expressions of interest and included in the information memorandum that will be shared with them.
“This provides all stakeholders with a common and trusted basis on cost and time required for completion, reduces information asymmetry and enables better quality and more realistic bids,” the regulator said.
The regulations also seek to strengthen the role of authorized representatives of creditors in the group, such as home and apartment buyers. Minutes of VP meetings must now capture the views, concerns and opinions expressed by these representatives.
The changes address a key problem with the current insolvency framework: the blanket moratorium that follows a developer’s admission to CIRP.
Anoop Rawat, partner and head of national practice, Insolvency & Restructuring, Shardul Amarchand Mangaldas & Co, said earlier this month that the moratorium freezes payments even for healthy, near-complete projects without defaults. This can halt construction, force workers and contractors to leave, block home loan payments and delay registrations.
Project-wise insolvency would limit the moratorium and CIRP on projects in arrears, allowing construction, financing, holding and registration of financially sound projects to continue, Rawat said.
