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Real Estate: IBBI Notifies Project Wise Resolution Rules

The real estate industry forms a significant portion of the flourishing Indian economy. However, it is also plagued with inordinate delays, cash-flow issues and anguished homebuyers. The Insolvency and Bankruptcy Board of India (“IBBI”) has recently added to the array of steps being taken to address these issues.

On February 15, 2024, the IBBI notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2024 (“Amendment”). The Amendment intends to streamline and bridge in the gaps faced in the Corporate Insolvency Resolution Process (“CIRP”) of real estate companies under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Amendment follows the Judgment of the Supreme Court of India.[1] and a subsequent Discussion Paper[2]. The Supreme Court upheld an innovative project-wise approach adopted by the National Company Law Appellate Tribunal (“NCLAT”) to streamline resolution.

Prior to the Amendment, all ongoing projects would be brought under the sweep of the CIRP upon commencement of CIRP of a Real Estate Company, at the helm of which, would be the Resolution Professional. This was expected to culminate in a Resolution Plan for the corporate debtor as a whole. Invariably, this process would (i) accentuate cash flow issues; (ii) deter potential Resolution Applicants; and (iii) further agonise homebuyers. Resolution Applicants would have to make mammoth financial commitments to succeed.

By the Amendment, solvent projects of the company will not be stalled on account of a default in one of the company’s projects. The Committee of Creditors (“CoC”) can invite and approve Resolution Plans even for individual projects since there may be multiple projects in different phases of construction. The Amendment also better aligns the IBC with the Real Estate Regulatory Act, 2016 and infuses much flexibility into the resolution process.

Some key aspects of the Amendment include:

  • Mandating the resolution professional of the debtor company to open separate bank CIRP accounts for each real estate project to ensure transparency.
  • Making provisions for inviting resolution plans for individual real estate projects.
  • Mandating that the Resolution Professional for the real estate project(s) shall be required to take approval on all costs from the CoC including costs to run the operations of the debtor company during CIRP.
  • Mandating that the CoC holds a meeting every 30 days to ensure that the CoC is apprised of the progress of the CIRP at all stages.
  • Mandating that the CoC approves of the valuation methodology proposed to be employed.

The Amendment is a welcome development, since creditors of a defaulting project are now likely to recover higher amounts. The provisions of the Amendment will enable pointed and speedy resolutions to defaulting real estate projects which is expected to benefit the entire real estate landscape.

[1] Indiabulls Asset Reconstruction Company Limited v. Ram Kishore Arora and Ors [AIR 2023 SC 2273].

[2] Discussion Paper: Real Estate Related Proposals-CIRP & Liquidation [November 6, 2023].

 

AUTHORS: Satyasrikant Vutha (Senior Associate) | Vaidehi (Associate)

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