On November 1, 2023, the Insolvency and Bankruptcy Board of India (“IBBI”) has published a discussion paper (“Discussion Paper”) on amendments proposed to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). Comments on the proposals mentioned in the Discussion Paper were invited till November 22, 2023 and presently the same is under active consideration of the IBBI.

The Real Estate (Regulation & Development) Act, 2016 (“RERA Act”) has been enacted to protect the interests of the individual investor in real estate projects by ensuring that homebuyers/allottees are not left in the lurch and either get delivery of their homes within the stipulated period or compensation for the delayed delivery of their homes.

Therefore, in the Discussion Paper, the IBBI has proposed certain amendments to the CIRP Regulations with an aim to establish an effective system of accountability and transparency for real estate projects developed by insolvent builders.

The proposal included the following suggested amendments to be incorporated in the CIRP Regulations:

1. Mandatory registration and extension of projects under Real Estate Regulatory Authority (RERA);
2. Operating a separate bank account for each real estate project;
3. Execution of registration/sublease deeds with approval of committee of the creditors (CoC) during corporate insolvency resolution process (CIRP);
4. CoC to examine and invite separate plans for each project; and
5. Exclusion of property in possession of homebuyers from the liquidation estate.

Each of the aforementioned suggested amendments are summarised hereinbelow for better understanding:

1. Mandatory registration and extension of projects under Real Estate Regulatory Authority (RERA): According to section 3 of the RERA Act, all real estate projects are required to be registered with the respective state’s RERA authority where the area of land proposed to be constructed exceeds five hundred square meters or the number of apartments proposed to be constructed exceeds eight.
   
   By way of the Discussion Paper, it has been proposed to mandate the Interim Resolution Professional/ Resolution Professional to register all real estate projects under RERA in accordance with the provisions of section 3 of the RERA Act or to extend the registration of the real estate project, wherein the registration is expired or about to expire.
2. Operating a separate bank account for each real estate project: In real estate projects, the developer/promoter has multiple projects that are at different stages of construction. Under RERA Act, each project is registered separately and given a unique identification number. Presently, for real estate projects during CIRP, projects-wise bank accounts are not being maintained currently in many of the cases. Operating a separate bank account for each real-estate project would record all receipts and payments of the individual project.
   
   By way of the Discussion Paper, it has been proposed to mandate the Interim Resolution Professional/ Resolution Professional to maintain and operate a separate bank account for each project undergoing CIRP.
3. Execution of registration/sublease deeds with approval of committee of the creditors (CoC) during corporate insolvency resolution process (CIRP): As per section 20 of the Insolvency and Bankruptcy Code, 2016 it has been provided that the Interim Resolution Professional shall make every endeavour to protect and preserve the value of the property of the Corporate Debtor and manage the operations of the Corporate Debtor as a going concern. For a real estate business under CIRP, the IRP/ RP needs to ensure continuity, which may involve the acquisition and sale of inventory and for a real estate entity the inventory is an ‘unit’.
   
   By way of the Discussion Paper, to enable smooth functioning of the business operations even during CIRP, it has been proposed that in handover of occupied units or where possession has been transferred to home buyers, the RP may handover the ownership of a plot, apartment, or building to the allottees through transfer during the resolution process, with the approval of CoC.
   
   In offering custody of the unit to homebuyers/allottees for completion of Fit-Outs and/or other interior finishing work on “As is, where is” basis, the provisions of the IBC and its attendant Regulations prevailing for the time being in force seem to be silent. There is no bar in the RERA provisions applicable at present, for a developer to offer custody of a unit to its customers on an “As is, where is” basis for completion of pending finishing works and fit-outs etc., however, provided that as per such statute, ‘possession’ of a unit, within the meaning of that statute, cannot be offered by the builder to an allottee without requisite Occupancy Certificate (‘OC’) being obtained from the concerned authorities.
   
   Therefore, by way of the Discussion Paper, in order 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.
4. CoC to examine and invite separate plans for each project: A Corporate Debtor/Developer which is associated with real estate has multiple projects that are at different stages of construction. However, investing in all projects by one resolution applicant requires huge capital, and thus limits the number of resolution applicants. It is often seen that some resolution applicants are not interested in all projects and want to undertake specific projects. Moreover, multiple bidders for different projects could yield better value than a single bidder for the entire business.
   
   By way of the Discussion Paper, a concept of ‘Project Wise CIRP’ is proposed to be introduced since each project needs different treatment in terms of resolution. It is also proposed to enable and empower the CoC to examine and direct the RP to invite separate plan for each project. Such proposal would also encourage the association of allottees of a real state project (or Resident Welfare Association) to bring their own resolution plan and resolve issues in a specific project.
5. Exclusion of property in possession of homebuyers from the liquidation estate: Allottees/Homebuyers hold the status of financial creditors under the IBC and their interests are safeguarded in the IBC ecosystem. Under a real estate insolvency, there can be different categories of Allottees/Homebuyers are formulated based on the respective stage the creditor-in-class is in i.e., with or without possession, with possession and without registration etc.
   
   However, there is some confusion as to whether properties where, the allottees have taken possession but registration of the instrument of conveyance is pending, are to be included in the liquidation estate or not. There is no clear jurisprudence laid down in this regard and the allottees/homebuyers cannot be penalised/charged for the fault of the developer/builder facing insolvency, where such allottees/homebuyers have fulfilled their contractual obligations.
   
   Under the RERA Act, section 2 (d) defines allottee as follows: “allottee” in relation to a real estate project, means the person to whom a plot, apartment or building, as the case may be, has been allotted, sold (whether as freehold or leasehold) or otherwise transferred by the promoter, and includes the person who subsequently acquires the said allotment through sale, transfer or otherwise but does not include a person to whom such plot, apartment or building, as the case may be, is given on rent.
   
   Therefore, by way of the Discussion Paper, it is proposed that an allottee (as defined above) who is in possession of the unit shall be excluded from the ambit of liquidation estate of the Corporate Debtor facing insolvency.

Author’s Thoughts: The aforementioned proposed measures/amendments will provide relief to the Homebuyers and would encourage their participation in the process objectively. Once these amendments are brought in force, many operational difficulties would be simplified, being faced by the professionals under the current framework running the real estate insolvencies. 

Please find a copy of the Discussion Paper here.

This update has been contributed by Somdutta Bhattacharyya (Partner) and Kiran Sharma (Senior Associate).

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