IBBI notifies new rules to shield healthy real estate projects from developer insolvency

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 from the consequences of defaults elsewhere in a developer’s portfolio.

Under regulations notified by the Insolvency and Bankruptcy Board of India (IBBI), a committee of creditors (CoC) can recommend that individual projects be excluded from the Corporate Insolvency Resolution Process (CIRP), even when the developer as a whole has entered insolvency proceedings. Any such exclusion will require approval from creditors holding at least 66% of the voting share and clearance from the National Company Law Tribunal (NCLT), as per the notification dated October 30.

Mint reported on 2 October that the regulator had deliberated on the proposal at its board meeting in late August and was preparing to notify changes empowering creditors to recommend the exclusion of financially healthy projects from the insolvency process.

The notification marks the culmination of months of deliberations on project-wise insolvency.

Under the existing framework, admitting a developer into CIRP brings all its projects under the insolvency process. This can leave buyers in completed or financially healthy projects exposed to disruptions in maintenance, uncertainty over registrations and other delays, even when their projects are not responsible for the developer's financial distress.

In a statement on Saturday, the regulator said the new rules “aim to facilitate more informed and viable resolution of real estate projects, enhance transparency and accountability, and strengthen the interests of homebuyers and other stakeholders in the insolvency resolution process”.

The regulations take immediate effect, which usually means they apply prospectively. Cases admitted before the notification may not automatically qualify for the new framework.

Legal experts, however, expect the courts to determine the precise applicability of the changes through judicial pronouncements.

The move has significant implications for the insolvency process, with real estate accounting for 22% of cases undergoing 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 Bankruptcy Code, amended in April, also provides for project-wise insolvency.

Under the new framework, the resolution professional must present project-wise information to the CoC at its first meeting. This will include details of registration with the Real Estate Regulatory Authority, the stage of construction, possession and occupancy status, and the number of completed and incomplete units.

Based on this information, the CoC can recommend that one or more projects be excluded from CIRP, provided creditors representing at least 66% of the voting share approve the proposal. The recommendation must be accompanied by reasons and submitted to the NCLT for approval.

The idea of project-wise insolvency has been debated for years. The latest framework draws on a discussion paper floated by IBBI in late June.

The regulations also seek to strengthen financial oversight by requiring a separate bank account for each real estate project of a distressed developer.

The resolution professional must periodically place project-wise receipts, payments and other financial information before the CoC. The insolvency process must also ensure compliance with fund-utilisation requirements under the Real Estate (Regulation and Development) Act (RERA).

“This ensures that funds contributed for a project are utilised for that project,” the regulator said.

The changes also give the CoC greater flexibility to approve homebuyers' requests for possession of their plots, apartments or buildings, and facilitate their registration.

Independent assessments

The new rules require the resolution professional, with the CoC's backing, to appoint one or more independent professionals to assess each project's technical condition and cost to completion.

The assessment must be completed before expressions of interest are invited from prospective resolution applicants and included in the information memorandum shared with them.

“This provides all stakeholders with a common and credible baseline on the cost and time required for completion, reducing information asymmetry and enabling better quality and more realistic bids,” the regulator said.

The regulations also seek to strengthen the role of authorised representatives of creditors in a class, such as homebuyers. Minutes of CoC meetings must now capture the views, concerns and opinions expressed by these representatives.

The changes address a key problem with the existing insolvency framework: the blanket moratorium that follows a developer's admission into CIRP.

Anoop Rawat, partner and national practice head, Insolvency & Restructuring, at Shardul Amarchand Mangaldas & Co, said earlier this month that the moratorium freezes payments even for healthy, nearly completed projects with no defaults. This can halt construction, prompt labour and contractors to leave, block home-loan disbursements and delay registrations.

Project-wise insolvency would ring-fence the moratorium and CIRP to defaulting projects, allowing construction, funding, possession and registration to continue in financially healthy ones, Rawat said.