Insolvency law may provide carveouts for homebuyers

New Delhi, Jan 19, 2023

The government and the Insolvency & Bankruptcy Board of India (IBBI) have proposed a tweak in the norms for the real estate sector, recognising the special needs of homebuyers, who often invest their entire savings.

A discussion paper, which will form the basis for amendments to the Insolvency & Bankruptcy Code (IBC), has suggested that in case an application is filed against a real estate company, which has multiple projects, a special dispensation will provide for initiating proceedings only against a part of the entity, which could be a specific project, that has defaulted.

“It is observed that insolvency resolution of corporate debtors (CDs) that are promoters of the real estate projects has posed a major challenge due to the peculiarities of this sector. Though the law has clarified the status of the allottees in a real estate project as financial creditors(FCs) and made them a core part of the committee of creditors (CoC), at times, their divergent interests do not align with the scheme of the CIRP. For instance, unlike other FCs, allottees prefer ownership and possession of the plot, apartment, or building rather than repayment of their advances with suitable haircuts or commencement of the liquidation process,” it said, while pointing to the inherent tension between banks and homebuyers who have different objectives.

While IBBI had proposed a similar solution in the rules, the plan is to provide a firm legal backing, which will reduce the hardship for homebuyers, who are often caught in the legal battle. It has also been proposed that during the insolvency resolution process, the resolution professional, who is in charge of the exercise, can allow transfer and ownership of property after a decision of the CoC, which includes banks and homebuyers.

While informal arrangements for completion of housing units have been initiated by resolution professionals, and possession is also being offered, transfer of ownership is something that has not been considered so far.

Real estate accounts for the second highest number of cases admitted for insolvency action — more than one-fifth — but resolution plans have been prepared in around 13% of the cases, IBBI data up to September showed.

[The Times of India]