Monday, July 22, 2024

Government Likely to Abandon Special Insolvency Framework for Real Estate in Upcoming IBC Amendments

The contemplation of a dedicated resolution framework for the real estate sector, designed to offer additional safeguards to defaulting firms within the existing Insolvency and Bankruptcy Code (IBC), may not find its way into the anticipated amendments, according to sources familiar with the matter. The government, having engaged in thorough discussions, is now of the opinion that introducing sector-specific mechanisms into the IBC could potentially dilute the fundamental principles of bankruptcy laws, leading to counterproductive outcomes. These insights, suggest that the amendments to the IBC are slated to be introduced post the general election scheduled for April-May, potentially with some flexible regulations to facilitate smoother resolution processes within the real estate domain.

In January 2023, the government sought the perspectives of stakeholders on the proposal for a specialized insolvency regime tailored for real estate. This envisaged a scenario where the adjudicating authority could selectively apply IBC provisions solely to insolvent projects, rather than subjecting the entire realty company to bankruptcy proceedings. The intention behind this proposal was to expedite stress resolution while allowing developers to maintain focus on completing other projects. However, concerns about the potential retention of control by defaulting promoters during the insolvency resolution process and the risk of misuse prompted a reevaluation of the initial plan.

“After due deliberations and consultations, no special framework for real estate is being planned now,” emphasized one of the sources. The government is exercising caution, apprehensive about the possibility of promoters and developers exploiting relief measures, leading to the abandonment of certain projects in favor of higher profits. Such a scenario could potentially worsen the challenges faced by homebuyers instead of alleviating them.

It is noteworthy that the current version of the IBC does not incorporate special dispensations for real estate developers. Homebuyers and other creditors retain the authority to bring the entire realty firm to the National Company Law Tribunal (NCLT) for insolvency, even if the issue pertains to just one of its projects. Additionally, defaulting promoters face the imminent risk of losing control over their companies once insolvency cases are admitted by the NCLT. According to data from the Insolvency and Bankruptcy Board of India (IBBI), the real estate sector accounted for 21% of admitted cases until December 2023, marking it as the second-highest after manufacturing. However, it constituted only 14% of resolved insolvency cases, highlighting the challenges in effectively resolving distress within the real estate domain.

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