Home buyers likely to get some relief from bankruptcy shock

Home buyers may be spared the agony in insolvency cases where they have bought and occupied a house without completing the necessary paperwork, a person aware of the development said. Currently, such houses are considered part of the builder’s inventory and hence open to resolution under the Insolvency and Bankruptcy Code (IBC).

The government is planning a special carveout within IBC to exclude such homes, the person cited above said on the condition of anonymity. In some cases, customers got possession but not occupation certificates, as the developer failed to pay the local authority for the land.

The change would prevent situations where a home buyer who has taken possession of the house and has been living there for years faces questions about his eligibility for the full value of the house while other creditors have to take a haircut as part of debt resolution of the builder because that house is still deemed to be the builder’s inventory, the person cited above said. “In the real estate sector, land value is huge, and the payment period for the builder is long. If timely payment is not made by the builder, approvals could get delayed,” the person added.

The move is meant to soothe home buyers and simultaneously offer a tailored debt resolution regime for the real estate sector, a large employment-generating industry which is struggling. About a fifth of all companies ending up in bankruptcy tribunals are from real estate, according to data from the regulator Insolvency and Bankruptcy Board of India.

Experts said the move would benefit consumers, but the process could get complex. “Approaching insolvency resolution in the real estate sector on the basis of individual projects rather than at the level of corporate entity is a novel idea. However, it would require rules to be put in place so that there is no confusion or ambiguity in executing this process, given the complexities and the often clashing interests of creditors involved,” said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.

Media reports suggest that developers owe several thousands of crores of rupees to the Noida, Greater Noida, and Yamuna Expressway authorities against the plots allotted to them for construction.

A second area of emphasis in the proposed amendments to IBC is a new regime for handling the insolvency of business groups for which a new chapter will be introduced in IBC, said the first person quoted above. At present, IBC only deals with debt resolution of individual legal entities, not of a group, which is far more complex. The new group debt resolution regime will draw from the government’s experience of handling the debt resolution of the group entities of Infrastructure Leasing & Financial Services Ltd (IL&FS), which was done outside IBC.

A regime to handle the insolvency of a group as a whole could bring much better outcomes of debt resolution by coordinating the process at the level of different downstream entities rather than attempting their resolution individually, said Rawat. The proposed regime is likely to cover only those entities in a group which are in distress and not the solvent members of the group. Under this, a lender could file joint bankruptcy applications against multiple group entities.

The government intends to bring a Bill to amend the IBC in the monsoon session of Parliament, which is likely to commence in July. An email sent to the ministry of corporate affairs on Friday seeking comments for the story remained unanswered.