IBC reforms will benefit distressed real estate projects, experts say
It will increase their chances of a revival by discouraging litigation from dissenting creditors, providing greater flexibility to dispose assets, and offering more freedom to strike quick deals with potential investors, experts told Mint.
Bengaluru/New Delhi: The proposed revamp of the Insolvency and Bankruptcy Code (IBC) will increase the chances of a revival for real estate projects undergoing insolvency proceedings by discouraging litigation from dissenting creditors, providing greater flexibility to dispose assets, and offering more freedom to strike quick deals with potential investors, several experts told Mint.
The overhauled IBC will also give property developers greater access to capital and lower funding costs, and help reduce project delays with a creditor-led, out-of-court insolvency route, they said.
Tweaking incentives
The IBC Amendment Bill proposes an ingenious way to encourage creditors to choose a restructuring plan that benefits homebuyers over liquidation. It does so by introducing a new benchmark to decide the payout for dissenting creditors. Banks that don't back a restructuring plan will receive the lesser of the following two – their liquidation entitlement, or what they would have received if, hypothetically, the resolution plan value was disbursed based on the "waterfall mechanism" for distributing proceeds under the IBC.
Banks that don't back a restructuring plan will be paid less than their liquidation entitlement or what they would have received if, hypothetically, the resolution plan value was disbursed based on the "waterfall mechanism" for distributing proceeds under the IBC.
This is expected to discourage banks from blocking resolution plans that benefit homebuyers and insisting on their liquidation entitlement, experts said. Anoop Rawat, national practice head (insolvency and restructuring) at law firm Shardul Amarchand Mangaldas & Co, said the dissenting payout provision appears to remove the motivation to dissent on the basis of a higher liquidation value.
“While the liquidation value (LV) assurance is a globally recognised principle, LV assurance under the code is frequently used for recovery-based decision-making, which adversely impacts successful resolution. The new provision will be of help for real estate projects where the high LV motivates dissentbysecuredfinancial creditors," he said.
Project-wise resolution
The proposed amendments also allow the administrator of the company, hired by lenders, to sell individual assets when required. This enables project-wise resolution while ring-fencing other viable projects from insolvency proceedings.
The proposed creditor-initiated debt resolution scheme allows existing management to continue to run the operations under the oversight of administrator while new investors, shareholders and lenders explore informal restructuring measures.
Experts also said flexible settlement terms could attract a wider pool of investors and boosting valuations. The ability to restructure debt more efficiently would improve cash flow for stressed real estate firms, they added.
“The real estate sector attracts a lot of private and foreign credit. With the proposed reforms in IBC, credit will be more accessible," said Ashwin Bishnoi, partner at law firm Khaitan & Co.
IBC cases have dragged on in recent years owing to a growing number of cases and limited bandwidth of courts, and the overhaul makes clear the government's intent to speed up the process, he said.
“This is good news for both homebuyers and lenders, and will give more confidence.Out-of-court settlement also means that the company doesn't go into insolvency and the business can continue under supervision. This can prevent further delays in such cases," Bishnoi added.
Streamlining insolvency
The government has taken a series of steps of late to make IBC more effective. In February, the Insolvency and Bankruptcy Board of India (IBBI), the rule maker for the sector, made amendments to streamline the corporate insolvency resolution process with a special focus on real estate projects. For instance, the resolution professional can, after obtaining necessary approvals, hand over possession of plots, apartments or buildings to homebuyers even during an ongoing resolution process.
The latest IBC reforms will make things even easier for the sector, experts said.A creditor-led insolvency process could speed up resolutions, especially in real estate, they said, reducing the time lost to litigation.
“A quick and predictable process will not only protect brand credibility but also attract more private credit to help complete stuck projects efficiently and provide viable solutions to all stakeholders including homebuyers," said Dinkar Venkatasubramanian,partner and national debt and special situations leader, EY India.
“The bill also has a number of amendments that can help fast-track resolutions and optimise outcomes, including mandatory admission within 14 days, clarity of creditor dues and flexibility to opt for group insolvency or project insolvency," he added.
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