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Business News/ News / India/  Reverse insolvency for realty yet to take shape
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Reverse insolvency for realty yet to take shape

The so-called reverse bankruptcy framework was first proposed by the MCA in a discussion paper in January.

Bifurcation of assets, service provisions to projects remain hurdles. (File photo: Mint)Premium
Bifurcation of assets, service provisions to projects remain hurdles. (File photo: Mint)

A government move to protect homebuyers in bankrupt real estate projects is yet to take concrete shape given the way developers structure their projects, two people aware of the matter said.

The so-called reverse bankruptcy framework was first proposed by the ministry of company affairs in a discussion paper in January. It would apply the insolvency law to the stalled project and not the entire company. Creditors can ask the promoter to bring in funds and finish the project, or assign the project to another developer to complete. This contrasts with the normal Insolvency and Bankruptcy Code (IBC) procedure where any default triggers insolvency against the whole company.

However, even after several industry consultations, the Ministry of Corporate Affairs (MCA) is yet to notify the final rules. Market participants informed the government about several practical issues that could arise, and the ministry is still working to iron out the same, people cited above said on condition of anonymity.

An email sent to MCA for comment remained unanswered.

Legal experts say it is difficult to ascertain creditors, both financial and operational, in the real estate sector.

Financial creditors like banks often lend money to the company or a group of projects being developed by the company. In such a scenario, bifurcation of creditors for a specific project becomes difficult. Operational creditors, on the other hand, are generally service providers to the project for whom dues are owed. Most of the service providers cater at the company level and not at the individual project level.

“For project-wise insolvency of a real estate company, there may be practical challenges in identifying creditors project-wise, be it financial or operational creditors. Further, dues to development authorities would be payable by the company as a whole," said Uday Khare, partner, Cyril Amarchand Mangaldas. “There would, therefore, be a lack of clarity, both from the perspective of admission and resolution, on which claims pertain to the specific project and which to the company as a whole."

Separation of assets is another key challenge, since most projects don’t have distinct assets. For instance, if a company is developing three projects in a large land parcel and one of them goes insolvent, it would be difficult to delineate the assets, legal experts add.

Another key peculiarity arises from the fact that under regular IBC, existing promoters are ineligible to bid, but in reverse IBC, there is no such restriction.

“The principle of the reverse corporate insolvency resolution mechanism (CIRP) stands contrary to the principles on which the CIRP process is based. In reverse CIRP, the promoter itself is responsible for infusing the funds in the project and acts as a lender to the concerned project/real estate company," said Sanjeev Kumar, partner, Luthra and Luthra Law Offices. “CIRP of real estate companies poses different challenges on account of the peculiarity of sector and the nature of the stakeholders involved," Kumar added.

Currently, there are no notified rules on reverse insolvency; however, the framework is being adopted on ground based on a verdict given by the National Company Law Appellate Tribunal (NCLAT) in a case involving Flat Buyers Association Winter Hills, Gurgaon vs Umang Realtech.

“Reverse insolvency is promoter-driven process as it requires the promoters to fund the project to complete the construction and development of projects. This may lead to conflicts if promoters are disqualified under Section 29A or if a proceeding is initiated against the promoters for related party or fraudulent transactions," said Suresh Palav, partner, IndiaLaw. “Considering the uniqueness and challenges involved in the realty sector, IBC should be resorted only as a last option. Instead, alternatives like addressing the stress through an administrator appointed under RERA should be explored."

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Updated: 03 Nov 2023, 09:57 PM IST
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