Government sources reported on Monday that the Ministry of Corporate Affairs (MCA) is attempting to implement certain “speed breakers” to prevent the possible misuse of its proposal for project-based insolvency resolution for real estate firms. The MCA suggested in its consultation paper on amendments to the Insolvency and Bankruptcy Code (IBC) that “when an application is filed to initiate the corporate insolvency resolution process (CIRP) in respect of a corporate debtor who is the promoter of a real estate project, and the default pertains to one or more of its real estate projects, the adjudicating authority, at its discretion, shall admit the case but apply the CIRP provisions only with respect to such real estate projects which have defaulted.” The MCA stated that such projects would be recognised as distinct from the larger entity for the limited purpose of resolution.
The government is considering giving the National Company Law Tribunal (NCLT) the power to decide cases where the insolvency of a real estate project must remain limited to the project in default. Additionally, the MCA, in collaboration with the housing and urban affairs ministry, has been consulting with representatives of the Real Estate Regulatory Authority (RERA) on this matter. One proposal is to allow project-wise insolvency only for those registered with RERA.
To avoid unauthorised diversion of funds, the government is considering putting in place certain safeguards, such as conducting due diligence before admission. The government is also considering allowing RERA to determine whether a project can be resolved before the NCLT takes a decision.
Since the IBC’s inception, the real estate sector has faced unique challenges. According to professional services firm Alvarez & Marsal, the behaviour of homebuyers is significantly different from that of traditional financial creditors and may lead to suboptimal economic decisions. The proposed changes to the IBC also include enabling the resolution professional to transfer the ownership and possession of a plot, apartment, or building to the allottees with the consent of the CoC.
