Introduction
The Insolvency and Bankruptcy Board of India (IBBI) has released a discussion paper aimed at improving the resolution of insolvency cases in the real estate sector. This paper, drawing from a study by the Indian Institute of Insolvency Professionals of ICAI (IIIPI), proposes significant regulatory amendments to streamline the resolution process under the Insolvency and Bankruptcy Code (IBC), 2016. It addresses various practical challenges, including the role of land authorities, the handling of cancelled land allotments, the inclusion of homebuyers’ interests, and the dissemination of information to creditors.
This article critically evaluates these proposals, incorporating perspectives from comparative foreign insolvency frameworks, particularly from the United States, the United Kingdom, and Australia, to assess their effectiveness and potential impact.
Key Proposals and Critical Analysis
1. Inclusion of Land Authorities in Committee of Creditors (CoC) Meetings
The IBBI proposes allowing land authorities to attend CoC meetings as special invitees without voting rights. This change aims to enhance coordination between insolvency proceedings and regulatory requirements.
Commentary: While this proposal ensures that land authorities can provide critical inputs on land-related issues, it stops short of granting them a voting stake. In the UK’s insolvency framework, secured creditors—including governmental land authorities—have substantive rights in creditor meetings. A similar approach in India could ensure that land authorities’ concerns are not merely advisory but have tangible influence on resolution plans.
2. Handling Cancelled Land Allotments in Real Estate Insolvency Cases
The proposal seeks to mandate reporting of cancelled land allotments to the CoC and adjudicating authorities, enabling informed decision-making on liquidation or alternative resolutions.
Commentary: This proposal is crucial in protecting stakeholder interests, especially homebuyers. In the U.S., under Chapter 11 bankruptcy proceedings, assets that are critical for business continuity are granted special consideration to prevent undue disruption. India’s framework should similarly explore mechanisms to reinstate cancelled allotments if they are integral to project completion.
3. Empowering CoC to Facilitate Participation of Associations of Allottees as Resolution Applicants
The discussion paper suggests allowing CoC to relax eligibility criteria, earnest money deposits, and performance security requirements for homebuyer associations.
Commentary: This move aligns with international best practices. In Australia, class action participation in insolvency proceedings is well-recognized, allowing affected parties (like homebuyers) to have a collective and influential voice. However, the Indian proposal should also incorporate safeguards to ensure that only credible and financially viable associations are allowed to participate.
4. Inclusion of Interest in Homebuyers’ Claims in CIRP
The IBBI proposes making it explicit that an 8% per annum interest should be included in the claim amount of homebuyers.
Commentary: This step seeks to eliminate ambiguity but should be refined further. In Canada, insolvency proceedings consider both contractual and statutory interests, providing more comprehensive relief to creditors. India should clarify whether the 8% interest applies to all claims uniformly or varies based on specific agreements.
5. Representation of Large Numbers of Creditors through Facilitators
The proposal allows for the appointment of facilitators in cases where the number of creditors exceeds a certain threshold.
Commentary: This measure is aimed at improving communication but could lead to dilution of individual creditors’ voices. The UK’s Insolvency Act 1986 permits creditor committees to be elected by creditors themselves, ensuring accountability. India should consider a model where facilitators are appointed through democratic processes rather than merely by regulatory mandate.
6. Dissemination of CoC Meeting Minutes to All Creditors
To improve transparency, IBBI proposes making CoC minutes available to all real estate project creditors through a secure online platform.
Commentary: Transparency is critical in insolvency proceedings. In the European Union’s insolvency regulations, digital accessibility of creditor meetings and resolutions is a norm. India’s proposal is in the right direction but should be supplemented with mandatory summary reports to enhance comprehensibility for laypersons.
7. Streamlining Possession Handover in Real Estate Projects
IBBI suggests allowing resolution professionals to hand over completed units to homebuyers with CoC approval.
Commentary: This aligns with global practices. In the U.S., courts have allowed transfer of assets to rightful owners even during insolvency to prevent undue hardship. However, clear timelines and conditions should be specified in the Indian framework to prevent disputes over partial payments or registration delays.
Conclusion
The IBBI’s discussion paper presents much-needed reforms aimed at enhancing the efficiency and fairness of real estate insolvency resolutions. However, lessons from international jurisprudence indicate that further refinements are needed, especially in ensuring enforceability, protecting homebuyers’ financial interests, and enhancing creditor participation.
A more inclusive approach, incorporating elements from UK and Australian insolvency practices—such as better-defined creditor representation and structured relief for financially distressed homebuyers—could make India’s insolvency resolution framework more robust and equitable. The IBBI should carefully consider stakeholder feedback to ensure that the final regulations strike a balance between expediency and justice in real estate insolvency cases.