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The Indian government is considering important amendments to the Insolvency and Bankruptcy Code (IBC) of 2016 to facilitate project-wise resolutions for real estate companies. Senior government officials have revealed that discussions are ongoing with the law ministry to bring about these changes.
The primary motivation behind these proposed amendments is to introduce a more nuanced approach to resolving insolvency issues in the real estate sector. Currently, there is no provision for project-wise resolutions within the IBC, leading to concerns that completed projects could become entangled in insolvency proceedings. The concern is that if construction projects under development face insolvency, it could potentially affect all projects, including those where people are currently residing.
A recent case involving Supertech, a real estate project in Noida, highlights the need for project-wise resolutions. In May 2023, the Supreme Court allowed for the project-wise resolution of one of Supertech's projects facing insolvency. However, the court also allowed the continued construction of other Supertech projects within the same compound under the supervision of an insolvency resolution professional (IRP).
The proposed amendments to the IBC are currently being finalized by the Ministry of Corporate Affairs in consultation with the law ministry and other relevant ministries. These changes are expected to enhance the likelihood of successful resolutions by focusing on specific distressed assets within real estate companies rather than imposing insolvency on the entire company.
Project-wise insolvency or reverse insolvency is not a novel concept in the real estate sector. The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have already adopted this approach in various cases. The primary objective of this approach is to protect the interests of homebuyers, who represent a significant group of creditors in such cases.
Real estate currently accounts for the second-highest number of insolvency resolution cases in India, according to data from the Insolvency and Bankruptcy Board of India (IBBI). However, the resolution rate for real estate cases is notably low, as reported in a joint study by property consultants Anarock and law firm Khaitan & Co.
In terms of sectors with insolvency cases, manufacturing leads the way with a 40 percent share, followed by real estate at 21 percent, construction at 11 percent, and the trading sector at 10 percent.
The IBC, which came into effect in 2016, was designed to provide a market-linked and time-bound resolution framework for stressed assets. Since its inception, the code has undergone several amendments to address evolving challenges in various sectors, and the proposed changes for real estate aim to further refine the insolvency resolution process in this critical sector. These amendments could potentially lead to a more efficient and targeted approach to resolving financial distress in the real estate industry while safeguarding the interests of both creditors and homeowners.
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