Proposal to allow insolvency process only against defaulting real estate projects, not entire company
In a big change proposed in the insolvency cases related to real estate companies, the insolvency regulator of the country has said that when an application is filed to initiate the CIRP in respect of a CD 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, should admit the case but apply the CIRP provisions only with respect to such real estate projects, which have defaulted.
Accordingly, the Insolvency regulator has proposed that such projects should be recognised as distinct from the larger entity for the limited purpose of resolution.
“In practice, it is observed that there are situations where because of the default in one project, the CIRP is initiated against the entire company. This is counterproductive as other solvent projects are also stalled post-commencement. It is also noted that in real estate cases, the default often pertains to specific projects (while other projects continue to do well). Thus, it is felt that the Code should provide a specialised framework to deal with cases involving CDs that are promoters of real estate projects,” the regulator has argued in a consultation paper suggesting far-reaching changes in the insolvency and Bankruptcy Code, 2016.
The regulator further proposes that while exercising its discretion pursuant to this framework, the NCLT will consider the concerns of all stakeholders and the extent of defaults made by the real estate company and determine whether a particular case requires a comprehensive insolvency resolution against the entire company or only a specific project or projects.
“The provisions of the Code as they apply to the CIRP of a corporate person shall, with necessary modifications, be made applicable to the CIRP of such real estate projects,” says one of the proposals.
In case of CIRP’s related to real estate companies, the regulator further proposes that to amend the law to enable the resolution professional to transfer ownership and possession of a completed unit of the real estate project to the allottees with the consent of the Committee of Creditors during the time of CIRP. At present, the possession of completed units is not given to the allottees during the CIRP due to moratorium.
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