Thousands of homebuyers have been affected by the insolvency proceedings against some of the well-known and established developers. And the cases are wide spread across the country. With big names of the industry falling, the economic impact could be much wider.
In case a realty firm is able to continue to discharge its liabilities, homebuyers can turn to a recourse available under RERA or the Consumer Protection, however once a company is declared insolvent, Insolvency and Bankruptcy Code (IBCI) is the only effective means of a redressal.
Vivek K Chandy, Joint Managing Partner, J. Sagar Associates agreed, “One of the primary reasons of increasing cases of IBC in real estate is the slow pace of implementation RERA Act, pan India. RERA in nutshell, seeks to protect the interests of home buyers with an aim to create an equitable and fair transactions between the seller and the buyer of properties, and to make real estate purchase simpler, by bringing in better accountability and transparency especially in the primary market and thereby boosting investments in the real estate sector. Even though the RERA Act requires real estate projects within defined parameters to be registered with the respective state’s RERA, including those where the completion certificate or occupancy certificate has not been issued, as of last available statics (end of 2021), only about 71307 projects have been registered. Model sale agreements are not yet being enforced or implemented or followed in letter and spirit. Developers continue to have their own versions which could be one-sided. Further, to prevent diversion of funds promoters are required to park 70% of all project receivables in a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional. However, funds are nonetheless being diverted. Smaller projects and those before the RERA Act came into force are excluded for purview. At a practical level, implementing RERA orders is also a challenging task.
Shounak Mitra, Partner, Khaitan & Co was of the view that simple answer is the advent of IBC, RERA and the amended Consumer Protection Act. “Previously, the homebuyers or the bankers had very limited options to raise their grievances on account of delay or in repayment of their loans etc. and more so the same were all expensive as well as time consuming. With different layers in the legal system, justice was delayed. With the coming of IBC and RERA, a trust and belief has come in the mind of the homebuyers and bankers. Even the Hon’ble SC has now put the homebuyers at a much higher pedestal compared to others and in some cases over and above the Banks. This has actually led confidence in the mind of the hapless homebuyers who had invested their entire savings for building their dream home.”
Saurav Kumar, Partner, IndusLaw expressed that a sharp increase in institution of cases against developers has emerged as an outcome of the uplifting of the relief packages provided by the Government during the initial stages of Covid-19. “For the lead banks, rejection by Supreme Court for extension of the moratorium on payment of instalments beyond August 31, 2020, has allowed banks to declare all loans, which not been repaid as per schedule beyond the said date, as non-performing assets. Such rejection of extension of moratorium has acted as a catalyst for initiation of IBC proceedings against the developers. With respect to the homeowners, the state RERA authorities had provided certain extensions to the developers for the completion of the project due the restrictions imposed on constructions during the first phase of Covid-19. However, largely such extensions are no longer available and therefore, homebuyers are now approaching the RERA authorities for initiating cases against the developers for delay in possession.”
Rajesh Narain Gupta, Managing Partner, SNG & Partners sums up the fundamental reasons for increasing number of cases of property developers being taken to court by homeowners or by the banks -
Liquidity Crunch - Statistics show that the residential sales volume has dipped across the country. The reasons possibly is liquidity crunch at the end of the homebuyers resulting into non-selling of the housing units and leading to liquidity crunch with the developers. This results in non-payment of loans by the developers to the banks and also non-completion of the projects by the developers. Covid has also played a vital role in increasing the liquidity issue. Things post Covid are now again improving.
New Statutes- The real estate sector, in the wake of RERA has started to transform into an organised sector. The transformation phase has led to abandoning of projects by small-time developers resulting into default by them in their projects and towards banks and homebuyers are suffering.
Lack of Bonafide- Another reason for increasing number of cases against developers is the lack of bona fide of the developers in delivering the timely projects. Funds have been siphoned off / diverted by the developers which has led to non-completion of the projects. The loans taken from the banks due to be utilised for the projects have not been utilised for the same and rather defaulter been committed in repayment of such loans. Numerous homebuyers are suffering on account of the inactions and omissions of unscrupulous developers.
IS THERE A REQUIREMENT OF SEPARATE PROCEDURES FOR REAL ESTATE INSOLVENCIES?
In view of Shounak Mitra IBC has been adequately amended to take care of the homebuyers. “The judiciary has done and been doing their best to protect their interests, for e.g., the judiciary has also come up with the novel idea of reverse CIRP to facilitate the project completions.
Saurav Kumar concurred, “The IBC regime, being the umbrella legislation for insolvency resolution of all entities in India (both corporate and individuals), is designed in a manner which is best suited to respond to all practical exigencies arising from the ongoing insolvency resolutions. Therefore, introducing a separate process for dealing with the real estate insolvencies might not be in the best interest of homebuyers as well as the other creditors. Having said that, the existing framework can be amended from time to time to cater to the requirements of homebuyers as and when the need arises.”
Rajesh Narain Gupta too believes that as IBC has treated individual homebuyers as a financial creditor, this means homebuyers’ representative can be a part of the committee of creditors for the purposes of devising a resolution plan. “They have a window to seek more details about the funds in respect of the project and its utilisation from the resolution professional, which otherwise was not being provided to the homebuyers. The homebuyers as a member of the committee of creditors have an added advantage now. Home buyers can negotiate with other financial creditors on the haircut to be suffered by each of the financial creditors while devising and finalising the resolution plan.”
Sharing a different perspective, Vivek K Chandy said most definitely. “If you examine the current IBC laws, 10% of allottees or 100 buyers whichever is less can file a petition before the NCLT to initiate a resolution process. Upon being admitted, NCLT can direct initiation of CIRP as well. IBC laws have an overriding effect on other Indian laws including the RERA, Consumer Courts, Civil Courts et al. From a practical perspective as well, approaching NCLT is a more robust option, since it is time bound and solution oriented. Home buyers have the status of financial creditors. However, the general market perception is that IBC laws are not apt for dealing with the real estate as it is a project business and does not function on a going concern basis. It does not help with injecting liquidity and the law is more bailout focused as against project completion focused. Considering all this, the need of the hour is to have a more robust result-oriented procedure to deal with real estate nsolvencies."
CAN PRE-INSOLVENCY MEASURES HELP RESOLVE ISSUES AT EARLY STAGES?
Rajesh Narain Gupta feels pre-insolvency measures, if introduced to resolve the issues at the early stages can prove to be effective. “Pre-insolvency advisors can be appointed to look into a dying real estate developer. Such advisors should come from the arenas of diverse professions with adequate experience who can assess and help financially troubled small or medium size developer. The pre-insolvency assessment may involve a root cause analysis by experts to understand the reasons of the developer not been able to develop the project for the home buyers.”
According to Shounak Mitra, speed is the key in insolvency resolution. “Pre-insolvency measures will ensure that speed. This will also maximise value for the creditors. The value of the work-in-progress is protected thereby preventing creditor’s losses. Adverse publicity is also avoided thereby brand perception remains positive. All in all, a robust pre-insolvency measure will ensure a win-win situation for all stakeholders.”
Vivek K Chandy shared that while not mandated under regulation, there are several structures are being adopted in the market for resolution of cash flow issues that seem to be the concern plaguing the industry. “These structures include pre- insolvency introduction of development management companies who take on the obligation to bring in working capital for the completion of the project. The lenders also seem interested in this procedure since it could mean recovery against assets that were considered nonperforming. This structuring however requires the cooperation of the promoter in all respects and may benefit from a regulatory mandate. Further, official recognition of groups of homebuyers pre insolvency will provide the requisite wherewithal to such homebuyers to initiate such structured solutions prior to insolvency.”
Saurav Kumar agreed, “With respect to creditors such as banks, the RBI has provided criteria for classification of defaulting entities such as NPA declaration. It is only after breach of such specified classifications, creditors such as banks initiate an IBC proceeding. On the other hand, for operational creditors, IBC has already put in place pre-insolvency measures such as the requirement of a demand notice. Additionally, any insolvency proceedings under the IBC framework can be initiated only if the prescribed threshold (i.e., rupees one crore) is met. Accordingly, additional pre-insolvency measures might not be required.”
WHAT STEPS CAN BE TAKEN TO MAKE RERA/IBC STRONGER?
Vivek K Chandy suggested, “A project wise resolution option could be introduced since the present regime only contemplates action to resolve the company as a whole – this makes it difficult for willing investors to come forward and invest monies in single projects where the company holds more than one project and may have a limited number of viable projects that attract investment. Alternatively, there should be a mandate that any resolution applicant for a real estate company establishes a corpus equal to the amount payable to existing homebuyers who have contracts with the developer company.”
Shounak Mitra opined that while “RERA has already taken care of the unscrupulous developers, stress due to genuine reasons will also punish developers under IBC. “Pre-pack is the need of the hour to ensure revival of real estate developers who are facing genuine difficulties due to cogent reasons, including market conditions or funding issues,” he said
Rajesh Narain Gupta too felt that RERA has to some extent revived the confidence of the homebuyers and more and more homebuyers are assured of their rights under the regime. Developers are scared and cautious. “The registration of the project is also an important aspect of the regime. At present the builders/ developers are at the mercy of state agencies who are in charge of granting approvals at various stages of the development of the project. It takes considerable amount of time in this process. Possibly RERA authority can be given mandate to monitor the process of statutory approvals which may result in faster approvals and clearances which will boost project productivity and result in timely completion of the projects by the developers,” he recommended.
“Since insolvency resolution needs more money, my personal view is that a provision may be made for the financial creditors (Banks & FIs) to mandatorily provide interim finance to real estate companies in CIRP. This will ensure project completion. Bankers will also not be left high and dry since interim finance is given super priority under IBC.” - Shounak Mitra
“Steps need to be taken for a more stringent implementation of RERA. Further there are some states which are lagging in the creation of RERA website for uploading all relevant information to become RERA compliant. A single window clearance for construction related approvals is the need of the hour.” - Vivek K Chandy
IBC has provided a tool in the hands of the homebuyers to be a part of committee of creditors and this should help homebuyers to protect their interest by having their say as a financial creditor to protect their interests and negotiate on the amounts to be received under their resolution plan. - Rajesh Narain Gupta
“Measures to facilitate pending regulatory approvals by the incoming resolution applicants for development of project will lead to an effective resolution for homebuyers. Further, the Government while formulating the detailed framework for utilisation of the IBC Fund, may consider dedicating a portion of the IBC Fund towards enabling the insolvency process for aggrieved homebuyers.” - Saurav Kumar