Needless to say, the process of insolvency of real estate projects needs to undergo a sea-change so as to provide much-needed relief to homebuyers. In this context, the government is currently considering a slew of changes in the Insolvency and Bankruptcy Code (IBC) for the sector.
In an exclusive interview with Sanjeev Sinha, Mr. Santosh Pandey, CEO, Sarthak Advocates & Solicitors, shares his perspective. Excerpts:
How can the autonomy for homebuyers with respect to participation in CIRP be improved in the real estate sector?
Homebuyers are treated as financial creditors and, hence, form part of the Committee of Creditors (“CoC”). In most cases of insolvency proceedings initiated against real estate companies, homebuyers constitute the majority of the voting share. However, the experience of homebuyers is that their participation gets passive and limited due to information asymmetry. The Authorized Representatives (“AR”) appointed under Section 21 (6A) (b) of the Insolvency and Bankruptcy Code, 2016 (“IBC/ Code”) represent homebuyers on CoC. The AR should be obligated under the law to communicate all information regarding the Corporate Insolvency Resolution Process (“CIRP”) to the homebuyers in a timely manner. The AR should be obligated to effectively represent the interests of the homebuyers. This will in turn lead to a more active role for the homebuyers in decisions of the CoC. The provisions to replace the AR are needed to ensure that homebuyers can seek a change in cases where an AR is found wanting in any which way.
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What can be the position of homebuyers who have a decree in their favour for refund from RERA or consumer forums?
While it is understandable that homebuyers avail remedies under other legislations like Real Estate (Regulation and Development) Act, 2016 (“RERA”) and Consumer Protection Act, 2019, the orders for refund and compensation create an additional stress in the system. It leads to uncertainties for other homebuyers. In an ideal scenario, every allottee should have complete autonomy over their decisions. However, if some allottees on the back of decrees from RERA /consumer commissions are allowed to back out and recover compensation; it will create an inequitable playing field. In any case, as a decree holder, such allottees are unsecured creditors, and at the near end of distribution waterfall. In a CIRP, the allottees having decrees from various courts should abide by the decision of the majority of the homebuyers and not be allowed to back out.
How can the issues related to the conduct of insolvency resolution process with respect to the real estate sector be resolved?
Insolvency of the real estate companies accounted for approximately 20% of the total number of matters admitted. There can be no one size that fits all models in the context of insolvencies, including for real estate companies. In some cases, the value may be maximized through group insolvency, especially where land is held by related companies. In some cases, the insolvency of the company may be considered project-wise as was recently done in SuperTech and earlier in Flat Buyers Association Winter Hills by NCLAT. There may be instances where insolvency may be initiated by banks and financial institutions, where the existing mode of CIRP may be appropriate.
Several experts and developers are of the opinion that insolvency proceedings should be undertaken on a project basis and not against the entire group. What is your take on it?
There cannot be a one-size-fits-all approach. The issue with proposals to adopt only project-wise insolvency in real estate companies also has to be analyzed from the perspective of financial creditors of such companies who could be having a charge over the entire assets of the corporate debtor. How would the interests of such creditors be protected? In our view, the adjudicating authority has so far done the right thing by ordering project-wise insolvency on a case to case basis.
How can the situation of homebuyers be improved if the Corporate Debtor goes into liquidation and what can be the possible treatment of those allottees who have taken possession and those who have not?
As the RP is the de-facto and de-jure management of the Corporate Debtor during CIRP, the RP should perform the ministerial action of executing sale deeds where the only action left is the execution of sale deeds. Whether in CIRP or liquidation, the status of such homebuyers should not be altered as long as possession is legal.
How should the unsold inventory in various projects be dealt with when the CIRP of a real estate firm is done?
In the case of a non-real estate company, assets like land, etc. are capital assets. On the other hand, in the case of real estate companies, properties like unsold inventory are treated as stock-in-trade. If during CIRP, the real estate company has completed (ready-to-move-in) unsold inventory, the same should be allowed to be sold and the money from such sales should be kept in interest-bearing accounts for use by the successful resolution applicant or to be distributed amongst the creditors in case of liquidation.