For homebuyers hit by stalled real estate projects and insolvent developers, the Insolvency and Bankruptcy Code (IBC) promised a glimmer of hope, but, eight years on, the path to resolution has remained rocky. This is all the more concerning since the real estate and construction sector accounts for 33 per cent of corporate insolvency resolution process (CIRPs) cases.

The Centre’s August 2018 amendment allows homebuyers to be part of the committee of creditors (CoC), with a say in the resolution process. This landmark move recognises their investments as financial debts rather than consumer grievances. 

The jury is still out on whether the Centre’s move to categorise homebuyers as “financial creditors” (FC) has had the intended effect, especially since many homebuyers still struggle to get timely and meaningful resolution under IBC. 

The amendment has also introduced new complexities by vitiating the basis of the classification of creditors, points out MS Sahoo, former chairman of Insolvency and Bankruptcy Board of India (IBBI). Most homebuyers lack the commercial expertise needed to decide the fate of the insolvent entity, he says. Also, they may not have the capacity or willingness to accept the same level of haircuts on their investments as other FCs, he adds.

Unlike banks or other institutional creditors, homebuyers represent a diverse group, so achieving consensus among thousands of buyers in large projects has been difficult, often delaying resolutions. 

Sahoo suggests a different solution to the impasse — adopting the waterfall mechanism already specified for the ‘financial services providers’ framework, which prioritises the interests of customers over those of other claimants who assume greater risks in supplying funds.

By safeguarding customers’ interests across sectors, this mechanism would not only ensure efficient allocation of resources within the economy but also uphold the integrity of a unified insolvency framework, he says.

Coordinated approach

On its part, regulator IBBI has been taking active steps from time to time to deliver better resolution of cases involving real estate companies, but the grim data highlights the long road ahead before the IBBI can claim success in addressing the complex challenges faced by homebuyers.

As of June 2024, around 1,400 real estate and/or construction companies were admitted to the insolvency resolution process under the IBC. Of these, 645 companies were successfully rescued (through withdrawals, resolution, or closure of process) and 261 companies were liquidated.

Hari Hara Mishra, CEO, Association of ARCs in India, says about 500 real estate cases are pending under IBC and their resolution will bring relief to homebuyers and boost economic growth.

“There is a need for a coordinated approach involving sector regulator RERA (Real Estate Regulatory Authority), land and revenue authorities, and real estate investment structure, if any, in the resolution process,” he says.

Ashok Haldia, past chairman of the governing board of the Indian Institute of Insolvency Professionals of ICAI (IIIPI), says resolution of real estate cases is challenging due to the peculiarities involved.

Interests of allottees, now classified as FC, do not align with those of other FCs (lenders), he says. 

“Their interest is in allotment and possession of dwelling unit whereas lenders focus on loan recovery even at the cost of liquidation of the corporate debtor,” he points out.

Furthermore, the IBC process itself tends to prioritise financial recovery for creditors.

Limited success

Only 50 per cent of real estate cases have achieved resolution. Iconic examples involving Jaypee Infratech and Amrapali Group illustrate both the potential and limitations of the IBC framework. Homebuyers were part of the resolution plan, but the process was time-consuming.

Moreover, homebuyers find themselves at the mercy of the legal maze, with developers exploiting loopholes to delay or derail proceedings. The lack of clarity on addressing the competing claims of homebuyers and other creditors adds another layer of complexity.

Haldia, who was also chairman of the committee of IIIPI, whose report forms the basis of the recent IBBI discussion paper on the real estate sector, notes that real estate projects should be viewed empathetically given the underlying public interest. 

“Unless the reforms, legislatively and administratively, focus holistically on implementation, completion and allotment of dwelling units — helpless, stressed and exploited homebuyers would continue to suffer,” he says.

He says lenders cannot have a superior claim simply on the strength of the security cover they hold. Instead, they should be held accountable not only for laxity in due diligence and monitoring, but also aggressively marketing the project to prospective homebuyers. For this reason, homebuyers should also get a moratorium on repayment of loan taken from these banks, he says.

Frameworks for CIRP (under IBC) and RERA should work cohesively, with RERA exercising jurisdiction in cases where, for example, the COC restrains implementation while funds are available, he suggests.

RERA should be empowered to appoint administrators to oversee the execution and completion of projects, Haldia adds.

“Real estate projects are implemented through multiple closely associated companies and/or other entities and, at times, used as conduits for diversion of funds. In the absence of a framework for procedural and substantive consolidation, insolvency proceedings may remain long drawn out, with suboptimal outcomes,” Haldia says.

Challenges

Protracted timelines: The IBC aims to resolve insolvency cases within 330 days, but real estate cases are often delayed due to procedural delays, legal challenges, and complexity of projects.

Limited representation: Organising large and fragmented groups of homebuyers to act cohesively and make informed decisions remains a significant challenge.

Delaying tactics: Developers have been known to file frivolous appeals or attempt out-of-court settlements to avoid resolution under IBC.

Focus on financial recovery: The current framework emphasises financial recovery, whereas homebuyers prioritise getting their homes completed.

Overburdened system: With the rising number of cases, the National Company Law Tribunal (NCLT) and appellate bodies are overstretched, leading to delays in hearings and resolutions.

Ray of hope

The IBBI has, in recent years, intensified its focus on homebuyers’ woes, taking several measures to improve outcomes for them.

Authorised representatives: To improve homebuyer representation in the CoC, the IBBI has empowered authorised representatives (ARs) to make informed decisions on behalf of buyers to reduce delays caused by fragmented representation. ARs can assist homebuyers in understanding CoC discussions, decisions, and so on.

Reduced resolution timelines: The IBBI has emphasised strict adherence to resolution timelines for real estate cases.

Prioritising project completion: Recent discussions have focused on creating resolution plans that prioritise project completion over financial recovery, to cater to homebuyers’ primary interests.

Addressing developer loopholes: IBBI has mooted measures to tighten the framework to prevent misuse by developers.

Enhanced disclosure norms: Developers under the IBC process may be required to provide comprehensive project details upfront, reducing uncertainties for homebuyers.

Focus on legislative and procedural changes: To protect the interests of homebuyers, further legislative and procedural reforms are necessary, including setting up special courts for real estate insolvency cases within the NCLT; simplifying the voting mechanism for homebuyers through digital platforms for faster decision-making; ensuring greater integration between IBC and RERA in verifying claims or assessing the feasibility of project completion; according homebuyers a higher priority in the waterfall mechanism for effective recovery of their investments; and training authorised representatives to navigate the complexities of the IBC process and represent homebuyers more effectively.

As homebuyers continue to grapple with the complexities of the IBC, a more empathetic and efficient framework is essential to restore their faith in the system and help achieve their dream of owning a home — one of the most significant investments of their lives.