On February 3, 2025, the Insolvency & Bankruptcy Board of India (“IBBI”) amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) vide Notification F.No. IBBI1/2024-25/GN/REG122 (“Amendment”). The said Amendment aims to enhance the protections available to, homebuyers in real estate insolvencies and encourage greater participation from them as stakeholders. A significant change introduced in this Amendment, which promises to provide a major relief to the homebuyers is that they can now take possession of their unit even while the corporate insolvency resolution process (“CIRP”) is ongoing. This update outlines the changes introduced by this Amendment.
Background:
Homebuyers in a real estate project are recognized as financial creditors of the real estate corporate debtor under the Insolvency & Bankruptcy Code, 2016 (“IBC”). This entitles them to initiate insolvency proceedings against developers and become a part of the Committee of Creditors (“COC”), allowing them to participate in the meetings of the COC and the approval of the resolution plan. However, despite legislative amendments to the IBC and judicial interventions from time to time, the position of homebuyers remains precarious and their rights as creditors are not adequately protected under the insolvency regime. Homebuyers were particularly burdened by the fact that they were obligated to pay equated monthly instalments (EMIs) on their home loans while not being able to take possession of their unit when the CIRP is ongoing.
Taking into account the concerns of distressed homebuyers, IBBI published a discussion paper on November 7, 2024 (“Discussion Paper”), detailing various proposals for amending the CIRP Regulations for streamlining the CIRP in the interest of homebuyers. The changes introduced by the Amendment are broadly in line with the proposals outlined in the Discussion Paper.
Key highlights of the Amendment:
- Handing over of possession: The Amendment introduces regulation 4E, which provides that the resolution professional (“RP”), after obtaining the approval of the COC with not less than 66% (sixty-six) of total votes, shall handover possession of the plot/ apartment/ building or any instruments agreed to be transferred under the real estate project and facilitate registration if the homebuyer has requested the same and has performed his part under the agreement.
Even prior to this Amendment, courts/adjudicating authorities under the IBC have observed that the rights of the homebuyers cannot be adversely affected by an ongoing CIRP. In Alok Sharma v. M/s IP Construction Private Limited,1 the appellant-homebuyers contended that despite having taken possession of the unit prior to the commencement of the CIRP and paying maintenance & electricity charges month after month, the RP had refused to execute the sale deed in favor of the said homebuyers. In this case, the Learned National Company Law Appellate Tribunal (“NCLAT”) directed the RP to execute the sale deed after collecting the dues and costs from the homebuyers, holding that the registration of units would not amount to a violation of the moratorium under section 14 of the IBC. In New Okhla Industrial Development Authority (NOIDA) v. Lotus 300 Apartment Owners Association & Ors.,2 the Hon’ble Supreme Court vide order dated September 27, 2024 directed the land authority, being the New Okhla Development Authority (NOIDA) to ensure that the homebuyers are given possession of their units and further directed the RP to take necessary steps in this regard by signing the documents on behalf of the real estate developer and submit a list of homebuyers and their flat numbers to the land authority.
- Appointment of facilitators: The Amendment
introduces regulation 16C, which provides that if the number of
creditors in a class exceeds 1000 (one thousand) such as
homebuyers, the COC may direct the interim resolution professional
(“IRP”) or RP to appoint an insolvency
professional as facilitator. A facilitator for a sub-class of
creditors can be any person other than the IRP or RP or authorized
representative (“AR”), subject to the
following conditions:
- After the first meeting of the COC, a sub-class comprising of at least one hundred creditors out of the total number of creditors in a class request the appointment of a facilitator with a name of a proposed facilitator;
- The total number of facilitators shall not exceed 5 (five);
- The fee for facilitator of each sub-class shall be 20% of the fees specified for the AR and such fee shall be part of the insolvency resolution process cost (“CIRP Costs”).
The COC may replace the facilitator on the recommendation of a majority of the members of the sub-class.
It is evident from the regulation that no voting rights have been granted to the facilitator.
The Discussion Paper considered the fact that prior to this Amendment, the CIRP Regulations only allowed 1 (one) AR for each class of creditors, irrespective of the actual number of creditors in each class. In view of the challenges faced by the sole AR in representing and communicating the diverse interests of creditors within a class, the Discussion Paper suggested the appointment of facilitators to facilitate communication between the AR and the creditors assigned to them.
- Roles and responsibilities of the facilitator: The Amendment introduces regulation 16D, which provides for the roles and responsibilities of the facilitator appointed under regulation 16C. Under the Amendment, the facilitator is envisaged to be a liaison between the sub-class of creditors they represent and the AR of that class of creditors. Further, the facilitators have been allowed to attend the meetings of the COC as observers to enable communication between the creditors of the respective sub-class. Additionally, they are also tasked with providing information and clarifications to the creditors in a sub-class about the CIRP process as per the advice of the AR. The COC can also assign any other tasks to the facilitator in the interests of ensuring representation and communication.
- Fees payable to facilitator: The Amendment introduces sub-clause (ac) to regulation 31, which provides that the fee payable the facilitator under regulation 16C(1)(c) shall be included under ‘insolvency resolution process costs’.
- Disclosure of MSME status of corporate debtor: The Amendment adds clause (e) to regulation 36A(4), which provides that the resolution professional shall disclose and provide details of the CD’s registration as a micro, small, or medium enterprise (under the Micro, Small and Medium Enterprises Development Act, 2006) in the invitation for expression of interest from resolution applicants.
- Relaxations for real estate allottees: The Amendment further adds a proviso to the aforementioned clause (e) to regulation 36A(4), which allows the COC to grant relaxations to an association/group of homebuyers as a resolution applicant in the eligibility criteria for submission of expression of interest and in conditions regarding refundable deposits. Another relaxation which the COC can now grant to such an association/group of homebuyers relates to the furnishing of performance security, which is provided for in the newly added proviso to regulation 36B(4A).
These relaxations should encourage associations/groups of homebuyers to participate in the CIRP process as resolution applicants.
- Inclusion of ‘Competent Authority’ in COC meetings: The Amendment adds sub-regulation (4) to regulation 18, which allows the COC to direct the RP to invite the ‘Competent Authority’ as defined under the Real Estate (Regulation and Development) Act, 20163 to attend the meetings of the COC without any voting rights for providing inputs on matters relating to the development of the real estate project undergoing CIRP.
The Discussion Paper notes that the land authorities, who might be operational creditors, are not generally a part of the COC, which results in insufficient consideration of land-related issues and regulatory requirements, potentially leading to delays and complications in implementing the resolution plan.
From a bare perusal of this provision, it is evident that the COC can invite the Competent Authority to participate in the meetings of the COC in an observatory capacity without any voting rights.
- Report on real estate development rights and permissions: The new Amendment adds regulation 30C, which mandates the RP in a real estate project insolvency to prepare a detailed report which details the status of development rights and permissions required for the further development of the project. This report shall be submitted to the COC for its comments and thereafter, to the adjudicating authority with the comments of the COC. The report shall be submitted to the adjudicating authority on or before the 60th (sixtieth) day from the insolvency commencement date.
The Discussion Paper noted that there have been instances where the allotment of land by the land authorities in favor of the real estate CDs have been cancelled and possession has been taken back by them before the insolvency commencement date. The inclusion of regulation 30C should enable the COC to assess the viability of the corporate debtor and take an informed decision on alternatives such as withdrawal, early liquidation/dissolution or continuation of the CIRP.
Conclusion:
The Amendment promises to streamline the corporate insolvency resolution process, in addition to providing some much-needed relief to homebuyers, who are left in the lurch when insolvency proceedings are initiated against the real estate project. Homebuyers have also been empowered by the inclusion of new provisions on relaxations granted to homebuyers participating as resolution applicants. The new provisions on appointment of facilitators, inclusion of land authorities in the COC, and submission of report by the RP will enhance transparency and ensure that diverse interests are adequately represented.
Footnotes
1. Company Appeal (AT) (Ins.) 350/2020.
2. SLP (C) No. 17238-17239/2024.
3. Under Section 2(p) of the Real Estate (Regulation and Development) Act, 2016, ‘Competent Authority means “means the local authority or any authority created or established under any law for the time being in force by the appropriate Government which exercises authority over land under its jurisdiction and has powers to give permission for development of such immovable property”.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
