30 June 23

Real Estate Firms Stuck in Insolvency Courts have a Slower Resolution Rate’


Over a fifth of insolvency cases are from the real estate sector, but only 13% have approved plans: Study


New Delhi: Real estate comprises a significant portion-more of a fifth-of filed insolvency cases, although approved resolution plans total only 13%, a study by Grant Thornton Bharat showed.


Out of 2,298 corporate insolvency resolution process (CIRP) cases under the Insolvency & Bankruptcy Code, 518 are related to real estate. Surprisingly, only 78 out of 611 approved resolution plans are from the real estate sector.


“One of the reasons for a lower success rate of insolvency resolutions in the real estate sector is that financial creditors include a large number of home buyers, resulting in time-consuming decision-making and consensus-building within the committee of creditors,” said Surendra Raj Gang, partner, GT Restructuring Services LLP.


Experts said the majority of distressed real estate projects are experiencing financial losses, which reduces commercial incentives for potential buyers to invest in such projects


“Another major challenge is litigation from the promoters of these insolvent real estate companies. Lack of clarity about project in-solvency vis-à-vis legal entity in-solvency has created complexities with stakeholders because, in a large group, a particular project may be stressed while other projects are doing well,” Gang said.


The treatment of claims from state authorities such as Huda, Noida, or Mhada in real estate insolvency cases has been a contentious issue, leading to project delays. The slow resolution rate exacerbates the plight of homebuyers who have been left in limbo by developers.


In certain instances, reverse in-solvency is offering relief to buyers. Under this model, NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal) courts permit or authorise promoter to complete the construction work without initiating insolvency. “Even today, the main promoter is the most competent party to complete the project. Favourable government policies and support from the judiciary system and homebuyers enabled lots of developers to complete their projects in the last seven-eight years,” said Himanshu Garg, Director, of RG Group. RG Group is one such case in which NCLT appointed a ‘resolution professional’ but never ordered the formation of a committee of creditors.


The insolvency proceedings of real estate companies present unique complexities and distinctions compared to other sectors. These complexities arise due to the intricate group structure of the corporate debtor, the inclusion of thousands of homebuyers in the CoC, and the interplay of statutory regulations such as the Real Estate Regulatory Authority (RERA) and other state authorities. Despite the provisions of the Insolvency and Bankruptcy Code (IBC) taking precedence over other laws, industry officials highlight numerous challenges in obtaining the waivers granted in the resolution plan.


According to experts, government agencies often deviate from plans approved by NCLT and pursue avenues for appeal, either through reviews or curative petitions submitted to the Supreme Court.

Source – Economic times


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