The insolvency and bankruptcy board announces that allocated apartments will not be included in the liquidation

By Bricksnwall | 2024-02-18

Formerly, the only recourse available to buyers of apartments who were assigned prior to the real estate company's bankruptcy was the right to reimbursement.

In its most recent amendment, the Insolvency and Bankruptcy Board of India stated that assets in a real estate project that have been turned over to the allottees would be exempted from the liquidation process. This is a relief to homebuyers who had been given possession of their homes but were left in a bind after the builder's company was declared insolvent.

"Where the corporate debtor has given possession to an allottee in a real estate project, such asset shall not form a part of the corporate debtor's liquidation estate," specified the notification dated February 12 in accordance with clause (e) of sub-section (4) of section 36.

In other words, properties that the allottee has already occupied ought to be kept out of the liquidation estate. This implies that even in the event of the builder's liquidation, a buyer who has already been granted possession of a house will keep it. Previous to this modification, in the event that the builder became insolvent, the buyer who had obtained ownership of the property was bundled with buyers who had not, and they had no recourse other than the right to a refund.

The IBBI has proposed these adjustments to address this problem and make sure that these apartments—for which ownership has already been offered but no conveyance deed has been executed or registered—are not included in the liquidation estate. He clarifies that these rules will only be applicable if a corporation is going through liquidation and that they will apply prospectively.

According to experts, this provision gives purchasers assurance that finished projects won't be included in liquidation. It looks after purchasers who have already gotten their units. As it is frequently observed that certain resolution applicants are not interested in all projects and want to execute some specific projects, this may also result in Resolution Professional (RP) inviting a separate resolution plan for each real estate project or set of projects of the corporate debtor.

The committee of creditors (CoC) may request distinct resolution strategies for every project, according to the IBBI.

The IBBI amendment also mandates that each real estate project under a corporate debtor have a separate bank account in order to guarantee financial transparency and responsibility, according to the IBBI.

These modifications are crucial because, in the past, hundreds of homeowners found themselves embroiled in a protracted and intricate court struggle following the builder's bankruptcy.

The background information

Experts in law note that there has been a lack of consistency in the court's rulings on real estate insolvency. "This led to issues that needed to be resolved right away," stated Bharat Sethi, managing partner of Sethi Law Chambers.

This was included in the discussion paper that IBBI submitted in November 2023 as well. A topic covered in the discussion paper was the exclusion of homeowners' property from the liquidation estate.

The discussion papers included a number of cases, one of which being Tharuvai Ramachandran Ravichandran, RP JBM Homes Private Limited, NCLT Chennai Bench. The ruling from September 12, 2023, said as follows:

Therefore, we believe that in the project "GRT Grand," the 71 flats that are sold should be kept outside the scope of the "Liquidation Estate" (Excluded Assets) of both Corporate Debtors in order to protect the interest of the homebuyers and to do complete justice, taking into account the complex and unique facts and circumstances of the present case. needs to be given to each and every recipient

According to Aditya Parolia, partner at PSP Legal, "this is a much-needed amendment to protect the interest of allottees," but it should apply to all allottees regardless of whether they have been offered possession or not.

NCLAT rulings have already brought attention to this problem since, although these assets may not be worth much to secured creditors, to an allottee they represent their entire life savings. Therefore, every effort needs to be made to safeguard homebuyers' interests and ensure that unfinished projects are finished.

"Homebuyers' investments cannot be jeopardized throughout the liquidation procedure. Financial institutions may readily acquire haircuts and safeguard their interest with other corporate assets, he said.

It is not appropriate to misuse an amendment.

Developers in default should not abuse this amendment by calling on buyers of real estate to quickly take possession of their unfinished units, particularly if the units have not been completed in accordance with the standards that the buyers were promised.

In the majority of Indian real estate markets, this is a current problem. If insolvency procedures are brought against the corporate debtor, they can try to divide these assets according to their own needs, which might leave property buyers shortchanged, cautions Yudhist Narain Singh, senior partner at YNS & Associates.