The Insolvency and Bankruptcy Code (IBC) has facilitated the resolution of 46% of the insolvency cases admitted in the real estate sector as of June 2024, according to data from the Insolvency and Bankruptcy Board of India (IBBI). Out of 1,400 insolvency cases involving real estate and construction companies, 645 were successfully resolved, while 261 ended in liquidation. The IBC has provided a structured framework for insolvency resolution, contributing to the rescue of nearly two and a half times more companies than those liquidated.
The IBC has emerged as the preferred remedy for resolving insolvency in the real estate sector, compared to other available options like the Consumer Protection Act, 2019, and the Real Estate Regulation and Development Act, 2016. Notable large-scale real estate insolvencies, including those of Jaypee Infratech, Kohinoor CTNL Infrastructure Company, and SARE Gurugram, have resulted in recoveries exceeding 60%.
Overall, the corporate insolvency resolution process (CIRP) under the IBC has seen creditors recover Rs 3.4 lakh crore by June 2024, translating to a 32% recovery against total admitted claims, though this comes with an average haircut of about 68%. Despite the positive trend of more resolutions than liquidations in real estate, the process remains fraught with challenges. Lengthy resolution timelines, complex stakeholder dynamics, asset valuation disputes, and regulatory hurdles continue to hinder efficient resolutions.
The challenges
The real estate sector presents unique challenges in the insolvency process, including multiple projects and a large number of homebuyers. To address these, several steps have been implemented, such as granting homebuyers the status of financial creditors, excluding units already in possession from liquidation, allowing project-wise insolvency resolutions, and enabling homebuyers to become resolution applicants.
Although the IBC has seen success in resolving high-profile real estate cases, experts argue that there is still a need for a more detailed framework, backed by statutory provisions, to make the process more effective. While the IBBI has introduced project-wise insolvency processes through amendments to the CIRP Regulations, there are concerns that these changes may be challenged on legal grounds. Experts believe that a comprehensive amendment to the IBC, approved by Parliament, would provide a more robust solution.
The Ministry of Corporate Affairs has recognised the need for modifications to the IBC to accommodate the unique challenges of real estate insolvency. A discussion paper issued in January 2023 highlighted the need for a structured approach to initiating CIRP on a project-wise basis and managing the submission of resolution plans. Experts suggest that these changes should be formalised through an amendment to the IBC to ensure greater legal certainty and reduce the risk of litigation.
