The Insolvency and Bankruptcy Code (IBC), introduced in 2016, was designed to streamline insolvency proceedings and protect the interests of all stakeholders. However, in the real estate sector, the application of IBC has revealed certain challenges that often lead to delays, financial burdens, and significant stress for homebuyers and investors.
In this blog, we will explore how the misuse of IBC processes can affect real estate projects and propose potential solutions to address these challenges.
Understanding the Issue: Builders, Insolvency, and Homebuyers
Over the years, several builders have registered multiple real estate projects simultaneously. While this signifies growth and ambition, it often stretches financial and managerial resources too thin. In some unfortunate cases, misuse of funds or alleged siphoning leads to stalled projects. When builders face financial difficulties or allegations, they often turn to the National Company Law Tribunal (NCLT) to declare insolvency under the IBC framework.
Here’s how the process typically unfolds:
- NCLT Proceedings: The builder declares insolvency, leading to a freeze on all financial operations of the company.
- Resolution Professional (RP): An RP is appointed to oversee the company’s affairs and find a resolution plan, which may include transferring the project to a new entity.
- Delays: The insolvency resolution process often takes years due to the complexities of finding a suitable resolution plan, litigation, and the involvement of multiple stakeholders.
- Additional Costs for Buyers: The new entity that takes over the project may demand additional payments from homebuyers and investors, adding financial stress to those already impacted by delays.
Challenges Faced by Homebuyers
1. Prolonged Delays
The insolvency resolution process often takes years, leaving homebuyers in a state of uncertainty. Delayed possession not only affects their plans but also results in additional financial burdens such as paying rent and EMIs simultaneously.
2. Lack of Accountability
Once a builder declares insolvency, accountability becomes fragmented. Homebuyers often find themselves caught in a legal maze, with no clear entity to hold responsible for the delays and financial losses.
3. Financial Burdens
After a new entity takes over the project, it may demand additional payments from homebuyers to cover the costs of completing the stalled project. This often feels like paying twice for the same property.
4. Emotional and Legal Stress
Navigating the insolvency process can be emotionally draining for homebuyers, who must attend hearings, file claims, and stay updated on complex legal proceedings.
Why IBC is Misused in Real Estate
While IBC was designed to protect stakeholders, certain loopholes have enabled its misuse:
- Deliberate Over-Leveraging: Builders may knowingly over-leverage their financial capacity, launching multiple projects without sufficient backing, leading to insolvency.
- Siphoning of Funds: Allegations of fund diversion remain common, but proving such misuse is a lengthy and difficult legal process.
- Limited Oversight: There is often insufficient oversight during the project lifecycle, which allows financial mismanagement to go unnoticed until it’s too late.
- Lack of Penalties: Builders declaring insolvency rarely face penalties, which could serve as a deterrent against financial mismanagement.
Proposed Solutions to Protect Homebuyers
1. Strengthening Oversight Mechanisms
- Introduce stricter oversight during the lifecycle of real estate projects, with mandatory financial audits and fund usage reports submitted to regulatory bodies.
- Ensure that promoters are monitored for over-leveraging and diversion of funds.
2. Prioritize Homebuyers’ Claims
- Amend IBC rules to prioritize homebuyers’ claims over those of other financial creditors.
- Create a homebuyer protection fund to cover delays and additional costs in case of insolvency.
3. Time-Bound Resolutions
- Enforce stricter time limits for resolution processes under IBC, ensuring that homebuyers are not left waiting for years.
- Introduce fast-track insolvency processes specifically for stalled real estate projects.
4. Hold Promoters Accountable
- Impose penalties on promoters found guilty of fund mismanagement or negligence, even after insolvency proceedings are initiated.
- Mandate personal guarantees from promoters for large-scale real estate projects to ensure accountability.
5. Increased Transparency in Resolution Process
- Ensure that homebuyers are part of the committee of creditors (CoC) and have a say in the resolution process.
- Provide regular updates to homebuyers on the status of insolvency proceedings.
The Way Forward
While the IBC has been instrumental in resolving insolvency cases across industries, its application in the real estate sector requires significant reforms to ensure fairness and efficiency. Homebuyers and investors are often the most affected by project delays and financial mismanagement, yet they remain the least empowered during insolvency proceedings.
By addressing the loopholes in the current system and expanding protections for homebuyers, policymakers can ensure that the IBC fulfills its original intent—to create a fair and transparent framework for all stakeholders.
At myfloorarea.com, we strive to keep homebuyers informed and empowered. If you’re navigating the complexities of a real estate investment, stay tuned for more insights and updates to help you make informed decisions.
