Archive

Posts Tagged ‘real estate’

Amendments to the IBC: Implications for real estate allottees

July 26th, 2018 No comments

The Insolvency and Bankruptcy Code, 2016 was enacted to provide a time-bound process to resolve insolvency among companies and individuals.  Insolvency is a situation where an individual or company is unable to repay their outstanding debt.  Last month, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 amending certain provisions of the Code.  The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2018, which replaces this Ordinance, was introduced in Lok Sabha last week and is scheduled to be passed in the ongoing monsoon session of Parliament.  In light of this, we discuss some of the changes being proposed under the Bill and possible implications of such changes.

What was the need for amending the Code?

In November 2017, the Insolvency Law Committee was set up to review the Code, identify issues in its implementation, and suggest changes.  The Committee submitted its report in March 2018.  It made several recommendations, such as treating allottees under a real estate project as financial creditors, exempting micro, small and medium enterprises from certain provisions of the Code, reducing voting thresholds of the committee of creditors, among others.  Subsequently, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, was promulgated on June 6, 2018, incorporating these recommendations.

What amendments have been proposed regarding real estate allottees?

The Code defines a financial creditor as anyone who has extended any kind of loan or financial credit to the debtor.  The Bill clarifies that an allottee under a real estate project (a buyer of an under-construction residential or commercial property) will be considered as a financial creditor.  These allottees will be represented on the committee of creditors by an authorised representative who will vote on their behalf.

This committee is responsible for taking key decisions related to the resolution process, such as appointing the resolution professional, and approving the resolution plan to be submitted to the National Company Law Tribunal (NCLT).  It also implies that real estate allottees can initiate a corporate insolvency resolution process against the debtor.

Can the amount raised by real estate allottees be considered as financial debt?

The Insolvency Law Committee (2017) had noted that the amount paid by allottees under a real estate project is a means of raising finance for the project, and hence would classify as financial debt.  It had also noted that, in certain cases, allottees provide more money towards a real estate project than banks.  The Bill provides that the amount raised from allottees during the sale of a real estate project would have the commercial effect of a borrowing, and therefore be considered as a financial debt for the real estate company (or the debtor).

However, it may be argued that the money raised from allottees under a real estate project is an advance payment for a future asset (or the property allotted to them).  It is not an explicit loan given to the developer against receipt of interest, or similar consideration for the time value of money, and therefore may not qualify as financial debt.

Do the amendments affect the priority of real estate allottees in the waterfall under liquidation?

During the corporate insolvency resolution process, a committee of creditors (comprising of all financial creditors) may choose to: (i) resolve the debtor company, or (ii) liquidate (sell) the debtor’s assets to repay loans.  If no decision is made by the committee within the prescribed time period, the debtor’s assets are liquidated to repay the debt.  In case of liquidation, secured creditors are paid first after payment of the resolution fees and other resolution costs.  Secured creditors are those whose loans are backed by collateral (security).  This is followed by payment of employee wages, and then payment to all the unsecured creditors.

While the Bill classifies allottees as financial creditors, it does not specify whether they would be treated as secured or unsecured creditors.  Therefore, their position in the order of priority is not clear.

What amendments have been proposed regarding Micro, Small, and Medium Enterprises (MSMEs)?

Earlier this year, the Code was amended to prohibit certain persons from submitting a resolution plan.  These include: (i) wilful defaulters, (ii) promoters or management of the company if it has an outstanding non-performing asset (NPA) for over a year, and (iii) disqualified directors, among others.  Further, it barred the sale of property of a defaulter to such persons during liquidation.  One of the concerns raised was that in case of some MSMEs, the promoter may be the only person submitting a plan to revive the company.  In such cases, the defaulting firm will go into liquidation even if there could have been a viable resolution plan.

The Bill amends the criteria which prohibits certain persons from submitting a resolution plan.  For example, the Code prohibits a person from being a resolution applicant if his account has been identified as a NPA for more than a year.  The Bill provides that this criterion will not apply if such an applicant is a financial entity, and is not a related party to the debtor (with certain exceptions).  Further, if the NPA was acquired under a resolution plan under this Code, then this criterion will not apply for a period of three years (instead of one).  Secondly, the Code also bars a guarantor of a defaulter from being an applicant.  The Bill specifies that such a bar will apply if such guarantee has been invoked by the creditor and remains unpaid.

In addition to amending these criteria, the Bill also states that the ineligibility criteria for resolution applicants regarding NPAs and guarantors will not be applicable to persons applying for resolution of MSMEs.  The central government may, in public interest, modify or remove other provisions of the Code while applying them to MSMEs.

What are some of the other key changes being proposed?

The Bill also makes certain changes to the procedures under the Code.  Under the Code, all decisions of the committee of creditors have to be taken by a 75% majority of the financial creditors.  The Bill lowers this threshold to 51%.  For certain key decisions, such as appointment of a resolution professional, approving the resolution plan, and making structural changes to the company, the voting threshold has been reduced from 75% to 66%.

The Bill also provides for withdrawal of a resolution application, after the resolution process has been initiated with the NCLT.  Such withdrawal will have to be approved by a 90% vote of the committee of creditors.

Regulating real estate: the 2013 Bill and recent developments

April 8th, 2015 10 comments

Yesterday, Cabinet approved amendments to the Real Estate (Regulation and Development) Bill, 2013, which is currently pending in Parliament.

In this context, the blog post outlines key features and issues related to the Bill, and certain changes which were approved by Cabinet.

What is the current status of the Bill?

The Bill was introduced in Rajya Sabha in August 2013.  It was then referred to the Parliamentary Standing Committee on Urban Development, which submitted its report in February 2014.  The Bill has not been discussed in Parliament as yet, and is currently pending in Rajya Sabha.

As mentioned above, Cabinet approved certain changes to the Bill yesterday.  However, a comprehensive list of these changes is not available in the public domain yet.

What are the key features of the Bill?

The Bill regulates transactions between buyers and promoters (sellers) of residential real estate projects.  It establishes state level regulatory authorities called Real Estate Regulatory Authorities (RERAs) in order to do so.  Residential real estate projects, with some exceptions, need to be registered with RERAs, and their details must be uploaded on the website of the RERA.  This implies that promoters cannot book or offer these projects for sale without registering them with RERAs.  Real estate agents dealing in these projects also need to register with RERAs.  The Bill also establishes state level appellate tribunals called Real Estate Appellate Tribunals.  Decisions of RERAs can be challenged before these tribunals.

The Bill outlines the duties of promoters, buyers, and real estate agents.  For example, the Bill requires that promoters keep 70% of the amount collected from buyers for a project, in a separate bank account. This amount must only be used for construction of that project.  The state government can alter this amount to less than 70%.  The Bill also provides for penalties for the breach of certain provisions of the Bill.

What are some of the issues to consider?

A few key issues to consider in the Bill are related to the following: (i) certain states have already enacted laws to regulate real estate; (ii) commercial real estate has not been included within the ambit of the Bill; (iii) certain smaller sized projects have not been covered under the Bill; and (iv)  70% of the amount collected from buyers must be kept in an escrow account.

Firstly, at present, certain states, such as West Bengal and Maharashtra, have already enacted laws to regulate real estate.  So, any central law on real estate that is subsequently enacted will override provisions of state laws if they are inconsistent with the central law.  For example, while this Bill (introduced at the centre) requires that 70% of the amount collected from buyers be kept in a separate account and be used only for construction of that project, the Maharashtra law requires that the entire amount collected from buyers be used only for purposes collected.

Secondly, while the Bill seeks to regulate residential real estate, commercial real estate has been excluded from its ambit.  The Standing Committee has also pointed out that commercial and industrial real estate should be regulated by the Bill.

Thirdly, registration with RERAs is not required for projects that: (i) are less than 1000 square metres, or (ii) entail the construction of less than 12 apartments, or (iii) entail renovation/repair/re-development without re-allotment or marketing of the project.  The Standing Committee has pointed out that the exclusion of projects, smaller than 1,000 square meters or 12 apartments, from the purview of RERAs could lead to the exclusion of a number of small housing projects.  Instead, it has suggested that only projects that are smaller than 100 square meters or three apartments need not register with the RERA.

Finally, the Bill mandates that 70% of the amount collected from buyers of a project be used only for construction of that project.  Typically, the project cost of a real estate project includes the cost of land and the cost of construction.  In certain cases, the cost of construction could be less than 70% and the cost of land more than 30% of the total amount collected.  This implies that part of the funds collected could remain unutilised, necessitating some financing from other sources.  Consequently, this could raise the project cost.

The Standing Committee made certain other recommendations in relation to the Bill.  It suggested that all real estate agents be registered with RERAs; and that a new provision be inserted to allow RERAs to give directions to state governments to establish a single window system for providing clearances for projects.  Additionally, a time limit should be specified for state and local authorities to issue completion certificates for projects.

What were the changes to the Bill approved by Cabinet yesterday?

A comprehensive list of amendments is not in the public domain yet.  However, a press release of the government, published by the Press Information Bureau, indicates the following changes have been made: firstly, the application of the Bill has been extended to cover commercial real estate, in addition to residential real estate; and secondly, the amount to be kept in an escrow account has been reduced from 70% of the amount collected from buyers to 50%.

For more information, please see the PRS Legislative Brief on the Bill, available here.  You can also watch a PRS video on the Bill here.