A time for prudence

The insolvency code is being wielded against real estate companies that accumulated large debts in order to outpace the competition. Tushar Chawla, Alpana Srivastava and Ishani Nayyar explain

India’s new insolvency regulations i.e. the Insolvency and Bankruptcy Code, 2016 (IBC), sets the ground for a much-needed creditor-driven insolvency resolution mechanism. The IBC simplifies the legal framework regarding insolvency and bankruptcy of corporates, individuals and partnerships among others. The code ensures a faster and smoother resolution process for stressed assets in the country. It attempts to simplify the process of insolvency and bankruptcy proceedings by handling matters using the National Company Law Tribunal (NCLT) and debt recovery tribunals (DRT).

Impact on real estate sector

The IBC has made a vast impact on the real estate sector. According to a report published in 2015, non-performing assets (NPAs) in real estate were worth ₹60 billion (US$947 million). There are several developers that have for various reasons delayed their loan repayments. Creditors can file an application against such defaulting developers.

Within the sector, developers are defaulting on payments rather than home buyers. Intense competition has led to a massive accumulation of land as developers built up land banks as a strategic weapon against one another. Borrowing for this purpose and the development of land meant that the burden of interest on the developers was enormous, and in excess of what could be met by the development and marketing of residential properties and commercial floor space. So, leading developers have stopped servicing debt. The impact on construction is reflected in their development and in recent decline in cement production, which is commonly used as a proxy for real estate growth.

The banks are hesitant to lend as they work on cleaning up balance sheets and finding funds to recapitalize themselves. This has affected the housing sector. Here too, while credit and demand for housing are still growing, they are fast losing momentum. Trapped between rising interest and other costs and faltering demand that affects prices, the real estate sector is experiencing a severe version of the crisis stemming from the inability of the system to sustain growth-driven by private debt-financed spending.

Before the 2000s, banks were wary because of the long maturity, low liquidity and higher risk associated with lending to this sector. Partly because banks dropped that reticence and hugely increased lending to a few large borrowers in this sector, they are now finding themselves burdened with large NPAs. This has set off the bad debt resolution process based on the IBC, which in turn comes as a boon for the investors. The introduction of the Real Estate (Regulation and Development) Act, 2016 (RERA), has further addressed the loose ends in the real estate sector.

The IBC consolidates and amends all laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of these persons, and to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. It provides a complementary ecosystem for insolvency, and aims to ensure smoother settlement of insolvency cases, enable faster turnaround of businesses and provide for creation of a database of creditors.

The IBC provides a time-bound insolvency resolution process – 180 days after the process is initiated, plus a 90-day extension – for resolving insolvency. The code provides for a expedited insolvency resolution process within 90 days after the process is initiated, plus a 45-day extension for resolving insolvency in fast-track mode. Over the last two years, 300 cases have been registered under the IBC.

Recent judgments

A bench headed by Chief Justice Dipak Misra, who had heard several petitions of home buyers against real estate companies such as Unitech, Supertech and Amrapali, heard the public interest litigation on 6 October 2017. Currently, the moment insolvency proceedings are initiated against a real estate company, execution of enforceable decrees of courts and the consumer forums are rendered ineffective, as they cannot be executed. Moreover, no fresh cases can be initiated by hassled home buyers against such companies.

Tushar Chawla is the India general counsel, Alpana Srivastava is assistant general counsel (India) and Ishani Nayyar is assistant manager for legal at Jones Lang LaSalle. Ambika Kalsi and Kelissa D’Souza are trainees with the legal department who assisted with the article’s research.

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