Insolvency and Bankruptcy Code (IBC): Reforms and Real Estate Insolvency

Context

The IBBI has proposed project-wise resolution of real estate insolvency, allowing the Committee of Creditors (CoC), with 66% approval, to authorise the exclusion of selected projects, such as completed ones, from insolvency proceedings. At the first CoC meeting, the Resolution Professional (RP) must present project-wise details of all projects.

About the IBC

1. The IBC, 2016 is a unified, time-bound legal framework in India designed to resolve insolvency and bankruptcy for corporates, partnerships, and individuals through resolution or liquidation.
2. Insolvency vs bankruptcy: Insolvency is the inability to pay debts when due, while bankruptcy is a legal declaration for individuals when insolvency cannot be resolved. A company in default enters the Corporate Insolvency Resolution Process (CIRP).
3. Administered mainly through the Ministry of Corporate Affairs.
4. Regulator: The Insolvency and Bankruptcy Board of India (IBBI) oversees insolvency proceedings and professionals.
5. Adjudicating Bodies: The National Company Law Tribunal (NCLT) handles companies and LLPs and appeals go to National Company Law Appellate Tribunal (NCLAT), while the Debt Recovery Tribunal (DRT) manages individuals and partnership firms and appeals go to Debt Recovery Appellate Tribunal (DRAT).
6. It follows a creditor-in-control model through the Committee of Creditors (CoC) instead of debtor control.
7. Key objectives: speedy resolution, maximum asset value, creditor protection, business revival and stronger credit discipline.

How CIRP Works

1. Initiation: Insolvency proceedings can begin after a default of at least ₹1 crore by a financial creditor, operational creditor or the corporate debtor
2. Financial creditor: Provides loans or financial assistance, such as banks. Homebuyers (allottees) are treated as financial creditors.
3. Operational creditor: Entities or individuals owed payment for goods, services or wages, such as vendors and employees.
4. Time-Bound Process: The CIRP is generally completed within 180 days, with extensions subject to a maximum overall limit of 330 days.
5. Moratorium: A temporary legal freeze is imposed on recovery actions and other proceedings against the debtor during the insolvency process.
6. After a default, eligible creditors can approach the NCLT to initiate CIRP.
7. An Interim Resolution Professional/Resolution Professional (RP) takes control of the process and manages the corporate debtor as a going concern.
8. A Committee of Creditors (CoC), mainly comprising financial creditors, evaluates resolution options.
9. At least two registered valuers assess the debtor’s assets.
10. They estimate:

• Fair Value: Likely value of assets under normal market conditions.
• Liquidation Value: Expected amount if assets are sold during liquidation.
• Enterprise Value: Economic worth of the business as a continuing enterprise.

11. Potential buyers submit resolution plans, which are evaluated and voted upon by the CoC before final approval by the NCLT.

12. A resolution plan requires approval by at least 66% vote by value of CoC. If resolution fails, the company may move towards liquidation.

Key Features of Real Estate Reforms

1. Project-wise Resolution: Treats each project separately to prevent a single failure from affecting others.
2. Ring-Fenced Accounts: Uses separate bank accounts per project to prevent the diversion of funds.
3. Possession Handover: Empowers the RP to hand over completed units to homebuyers during CIRP with 66% CoC
4. RERA Advisory Role: Allows the CoC to invite RERA (Real Estate Regulatory Authority) to meetings as a non-voting member.
5. Homebuyer Facilitators: Appoints up to five facilitators to assist communication with large creditor classes.
6. Flexible Bidding: Permits the RP to invite separate resolution plans for individual projects or groups.

IBC (Amendment) Act, 2026: Key Changes

1. CIIRP Framework: Introduces an out-of-court Creditor-Initiated Insolvency Resolution Process (CIIRP), enabling financial creditors with 51% approval to start resolution without prior tribunal admission.
2. Faster Admission: Mandates the NCLT to admit applications within 14 days once default is established.
3. Group Insolvency: Enables joint resolution proceedings for interconnected corporate entities.
4. Cross-Border Insolvency: Adopts a framework based on the UNCITRAL (United Nations Commission on International Trade Law) Model Law to manage foreign assets and creditors.
5. Key Protections: Separates roles of resolution professionals and liquidators, guarantees liquidation value to dissenting creditors, and grants clean-slate protection to approved plans.
6. Phased Implementation: Statutory provisions are being brought into force in a phased manner.

Challenges of IBC

1. Resolution Delays: Excessive litigation and tribunal backlogs frequently cause cases to exceed the statutory 330-day timeline.
2. Severe Value Erosion: Financial creditors suffer heavy haircuts, resulting in low recovery rates and forced liquidation over resolution.
3. Marginalized Homebuyers: Large, scattered classes of homebuyers lack real bargaining power compared to banks in the
4. Fund Diversion: Mixing and diverting funds across different real estate projects makes resolving individual project insolvencies difficult.
5. Capacity Shortages: A shortage of NCLT benches and judges creates severe bottlenecks that slow down case disposal.

Way Forward

1. Strengthen Tribunals: Increase NCLT benches and staff to ensure fast, time-bound case resolution.
2. CIIRP Safeguards: Implement fair checks in CIIRP to prevent dominant creditors from misusing power.
3. Clear Operational Rules: Rapidly notify detailed operational rules for group insolvency and cross-border insolvency.
4. Early Stress Detection: Use RERA oversight and project-level tracking to catch financial stress early.
5. Protect Homebuyers: Focus on project completion and handing over homes rather than pushing real estate into liquidation.

Additional Information:

Insolvency and Bankruptcy Board of India (IBBI)

1. Established: 1 October 2016 under the Insolvency and Bankruptcy Code (IBC), 2016.
2. Nature: A statutory regulator created by an Act of Parliament responsible for implementing and regulating India’s insolvency framework.
3. Parent Ministry: Operates under the Ministry of Corporate Affairs.
4. Composition:

• Chairperson: appointed by the Central Government,
• Ex-officio Members: Three members from the Central Government (representing the Ministry of Finance, Ministry of Corporate Affairs, and Ministry of Law) and one member nominated by the Reserve Bank of India (RBI).
• Other Members: Five additional members appointed by the Central Government, with at least three serving as whole-time members.

5. Key Role: Regulates Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs) and Information Utilities (IUs) and oversees insolvency and liquidation processes.

6. Objective: Ensure time-bound insolvency resolution, value maximisation and protection of stakeholders’ interests.

Unique Feature: It regulates both insolvency professionals and insolvency processes, making it a distinctive regulator in India.

 IBC vs SARFAESI

FAQs

Q1. What is the role of IBBI?
Ans. IBBI regulates insolvency professionals, agencies and information utilities and frames insolvency regulations.

Q2. What is the minimum default for starting CIRP against a company?
Ans. ₹1 crore; applications can be filed by financial creditors, operational creditors or the company before NCLT.

Q3. Who are financial and operational creditors?
Ans. Financial creditors provide loans (e.g., banks and homebuyers), while operational creditors are owed money for goods, services or wages.

Q4. What is the maximum time limit for CIRP?
Ans. 330 days, including litigation and extensions, with a basic period of 180 days, extendable by 90 days.

Q5. Why is project-wise insolvency important in real estate?
Ans. It prevents completed projects from being affected by the failure of other projects and enables focused resolution.