Sections within the government are learnt to have argued against the ministry of corporate affairs (MCA) proposal to amend the law to allow the Committee of Creditors (CoC) to invite separate resolution plans for each real-estate project, rather than one failed project necessarily bringing the entire firm under the process.
According to official sources, who talked to FE on this on the condition of anonymity, such a provision could potentially be misused by errant developers to siphon off funds from certain projects.
Also, the ministry feels that home-buyers would benefit from the move because under the proposed norms, even after the start of the resolution process, units will continue to be allotted to them on an ‘as is where is’ basis or on making the balance payment to complete construction.
These proposals were part of a discussion paper released by the ministry in January, 2023, where a number of amendments were proposed the Insolvency and Bankruptcy Code (IBC) to make the resolution process faster and more effective.
The sourced cited above, however, said if the proposed leeway is given, the provisions in the Real Estate (Regulation and Development) Act, 2016 (RERA), as well as IBC sections 43-51 dealing with “avoidance transactions” may not suffice to address concerns pertaining to diversion of funds.
Currently, the IBC provisions stipulate that the CoC may declare the entire firm as insolvent and drag it into the Corporate Insolvency Resolution Process (CIRP), even if only one project of the firm has run into trouble. As per the proposed changes, the CoC may direct the Resolution Professional (RP) to invite separate plans for each real estate project, rather than the whole firm, which would also encourage the association of allottees of a real estate project to bring their own resolution plan and resolve issues in a specific project.
RERA has a detailed framework to ensure transparent project fund usage and to penalise project delays, which act as a measure to provide safeguards against potential abuse.
Under section 4 of RERA, the promoter during registration of a real estate project must file declaration and affidavit stating that 70% of the amounts realised for the project from the allottees shall be deposited in a separate account in a scheduled bank to cover the cost of construction and land. The funds shall be used only for the stated purpose, and any withdrawal of the funds by the pomoter from the account is possible only after certified by an engineer, an architect and a chartered accountant, about its need for the project. “This provision limits the use of proceeds from the home-buyers and prevents the diversion of funds,” said Farid Karachiwala, Partner and Co-Chair – Disputes at JSA Advocates and Solicitors.
In addition, proceedings can also be filed by the home buyer against the promoter for criminal breach of trust, criminal conspiracy, cheating, misappropriation, money laundering for any diversion of funds from the project.
Moreover, section 60 of RERA stipulates that if any promoter contravenes section 4 of the act, he/she shall be liable to a penalty up to 5% of the estimated cost of the project.
Similarly, IBC also provides for such safeguards. Under section 43-51 of the code, transactions can be avoided or undone by the RP during the CIRP by filing an application to the Adjudicating Authority (AA), or National Company Law Tribunal (NCLT).
Besides, Section 43 provides for avoidance of preferential transactions which involve actions that put any person in a better position than they would have been in the hierarchy and are not in the ordinary course of business. Also, Section 45 addresses undervalued transactions where the corporate debtor gifts or transfers property for significantly less than its value, enabling reversal of such transactions.
“These provisions equip the RP with an effective tool to recover lost value from the debtor’s asset pool, reinforcing its overall financial strength,” said Misha, Partner, Shardul Amarchand Mangaldas & Co. In practice, these provisions only need to be efficiently used to thwart avoidable transactions, and prevent leakage of value and siphoning of funds, she said.