Context:

• Reverse bankruptcy framework was first proposed by the  Ministry of Corporate Affairs (MCA) in a discussion paper in January. However, even after several industry consultations, MCA has yet to notify the final rules.

Reverse bankruptcy framework – Background, Benefits, and Challenges

The framework Proposed that the insolvency provisions would be applied only on such real estate projects where default has occurred. 

• Benefits: This would ensure minimum disruption of other projects that are doing well in the same company.
• Current Practice: Currently, the Insolvency and Bankruptcy Code (IBC) requires insolvency resolution of a company as a whole and there are situations where because of the default in one project, the Corporate Insolvency Resolution Process (CIRP) is initiated against the entire company. 
• Challenges in the existing mechanism: This is counterproductive as other solvent projects are also stalled post-commencement. In real estate cases, the default often pertains to specific projects (while other projects continue to do well).
  • As per IBBI (Insolvency and Bankruptcy Board of India) data, real estate debtors constitute a major chunk, 21% of all IBC cases. In effect over 1200 real estate cases have been admitted under IBC, which would involve lakhs of home buyers.

What is Reverse Bankruptcy?

• In Reverse CIRP, the promoter itself is responsible for infusing the funds into the project and acts as a lender to the concerned project/real estate company (Contrary to CIRP).
• Reverse insolvency is a promoter-driven process as it requires the promoters to fund the project to complete the construction and development of projects. 
• This may lead to conflicts if promoters are disqualified under Section 29A or if a proceeding is initiated against the promoters for related parties or fraudulent transactions.
• This contrasts with the normal Insolvency and Bankruptcy Code (IBC) procedure where any default triggers insolvency against the whole company.

Source: Live Mint