The introduction of Section 4(2)(l)(D) RERA accounts under the Real Estate (Regulation and Development) Act, 2016 (RERA) has created challenges in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). RERA requires developers to maintain three types of accounts—a Master Escrow Account, a Cash Retention Account, and a RERA-Specific Account—to ensure transparency and protect homebuyers’ interests by managing funds for project completion. During insolvency, issues arise as the Interim Resolution Professional (IRP) takes control of the developer’s assets, leading to uncertainty over whether the funds in the RERA-Specific Account should be considered part of the debtor’s assets or returned to the homebuyers who deposited them.
The article highlights that the RERA-Specific account does not sufficiently protect homebuyers’ interests during insolvency of the developer. This is due to lack of trust formation and creation of security interest in these accounts. This is exacerbated due to absence of any beneficiary. The deficiencies undermine RERA’s protective intent since there is no beneficiary to receive the funds.
To address this problem, the authors suggest adopting statutory trust provisions from Canada’s Condominium Act, of 1998. This approach creates a separate statutory trust for homebuyers’ deposits, keeping these funds distinct from the developer’s assets. By designating homebuyers as beneficiaries under the Canadian Bankruptcy and Insolvency Act, 1985 ensures that their deposits are protected during insolvency. The Condominium Act also provides for a tracing back mechanism to ensure that these funds are not commingled with other assets of the developer and returned to the homebuyers. Adopting these provisions would help safeguard homebuyers’ funds from creditor claims, aligning with RERA’s intent and enhancing financial security for homebuyers.
