Over the last few years, several cases of defaulting real estate companies, including major players like, Amrapali, Jaypee Infratech and Supertech, have been stuck at various stages of insolvency proceedings under the provisions of the Insolvency and Bankruptcy Code, 2016, as amended (“Code”). As per the data provided by Insolvency and Bankruptcy Board of India (“IBBI”), a total of 344 corporate debtors engaged in construction and real estate activities have been admitted into corporate insolvency resolution process (“CIRP”) as of September 2022.[i]
The major challenges in the insolvency resolution of real estate companies arise from the peculiarities of this sector, especially since the divergent interests of the allottees of the real estate projects do not align with the scheme of the CIRP. The allottees’ interest lies in the ownership and possession of the unit, while the interest of the financial creditors lies in the repayment of the loan (usually with haircuts). Furthermore, one of the unique features is that due to the scale of the projects, the real estate allottees (who have been categorised as financial creditors having voting rights) usually form a majority in the committee of creditors (“CoC”); however, they do not possess the financial expertise or prudence to take decisions for assessing the feasibility and viability of the resolution plans for revival of these companies.
Experimentation by courts: Project-Wise CIRP and Reverse CIRP
The insolvency courts have recognised the difficulty in conducting a normal CIRP in case of real estate corporate debtors and as the Code does not deal with the unique issues of this sector separately, they have attempted to evolve and adapt CIRPs to the nature of the real estate sector by introducing concepts such as ‘reverse CIRP’ and ‘project-wise CIRP’.
A. Project-wise CIRP is confined to only such project(s) whose allottees, financial creditors or operational creditors have initiated the CIRP, and does not impact other projects having different land owners, financial institution, or allottees..
B. Reverse CIRP is a promoter-driven process, with the promoter reaching consensus with all stakeholders to pay the outstanding dues and ensure construction of the project(s).
The aim of both these forms of CIRP is value maximisation for all stakeholders and to ensure completion of projects in order to deliver the flats to the allottees at the earliest.
One of the first cases of reverse CIRP and project-wise CIRP in India was in Flat Buyers Association Winter Hills-77, Gurgaon v Umang Realtech Private Ltd through IRP & Ors., CA(AT)(Insolvency) No. 926 of 2019 (“Umang Realtech”)[ii]. In the aforesaid case, the Flat Buyers’ Association and the original applicants who were allottees, desired CIRP but did not want to approve any plan of a third party i.e., a resolution applicant. One of the promoters agreed to infuse funds into the corporate debtor and play the role of a lender to ensure that the CIRP is a success and the allottees take possession of their flats/apartments. The Hon’ble NCLAT, while noting that the project would be completed within 4-5 months, allowed reverse CIRP and laid down a time frame for the promoter to finish the project. The Hon’ble NCLAT also directed that if the promoter fails to comply with the undertaking and fails to invest as a financial creditor or does not cooperate with the interim resolution professional (“IRP”), the Hon’ble NCLT will complete the CIRP in terms of the Code. The Hon’ble Supreme Court in Anand Murti vs Soni Infratech Pvt. Ltd.[iii] and Amit Katyal vs Meera Ahuja[iv]has upheld the principle of reverse CIRP.
Furthermore, in Umang Realtech, the Hon’ble NCLAT held that the asset of the company of the concerned project is to be maximized for balancing the creditors such as allottees, financial institutions and operational creditors of that particular project. Similarly, the Hon’ble NCLAT in Whispering Tower Flat Owner Welfare Association vs. Abhay Narayan Manudhane, RP of Corporate Debtor,[v] allowed project-wise insolvencywhile noting that the CoC in its commercial wisdom had approved division of the assets of the corporate debtor into eight projects for exploring possibility of project-wise resolution. Most recently, in Ram Kishor Arora Suspended Director of M/s. Supertech Ltd. v. Union Bank of India & Anr.[vi] allowed project-wise CIRP instead of CIRP of the entire company, while directing that the construction on the other projects shall proceed under the overall supervision of the IRP. However, recently, the Hon’ble Supreme Court vide order dated January 27, 2023[vii] stayed the NCLAT proceedings in Supertech, although, it directed that the offers made by the prospective resolution applicants may be evaluated and placed for consideration before the Hon’ble NCLAT.
In both project-wise and reverse CIRPs, the courts closely monitor the status of the construction of the projects and allotment to the homebuyers, by laying down strict timelines and directing the IRP and the management/ ex-management to file regular status reports.
Proposed Amendments in Insolvency and Bankruptcy Code (Amendment) Bill, 2023
While the courts have attempted to tailor the provisions of the Code for real estate companies, the Code itself is ill-equipped to regulate the same. Considering the need of a specialised framework to deal with such cases and the lack thereof, the Ministry of Corporate Affairs by way of notice dated January 18, 2023, proposed introduction of project-wise insolvency in cases of insolvency of real estate companies. In this regard, the following amendments have been proposed:
(i) When an application is filed to initiate the CIRP in respect of a corporate debtor who is the promoter of a real estate project, and the default pertains to one or more of its real estate projects; the Adjudicating Authority, at its discretion, shall admit the case but apply the CIRP provisions only with respect to such real estate projects, which have defaulted. Accordingly, such projects shall be recognised as distinct from the larger entity for the limited purpose of resolution
(ii) The provisions of the Code as they apply to the CIRP of a corporate person shall, with necessary modifications, be made applicable to the CIRP of such real estate projects; and
(iii) Section 28 of the Code may be amended to enable the RP to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the CoC.
Challenges and Recommendations
The amendments have only been proposed for introduction of project-wise CIRP and not reverse CIRP. While project-wise CIRP is a welcome move, it is recommended that the Code should provide statutory framework for reverse CIRP as well. In cases such as Umang Realtech, the Hon’ble NCLAT had allowed both project-wise and reverse CIRP in order to ensure that the overall interests of the homebuyers and the financial institutions are served.
Further, it is imperative that the provisions enabling project-wise insolvency should be carefully worded. The legislature and the insolvency courts need to bear the following in mind in cases of project-wise insolvency:
(i) Since all the projects are still under one company, there may be challenges in having operational control through IRP on the projects undergoing CIRP e.g. clarity on whether the board of directors will remain suspended or IRP to run the entire Company, ability to bind the Company with the decisions of the CoC for the projects undergoing CIRP.
(ii) Complication may arise while analysing avoidable transactions of the projects undergoing CIRP as such transactions may have a carry over to the projects outside the CIRP.
(iii) Real Estate (Regulation and Development) Act, 2016 (“RERA”), which has been enacted in order to ensure efficiency and transparency in the real estate sector, envisages certain compliances to be followed by the real estate company such as 70% of the amounts collected for one project is utilised only for cost of construction and towards land cost. While the IRP may adhere to this requirement, no monitoring mechanism is in place to ensure that the ex-management complies with this requirement for the projects kept outside CIRP.
(iv) Clarity on bifurcation of creditors (for example operational creditors, employee dues) for each project.
Introducing a robust mechanism in the Code for project-wise CIRP and reverse CIRP is the most appropriate solution for the problems faced by the real estate stakeholders, especially financial creditors and the homebuyers.. While an enabling provision for the Adjudicating Authority to initiate project-wise insolvency and/or reverse insolvency is important, it is equally imperative that the Code should have sufficient safeguards in order to ensure that the aim of the Code is not defeated and interest of the allottees is preserved.
[i] 344 real estate/ construction corporate debtors admitted into CIRP: Govt, Economic Times, available at https://infra.economictimes.indiatimes.com/news/construction/344-real-estate/construction-corporate-debtors-admitted-into-cirp-govt/96352730
[ii] Flat Buyers Association Winter Hills – 77, Gurgaon vs Umang Realtech, Company Appeal (AT) (Insolvency) No. 926 of 2019 (Order dated 04.02.2020).
[iii] Anand Murti vs Soni Infratech Pvt. Ltd., Civil Appeal Nos. 7534 Of 2021 (Order dated 27.04.2022).
[iv] Amit Katyal vs Meera Ahuja, Civil Appeal No. 3778 of 2020,(Order dated 03.03.2022).
[v] Whispering Tower Flat Owner Welfare Association Vs. Abhay Narayan Manudhane, RP of Corporate Debtor, Company Appeal (AT) (Insolvency) No. 896 of 2021(Order dated January 4, 2022).
[vi] Ram Kishor Arora Suspended Director of M/s. Supertech Ltd. v. Union Bank of India & Anr Company Appeal (AT) (Insolvency) No. 406 of 2022(Order dated June 10, 2022)
[vii] Order dated January 27, 2023 in Civil Appeal Diary No. 33603 of 2022