Consolidated Insolvency in Indian Real Estate: The Emerging Framework
Real estate insolvency within the framework of the Insolvency and Bankruptcy Code, 2016, has evolved significantly in recent years, notably with the inclusion of homebuyers as “financial creditors” and the subsequent amendments that imposed threshold requirements for initiating Corporate Insolvency Resolution Process (CIRP) proceedings. However, the challenges and uncertainties faced by real estate allottees persist. Real estate projects often involve many inter-connected companies, which makes it even harder and more expensive for homebuyers to file separate applications against each of these companies. To address these challenges, courts and tribunals in India have begun to adopt the doctrine of substantial consolidation. This doctrine, well-established in the bankruptcy laws of the US and UK, envisions the amalgamation of assets and liabilities from interconnected companies, allowing for a common CIRP. This approach seeks to maximize asset value, enhance transparency, reduce costs, and conserve judicial resources. However, the application of this doctrine in India faces multiple issues, thereby necessitating a more comprehensive framework. This blog explores the evolution and application of the doctrine of substantial consolidation in the context of real estate insolvency, examining key cases and the potential it holds for streamlining the insolvency process and safeguarding stakeholders’ interests.
Doctrine of Substantial Consolidation
Real estate insolvency is a complex subject in the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘Code’). The homebuyers weren’t even recognized as “financial creditors” under the broad contours of this Act until the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (26 of 2018). This amendment was the first significant development in this aspect which created a sui generis regime for homebuyers under Section 7 of the Code, classifying them as financial creditors and their debts as financial debts under Section 5(8)(f). Further, the Insolvency and Bankruptcy Code (Amendment) Act, 2020 [No. 1 of 2020] imposed a threshold requirement for initiating CIRP proceedings by the allottees. It allows them to file an application either “jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project.”
Nevertheless, the ordeal experienced by real estate allottees within the realm of insolvency remained an ongoing narrative, with further chapters of uncertainty and challenges. In the complex world of real estate, projects often involve multiple companies working together. For homebuyers, the prospect of filing separate applications against each of these entities can be a daunting task. This not only poses challenges in terms of maximizing the value of their investments but also becomes a burdensome and costly process. In this context, Courts and Tribunals have begun to adopt the doctrine of substantial consolidation. This doctrine, well-established in the bankruptcy laws of the US and UK, lacks specific support within the provisions of the 2016 Code. The Working Group on Group Insolvency, constituted by the Insolvency and Bankruptcy Board of India, in its report dated 23rd September, 2019 recommended that a framework be made to facilitate group insolvency by utilising the provisions of other laws such as the Companies Act, 2013. However, no such framework has been made yet, which has made this doctrine susceptible to several issues, pertaining to its meaning and application.
This doctrine envisions the amalgamation of assets and liabilities from interconnected companies into a shared pool, allowing for the initiation of a common Corporate Insolvency Resolution Process (CIRP). This approach is designed achieve a range of significant benefits, including maximizing asset value, fostering transparency in information, cutting the overall costs of the proceedings, reducing the cost of capital, conserving judicial resources, and instilling a sense of confidence among stakeholders. Further, it also ensures that conflicting orders are avoided, which had been the case if separate CIRPs are conducted. The problem with this doctrine arises in the context of ascertaining whether the companies can be considered as inter-linked companies, so as to consider them for consolidated insolvency. In State Bank of India v. Videocon Industries Ltd. (2018) ibclaw.in 84 NCLT . which is amongst the very first judgments where NCLT applied this doctrine, laid down 14 factors to be verified for the same, namely “common control, common directors, common assets, common liabilities, inter-dependence, interlacing of finance, pooling of resources, co-existence for survival , intricate link of subsidiaries, inter-twined accounts, inter-looping of debts, singleness of economics of units, cross shareholding, inter dependence due to intertwined consolidated accounts etc.” This list was considered to be inexhaustive and constituting the first prong of the two-pronged tests, i.e. elementary governing factors. The second prong was categorisation based on these governing factors.
Application of Doctrine of Substantial Consolidation in Real Estate insolvency
Later, this doctrine was also extended in the context of real estate insolvency wherein the courts and tribunals have dealt with several aspects of this doctrine. While dealing with a Writ Petition filed by the homebuyers against the various companies of Amrapali group, all of which were engaged in the development of residential projects, the Supreme Court applied this doctrine, albeit not explicitly. The Court ordered to attach the properties of all the forty companies and freeze their bank accounts and those of their directors.
Moreover, in the case of Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Pvt. Ltd. & Ors. (2019) ibclaw.in 477 NCLAT ., a significant decision was reached. This case marked one of the initial instances where a joint application against multiple corporate debtors was allowed. In this case, the Appellate Tribunal issued an order for a group Corporate Insolvency Resolution Process (CIRP) involving five companies. These companies served as corporate guarantors and co-borrowers for the loan obtained by Adel Landmarks Ltd. The Appellate Tribunal ordered the group CIRP against all these corporate debtors to ensure the successful completion of the CIRP. This decision was made because the lands owned by all five companies were consolidated for the purpose of constructing a residential plotted colony.
A similar approach of joint application was also permitted in the case of Mrs. Mamatha v. AMB Infrabuild Pvt. Ltd.  ibclaw.in 114 NCLAT . In this case, the court made it clear that a Section 7 application would be maintainable against corporate debtors jointly if they collaborated and established an individual corporate entity for the purpose of developing land and allocating premises to allottees. The court, in this instance, allowed the application jointly against the developer and the landowner. This approach was also mirrored by the National Company Law Tribunal (NCLT) in the case of LIC Housing Finance Limited v. SRS Real Estate Limited and others (2023) ibclaw.in 245 NCLAT . However, in the case of Vishnu Kumar Agarwal vs. M/s. Piramal Enterprises Ltd.  ibclaw.in 16 NCLAT ., the National Company Law Appellate Tribunal (NCLAT) held that once an application against one of the Corporate Debtors is admitted, a second application against the other Corporate Debtor for the same set of claims by the same Financial Creditor cannot be admitted.
Doctrine of Substantial Consolidation with holding and subsidiary companies
The application of this doctrine has gained prominence in cases involving holding companies and subsidiary companies. In a notable case from 2017, Chitra Sharma v. Union of India  ibclaw.in 37 SC . the apex court directed the parent company to deposit a significant sum of two thousand crores before the court, even though the parent company was not the subject of insolvency proceedings; rather, it was the special purpose vehicle that was involved. This case occurred during the early stages of the 2016 Insolvency and Bankruptcy Code’s implementation. While the court didn’t explicitly apply this doctrine, it signaled a predisposition toward its potential application. Subsequently, in various other judgments that followed, the courts did apply this doctrine within the context of holding companies and subsidiary companies.
In the case of Lavasa Corporation Limited v. Warasgaon Assets Maintenance Limited, separate Corporate Insolvency Resolution Processes (CIRPs) were initially initiated against a holding company and its subsidiaries, which were primarily involved in developing and maintaining townships. The request to consolidate these CIRPs was made by the financial creditors of the holding company. This consolidation request stemmed from the fact that the Resolution Applicant for the holding company proposed to resolve the entire debt of the entire group of companies as a single unit. The National Company Law Tribunal (NCLT), in applying this doctrine, concluded that these companies were part of the same group and were heavily interdependent on one another for their continued viability. As a result, the NCLT ordered the consolidation of the CIRPs for these entities.
Moreover, in the case of Jitender Arora v. Tek Chand (2021) ibclaw.in 535 NCLAT , the National Company Law Appellate Tribunal (NCLAT) addressed the Corporate Insolvency Resolution Process (CIRP) related to M/s. Premia Projects Ltd. In this context, it was noted that the landowning company was not undergoing CIRP proceedings, while the Corporate Debtor was responsible for developing a housing project on land owned by that company. The NCLAT recognized the importance of following the appropriate procedures to include the land assets held by the landowning company in the resolution process. Consequently, the case was referred back to the adjudicating authority for the purpose of conducting a consolidated CIRP. This decision was made to provide “fair, just, and proper relief to the creditors” and underscores the need for procedural diligence in including land assets held by a separate landowning company in the CIRP to ensure equitable relief for creditors.
Earlier, the Working Group reports of 2018 had advised against the incorporation and development of group Corporate Insolvency Resolution Processes (CIRP) within the IBC Code, citing that the code was at a much nascent stage. However, Working Group of 2019 produced a new report, which concluded that a comprehensive regulatory framework was essential to facilitate the insolvency resolution and liquidation of companies within a group. They recommended that this framework should address the unique issues that arise in the insolvency of group companies, while also maximizing the advantages and mitigating the concerns. While earlier advice discouraged the creation of such a framework, the 2019 report advised for evolvement, however it was the courts that exercised their inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016, allowing them to make necessary orders to meet the ends of justice and prevent the abuse of the tribunal’s processes. Similarly, Section 151 of the Civil Procedure Code (CPC) grants courts the inherent power to make orders as needed to serve the interests of justice and prevent misuse of the court’s processes. This is especially true given the courts’ increasing application of this doctrine across various sectors, including the real estate sector. The doctrine of consolidated CIRP, as seen in the cited case laws, is emerging as an alternative to the traditional entity-by-entity approach, particularly within the real estate sector. Thus, the need for a framework to regulate this practice has become extremely urgent. This framework can be established through amendments, rules, or advisory guidelines. The establishment of a regulatory framework for consolidated Corporate Insolvency Resolution Processes (CIRP) is now critical to provide clarity and efficiency in handling group insolvency cases, particularly in the real estate sector. This framework can help streamline the process, ensuring a balanced approach to unique challenges and benefits.
 Insolvency and Bankruptcy Code 2015, Section 7, proviso
 Report of the Working Group on Group Insolvency, 2019, p23
 Report of the Working Group on Group Insolvency, 2019, p20-21
 Ibid para 78,
 Lavasa Corporation Limited v. Warasgaon Assets Maintenance Limited, IA/1007/2023 In C.P.(IB)/1765(MB)2018
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