Major Breakthrough In Project-Wise Insolvency of a Real Estate Project – Ishaan Dhingra, Advocate

Major Breakthrough In Project-Wise Insolvency of a Real Estate Project

Ishaan Dhingra, Advocate

Project-wise proceedings in the Insolvency & Bankruptcy Code, 2016 (for short “the Code”) may not be envisaged in any of the provisions of the Code but due to the hardships faced by the Home Buyers in real estate companies going under the hammer of Insolvency the jurisprudence was widened and evolved into ‘Project-Wise’ insolvency/resolution, a type of a sub-process of Corporate Insolvency Resolution Process (for short “CIRP”).

Flat Buyers Assn. Winter Hills-77 vs. Umang Realtech (P) Ltd. [2020] 166 NCLAT, a highly celebrated precedent, laid down roots for CIRP to be instituted for a specific project of the Corporate Debtor. The Court held that if the CIRP is confined to a single particular project of the Corporate Debtor it then cannot affect any other project of the same real estate company in other places as the allottees or the Home Buyers are the Financial Creditors of that particular project and not the other projects of the Corporate Debtor. So where separate plans are approved for a project by a competent authority, CIRP cannot be extended to that project. This precedent was upheld, without modifications, regularly by the NCLT and NCLAT of India in Rajesh Goyal [2020] 273 NCLAT, Whispering Tower Flat Owner Welfare Assn. (2022) 05 NCLAT, Ambika Prasad Sharma (2021) 184 NCLAT and many more.

However, an interesting situation arises wherein Project-Wise insolvency/resolution is argued after a CIRP application is already accepted against the whole Corporate Debtor as the Committee of Creditors (for short “the CoC”) may now involve different stakeholders of different projects in the same CoC and decisions must be taken for the whole of Corporate Debtor instead of project-wise which would be beneficial to Home Buyers thereby increasing the chances of resolution and avoiding liquidation which is the whole ethos of the Code. Furthermore, if the project-wise insolvency/resolution is accepted by the concerned NCLT’s then the law was silent about the effect it would have on the composition of the CoC.

The M/s. Supertech Ltd. vs. Union Bank of India, (2022) 455 NCLAT tackled exactly this issue. The judgment filled the gaps dug by the previous decisions on the matter by directing the Interim Resolution Professional (for short “IRP”) to constitute the CoC with regard to Project Eco Village II only and proceed to complete the construction of the project. The IRP was to obtain approval of this CoC with the NCLT and all receivables with regard to the project were to be kept in a separate earmarked account maintained by the IRP. This decision provided much-needed clarity and settled the law of project-wise insolvency/resolution. Not only does it solve the CoC problem but also encourages resolution of the real estate projects so that Home Buyers can get their dream homes.

This decision was further upheld on appeal by the Supreme Court in Indiabulls Asset Reconstruction Co. Ltd. vs. Ram Kishore Arora (2023) 68 SC in which the Apex Court held that “In our view, greater inconvenience is likely to be caused by passing any interim order of constitution of CoC in relation to the corporate debtor as a whole; and may cause irreparable injury to the home buyers. In this view of the matter, we are not inclined to alter the directions in the order impugned as regards the projects other than Eco Village-II.” The constitution of CoC in project-wise CIRP must also be project specific, or it would defeat the whole purpose of the Code and cause the Home Buyers who have spent their hard-earned money to buy homes in the project.

The Supreme Court and the NCLAT have given priority to the interests of the Home Buyers in CIRP of real estate companies which is a major development in the law of Insolvency and a step in the right direction. It is imperative to remember that resolution is the scope and objective of the Code, not liquidation.


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