Tackling Real Estate Insolvency: Assessing the efficacy of IBC
(IIIrd Year student pursuing B.A., LL..B. (Hons.) at the National Law University Odisha, Cuttack)
According to India Brand Equity Foundation, the real estate industry in India is projected to experience substantial growth, with its market size expected to reach US$ 1 trillion by 2030. Additionally, it is anticipated that the sector will contribute around 13% to the country’s GDP by 2025. However, in spite of that, thousands of homebuyers are receiving delayed possession of their residential/commercial property or are still waiting to get the key to their dream home as numerous real estate companies, including Supertech Limited, Amrapali Group, and Jaypee Infratech, have undergone or are currently undergoing insolvency proceedings. Based on the data provided by IBBI, as of March 2023, the real estate sector accounts for the initiation of 21% of the corporate insolvency resolution process (“CIRP”) in India.
To address the woes of homebuyers, the Parliament enacted the Real Estate (Regulation and Development) Act, 2016 (“RERA”), which regulates the real estate sector and protects the interests of the consumers of this sector. It also introduced amendments to the Insolvency and Bankruptcy Code (“Code”) in 2018 recognizing the real estate allottees as Financial Creditors (“FCs”), thus empowering them to initiate CIRP and be part of the Committee of Creditors (“CoC”). The judiciary has also taken steps to accommodate the unique conditions of insolvency proceedings in the real estate sector.
Recently, the Hon’ble Supreme Court in Indiabulls Asset Reconstruction Company Limited vs. Ram Kishore Arora & Ors. (2023) ibclaw.in 68 SC in its order dated 11.05.2023 has upheld the NCLAT order, reported in (2022) ibclaw.in 455 NCLAT, in which the Appellate Tribunal had adopted project-wise resolution of the corporate debtor and reverse corporate insolvency resolution process in a matter relating to insolvency proceedings of the Corporate Debtor i.e., Supertech Ltd, a real estate company. The Appellate Tribunal in its order had directed the IRP to constitute CoC involving creditors of only one of the projects of the corporate debtor and continue the construction of the same with the interim finance brought in by the ex-management of the Corporate Debtor and other projects shall proceed as ongoing project basis under the overall supervision of the IRP.
The article assesses the measures taken by the legislature and judiciary to deal with special needs in insolvency proceedings of real estate companies in order to protect the real estate allottees. The article also highlights various challenges and hindrances to accommodate real estate insolvency proceedings and real estate allottees in the present framework of the Code. The author also analyses the amendments to the Code and regulations proposed by the Ministry of Corporate Affairs (“MCA”) and IBBI (“Insolvency and Bankruptcy Board of India”) and attempts to provide recommendations to improve outcomes in cases of real estate insolvencies and eliminate the regulatory hindrances.
Real Estate Insolvencies: Developments & Challenges
To give effect to the changes suggested by the Insolvency Law Committee (2017), the Parliament in 2018 amended the Code to include real estate insolvencies under the realm of the Code and protect the interests of real estate allottees in cases of insolvency of real estate companies. Subsequent to the amendment, real estate allottees are considered as FCs empowering them to initiate CIRP and representation in the CoC.
The aforementioned changes to the Code have not been proved to be adequate to deal with real estate insolvencies due five reasons. First, the real estate allottees have an interest in the construction of the project and timely delivery of ownership and possession of their residential or commercial property and not in the repayment of dues which is the case of financial creditors. There is no provision in the present framework to ensure timely delivery of the possession of their residential/commercial properties to the allottees. Second, financial creditors usually take hefty haircuts in case of liquidation of a corporate debtor. The real estate allottees who are usually middle-class home buyers can’t be expected to take haircuts. Third, the Code doesn’t classify real estate allottees as secured or unsecured financial creditors under Section 53 of the Code, thus leaving it to the courts to decide. Fourth, the commercial wisdom of the CoC is undermined due to the inclusion of real estate allottees. This is because the homebuyers lack the required financial prowess which could impede the ability to make prudent choices and potentially hinder in keeping the corporate debtor as a going concern. Last, the allottees often vote in favour of all available resolution plans in order to escape from becoming a dissenting FC and to save the corporate debtor from going into liquidation as the allottees are left with no relief in that situation.
Thus, the amendments have failed to entirely deal with the unique problems associated with insolvency in the real estate sector. To address the gaps in the code and handle the insolvency of real estate firms while prioritising the concerns of homebuyers, the judiciary has adopted an innovative approach by introducing “project-wise resolution” and “reverse corporate insolvency resolution process,” particularly in instances involving the insolvency proceedings of real estate companies.
Approach of the Judiciary
In Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd through IRP  ibclaw.in 166 NCLAT, the NCLAT was posed with a unique situation where the promoters of the corporate debtor were willing to infuse finance to complete the real estate project and provide possession of their flats/apartments. It was prayed by the allottees i.e., the appellants to prevent any third party to present a resolution plan so as to facilitate the completion of the project by the corporate debtor with the assistance of the promoters. The tribunal propounded the concept of “reverse CIRP” and “project-wise resolution” to achieve twin objectives: (1) keeping the corporate debtor as a going concern and, (2) ensuring the completion of real estate projects to protect the interests of allottees. The tribunal limited the CIRP only to the said project instead of the real estate company and directed the promoter to cooperate with the IRP and to function as an outside lender to ensure the completion of the project. Additionally, it was directed that the debts owed to the financial creditors must be paid concurrently. The tribunal also established specific timeframes for completing the entire process. If the promoter fails to comply, the tribunal instructed that the company’s insolvency proceedings be completed through the usual corporate insolvency resolution process.
The Appellate Authority has attempted to adapt the CIRP under the Code to the special conditions of the real estate sector. In a Project-wise resolution, instead of resorting to the resolution of all the projects and assets of the corporate debtor, CIRP is limited to only those projects whose creditors have initiated the resolution proceedings. On the other hand, Reverse CIRP is a process where the promoter or ex-management is given the opportunity to complete the real estate project and pay the outstanding dues of creditors to prevent the corporate debtor from falling into CIRP as per the procedure laid down in the Code.
The Hon’ble Supreme Court in the case of Anand Murti v. Soni Infratech Pvt. Ltd. (2022) ibclaw.in 27 SC had first recognized the concepts of “reverse CIRP” and “project-wise resolution” to protect the interests of the real estate allottees. In Indiabulls Asset Reconstruction Company Limited vs. Ram Kishore Arora (2023) ibclaw.in 68 SC, the Court went on to justify the new approach to handle real estate insolvencies by drawing upon the principles established in Union of India and Ors. v. M/s Raj Grow Impex LLP which emphasises that the court should take the course which appears to carry a lower risk of injustice. The Court has departed from the well-established principles of law, thus is not correct in its understanding on three grounds which are discussed below.
Firstly, the court has departed from the well-established principle of strict interpretation of economic legislations according to which judicial restraint must be exercised while interpreting economic statutes. Recently the Apex Court in Moser Baer Karamchari Union Through President Mahesh Chand Sharma v. Union of India (2023) ibclaw.in 59 SC, reiterated the principle of judicial deference or “judicial hands-off” approach while dealing with economic legislations. Thus, the NCLAT and the apex court has departed from the aforementioned principles by devising a new way to protect the interests of real estate allottees which is entirely outside the purview of the Code.
Secondly, the judiciary has not only exceeded the mandate of the present framework but has also violated Section 29-A, which aims to disqualify promoters and ex-management from being resolution applicants. This violation occurred by permitting promoters/ex-management to infuse funds into the ongoing project of the corporate debtor.
Lastly, the judiciary has also overstepped by directing the IRP and the promoter to deliver the possession and ownership of the residential/commercial property to allottees during CIRP since any asset of the corporate debtor cannot be transferred during moratorium period without the approval of the CoC as per section 28 of the Code.
The Code envisages minimal executive and judicial interference in order to achieve resolution of the corporate debtor in a time-bound manner. The Apex Court and NCLAT in an attempt to protect interests of the real estate allottees, the creditors, and the corporate debtor, inadvertently has transgressed into the domain of the legislature i.e., law-making. It is also pertinent to note that the present framework is unable to effectively deal with unique problems arising out of insolvency of real estate companies.
The Ministry of Corporate Affairs (MCA) in a notice dated 18.01.2023 floated a discussion paper proposing numerous amendments to the Code. The papers discussed challenges associated with insolvency resolution of corporate debtors involved in the real estate sector. It recognizes the diverging interests of real estate allottees and other financial creditors and concerns arising due to the same. It proposes to confer discretion to the Adjudicating Authority to determine whether insolvency resolution of the entire corporate debtor is required or only of a specific project, thus recognizing judicial innovation of “project-wise resolution.” An amendment to Section 28 of the Code is proposed to facilitate the transfer of ownership and possession of residential or commercial property in favour of allottees during the moratorium period. Also, creditors providing interim finance will be included in the CoC as non-voting members, thus incentivising interim finance providers (promoters in case of reverse CIRP) to infuse funds into the corporate debtor.
Moreover, the paper recommends the inclusion of a provision that would empower the Central Government to exempt a specific group or groups of debtors from being subject to the provisions of the Code. Alternatively, the government could apply the provisions with certain specified exceptions, modifications, and adaptations through a notification. However, such actions would be subject to procedural safeguards outlined in the Code. This will allow the Government to regulate insolvency proceedings of the real estate corporate debtors in accordance with the peculiar conditions of the sector.
Interestingly, there are no amendments proposed to include or exclude the “reverse corporate insolvency resolution process” in the framework. Thus, the concept although judicially recognized may not have legislative backing.
On 7th June, 2023, IBBI had also released a discussion paper dealing with hindrances in achieving time-bound resolution and the problem of resolution of companies with lesser value realisation. The paper proposed various amendments to CIRP regulations to facilitate the effective resolution of companies. Two proposals put forth in the paper will have a direct and significant bearing on real estate insolvencies. The paper has identified the issue of allottees’ lack of sufficient financial knowledge and to resolve the same, IBBI proposes to increase the scope of responsibilities of Authorised Representative (“AR”). The AR inter alia will be responsible for assisting the member representatives in understanding the issues discussed in CoC meetings and the intricacies of resolution plans, to reach a considered decision.
Another concern that has been addressed by the paper released by IBBI is regarding real estate allottees voting in favour of all available resolution plans to escape the possibility of becoming a dissenting FC and to prevent the corporate debtor from going into liquidation. In order to tackle this problem, the paper proposes to revamp the current voting framework and put forth changes that would enable CoC members to express their preference rankings instead of simply voting in favour or against the proposed resolution plans.
Overhauling the Present Legislative Framework
The proposed modifications to the Code and CIRP regulations by the MCA and IBBI indicate that the government has recognized the limitations to a ‘one-size fits all’ approach in handling real estate insolvencies. While the proposed amendments are a positive step, it is important to note that they do not fully address all the issues pertaining to the real estate sector. To achieve a more balanced outcome for real estate allottees, other financial creditors, and corporate debtors, a few suggestions are outlined below:
First, to give legal effect to the concept of Reverse CIRP, it is necessary to incorporate it into the existing framework since the usual corporate insolvency resolution process under the Code may not guarantee the completion of the project. This is crucial in order for keeping the corporate debtor as a going concern and ensuring that residential/commercial properties are delivered to the allottees in a timely manner.
Second, all efforts should be made to provide possession and ownership to the allottees of their real estate units during the insolvency resolution period. Although there is a possibility that the completion of the project is not accomplished within such period. To address this issue, there is a need to introduce an amendment which ensures that the liquidator endeavours the completion of the real estate project at the liquidation stage before fulfilling their claims under Section 53 of the Code.
Third, a subordinate legislation be introduced to address the complexities involved in real estate insolvency proceedings and to avoid ambiguities that could be subject to judicial interpretation.
Further, it is paramount to ensure that the Code does not become a mechanism solely for debt recovery and that it does become a ruse that allottees may use as a means to secure refunds for advances given to the corporate debtor.
The surge in real estate insolvencies in India has become a formidable challenge that necessitates careful consideration and strategic reforms. While RERA and the amendments to the IBC in 2018 have taken significant steps to protect the interests of real estate allottees, their efficacy in addressing the unique complexities of this sector remains debatable.
The judiciary’s introduction of “project-wise resolution” and “reverse corporate insolvency resolution process” displays innovative efforts to safeguard the interests of homebuyers and maintain the viability of corporate debtors. However, these judicial interventions have been subject to criticism for potentially overreaching and undermining certain provisions of the Code. To bridge the existing gaps and ensure a robust framework for handling real estate insolvencies, the proposed amendments by the MCA and the IBBI demonstrate a recognition of the challenges faced by real estate allottees although the proposed amendments do not entirely address the complex issues relating to real estate insolvencies.
Moving forward, it is imperative for the legislature to adopt comprehensive reforms that strike a balance between the protection of homebuyers’ rights and the sanctity of the basic tenets of the Code. By addressing the concerns specific to real estate insolvencies, India can foster a more resilient and equitable environment for both homebuyers and the real estate sector. Effective implementation of these reforms will be pivotal in restoring confidence in the real estate market and upholding the principles of insolvency resolution in India.
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