Status as on- 14/07/2023
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 the Insolvency and Bankruptcy Board of India (“IBBI”), a total of 344 corporate debtors engaged in construction and real estate activities have been admitted into the corporate insolvency resolution process (“CIRP”) as of September 2022.
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 categorized 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 the revival of these companies.
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 for a specialized framework to deal with such cases and the lack thereof, the Ministry of Corporate Affairs, by way of notice dated January 18, 2023, proposed introducing project-wise insolvency in cases 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 recognized 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 the 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 a 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) Complications may arise while analyzing 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 utilized only for the cost of construction and towards the 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 real estate stakeholders, especially financial creditors and 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 the interest of the allottees is preserved.
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