The Corporate Insolvency Resolution Process (CIRP) for real estate companies is notably distinct from other sectors due to its unique challenges and complexities. Real estate companies often have multiple projects at various stages of completion and in different geographical locations, necessitating a more adaptable and innovative approach for effective resolution. Recognising these differences, the judiciary has applied the Insolvency and Bankruptcy Code, 2016 (the Code) with flexibility and creativity, aiming to protect the interests of real estate project allottees while maintaining the integrity of the Code.
This article explores the origin and specifics of real estate insolvencies, focusing on the rights of allottees, judicial trends, and amendments to the Code and related regulations and further moves on to provide a way forward, keeping in view the:
Allottees as Financial Creditors in a Class
In 2017, the CIRP proceedings initiated by the National Company Law Tribunal (NCLT) against major real estate firms such as Jaypee Infratech Limited and Amrapali Group led to significant amendments in the Code. Concerns from distressed allottees of these real estate projects prompted the Insolvency Law Committee's March 2018 report, which recommended amending the Code to clarify that allottees of real estate projects are financial creditors. The report emphasized that delays in under-construction apartments were widespread, and funds raised from allottees were crucial in financing these projects.
Following these recommendations, the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 was enacted on June 6, 2018. This ordinance proposed amendments to the Code, categorizing allottees as financial creditors. Subsequently, on August 17, 2018, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 was passed, officially recognizing allottees of real estate projects as financial creditors under the Code. The 2018 Amendment added an explanation to the definition of 'financial debt' in Section 5(8)(f) of the Code, stating that any amount raised from an allottee under a real estate project is considered to have the 'commercial effect of a borrowing.' Consequently, the debt owed to allottees was legally recognized as 'financial debt.'
Acknowledging that allottees are a heterogeneous group of financial creditors in a class, Sections 21(6A)(b) and 25A were introduced. These sections mandated the appointment of an Authorized Representative (AR) to represent allottees in Committee of Creditors (COC) meetings. The AR, as per Section 25A(3A), is required to vote according to the majority decision and prior voting instructions received from the allottees.
The constitutionality of the 2018 Amendment was challenged in the Supreme Court case Pioneer Urban Land and Infrastructure Limited and Another vs. Union of India and Others. The Supreme Court upheld the amendment, highlighting the importance of protecting the interests of allottees. The judgment also examined the relationship between the Code and the Real Estate (Regulation and Development) Act, 2016 (RERA Act), stating that both are beneficial legislations operating in different spheres. The remedies available under both laws are to be harmoniously construed, but in case of a conflict, the Code prevails.
Threshold for Initiation of CIRP by Allottees
The 2018 Amendment to the Code, while beneficial, inadvertently allowed a single dissatisfied allottee to initiate CIRP proceedings against an entire real estate company with multiple projects, leading to a surge in litigations. To address this issue, the Legislature enacted the Insolvency and Bankruptcy Code (Amendment) Act, 2020, effective from March 13, 2020.
The 2020 Amendment revised Section 7 of the Code, introducing a minimum threshold for allottees to initiate CIRP proceedings against a corporate debtor. According to this amendment, CIRP proceedings can now only be initiated if:
At least 100 allottees of the same real estate project, or
At least 10% of the total number of allottees of the same real estate project, whichever is less,
jointly apply.
The constitutional validity of the 2020 Amendment was challenged but upheld by the Supreme Court in the case of Manish Kumar vs. Union of India. This significant ruling resolved the issues caused by the 2018 Amendment, emphasizing that only allottees who meet the minimum threshold from the same real estate project can jointly initiate CIRP proceedings under the revised Section 7 of the Code.
Judicial Interventions to Protect Allottees' Interests
1. Reverse CIRP: A Custom Approach for the Real Estate Sector
In the landmark judgment of Swiss Ribbons Private Limited and Anr. Vs. Union of India and Ors., the Supreme Court emphasized the importance of economic experimentation, noting the severe consequences of hindering such initiatives. Inspired by this judgment, the National Company Law Appellate Tribunal (NCLAT) introduced the concept of Reverse CIRP in Flat Buyers Association Winter Hills – 77, Gurgaon Vs. Umang Realtech Pvt. Ltd through IRP and Ors.
The NCLAT recognized the unique challenges faced by real estate companies under CIRP and proposed resolving these without a third-party Resolution Plan. This led to the innovative Reverse CIRP, where promoters of the corporate debtor can bypass Section 29A restrictions of the Code and propose to complete and deliver stalled projects, subject to creditor and stakeholder approval under the provision of the Resolution Professional (RP) and the NCLT. Promoters can infuse funds as investors, ensuring project completion and protecting the interests of allottees and creditors. This approach allows ex-management to regain control of their company after satisfying creditor claims.
2. Project-Specific Resolution: Restricting CIRP to the 'Project in Default'
In the Umang Realtech judgment, the NCLAT suggested limiting the CIRP of real estate companies to the specific 'project in default,' while excluding other projects that are financially healthy or at different construction stages from unnecessary resolution under the Code. The goal was to maximize the assets of the defaulting project for creditors and align with the Code's objectives. This project-specific resolution approach has been upheld in various NCLT cases, such as Project Avalon Rosewood and Project Blossom Zest. In IRP of Ansal Properties and Infrastructure Limited, the NCLAT restricted CIRP to the 'project in default,' a decision reaffirmed in 2024.
Amendments to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) effective February 15, 2024, allow for different Resolution Plans for various projects of a corporate debtor with COC approval and mandate separate bank accounts for each project for transparency.
Despite these amendments, the CIRP Regulations do not explicitly provide for project-specific resolutions or restrict CIRP to the defaulting project. Lawmakers may fear misuse by corporate debtors abandoning less profitable projects. However, without statutory provisions, solvent projects may face unnecessary delays. Thus, judicial intervention remains the primary remedy to ensure CIRP proceedings are project-specific.
The Interest of the Allottees is Paramount
The NCLAT and the Supreme Court have consistently intervened to protect the interests of the allottees of corporate debtors.
In Puneet Kaur Vs. K.V. Developers Pvt. Ltd. and Ors., the NCLAT addressed the issue of allottees challenging the rejection of their delayed claims by the NCLT after the Resolution Plan was approved by the COC. The NCLAT observed that public announcements are typically published in newspapers where the corporate debtor's offices are located, but many allottees, often middle-class individuals who have taken loans to pay for their units, may be scattered across the country and unaware of these announcements. Recognizing that the 90-day timeframe to file claims may be insufficient, the NCLAT noted that the RP, who manages the corporate debtor, has access to the debtor’s liability records. Therefore, claims not filed within the statutory period but reflected in the corporate debtor’s records should be included by the RP in the Information Memorandum, and Resolution Applicants should consider these claims.
As of September 16, 2022, CIRP Regulations require the IRP to send communications with the public announcement to all creditors listed in the corporate debtor's last available accounts. The timeframe for filing claims has been amended, effective September 18, 2023, to the date of issuing the Request for Resolution Plan or 90 days from the Insolvency Commencement Date, whichever is later.
In Alok Sharma, Authorized Representative of Commercial Space Buyers Vs. M/s. IP Construction Pvt. Ltd. through Resolution Professional, Anju Agarwal, the allottees appealed to the NCLAT after the NCLT refused to direct the RP to facilitate the registration of their sale deeds, despite full payment and possession of their units. The NCLT had argued that executing sale deeds would violate the moratorium under Section 14 of the Code. The NCLAT overturned this decision, stating that the units were part of the corporate debtor's ongoing business operations, not assets to be alienated. The NCLAT directed the RP to execute the sale deeds and emphasized that the rights of home buyers must be preserved and protected within the parameters of the Code.
In response to this judgment, the IBBI's discussion paper on "Real-estate Related Proposals- CIRP & Liquidation" (September 6, 2023) proposed amendments to the CIRP Regulations to facilitate the registration of sale deeds for units where allottees have full possession and have paid the full consideration, subject to COC approval with a 66% majority. However, these suggestions were not incorporated in the February 15, 2024 amendments to the CIRP Regulations. Implementing these proposals as statutory provisions would have provided significant relief to allottees, especially for near-completion projects.
The Liquidation Regulations were amended on February 15, 2024, to exclude units in real estate projects where possession has been given to allottees from the liquidation estate. Including similar provisions with adequate safeguards in the CIRP Regulations would align with the Code's intent and offer much-needed respite and faster resolution to allottees in the CIRP proceedings of real estate sector corporate debtors.
The Supreme Court, in Vishal Chelani and Ors. Vs. Debashis Nanda, resolved the issue of differential treatment of allottees with refund decrees, ruling that decree-holder allottees are recognized as 'financial creditors,' affirming that there can be no further classification within a class of creditors.
The Hon’ble Supreme Court further in its latest ruling in the subject matter in IndiabullsAsset Reconstruction Company Limited v. Rm Kishore Arora & Ors, yet again crystallised the rights of homebuyers and detonated the concept of Project Wise CIRP, basing its reasons that the importance of accepting a solution beneficial to a larger segment does not result in any grave injustice. Interestingly, an exception was carved out further by the Hon’ble Supreme Court by terming the infusion of funds by the Corporate Debtor as an “interim finance” but completely flouting the sanction and restrictions of Section 29A of the Code.
Challenges
The CIRP of a real estate company is unique and significantly different from companies in other sectors. Real estate companies often use special purpose vehicles (SPVs) or subsidiary companies to own project land, while the parent company handles funding, development, and construction, and collects money from allottees. Thus when the parent company is admitted into CIRP without its subsidiaries, in accordace with Section 18, Explanation (b) of the Code the project land is excluded, as it owned by the subsidiary, thereby, rendering the process ineffective.
Although the Supreme Court, in Victory Iron Works Limited Vs. Jitendra Lohia and Anr., ruled that development rights constitute a bundle of intangible rights vested in favor of the corporate debtor and further categorizing them as an 'asset' of the corporate debtor, this does not effectively resolve the current issue. While development rights are indeed an asset of the corporate debtor, practical challenges arise in enforcing these rights and completing the stalled project without ownership of the project land, which belongs to a third party. Moreover, unless both the developer and the landowner undergo joint CIRP, the proceedings will be fraught with various rounds of litigation. Consequently, the successful completion of CIRP for real estate companies, where the landowner and the developer are separate entities, remains uncertain.
In the National Capital Region (NCR), statutory authorities like the Greater Noida Industrial Development Authority (GNIDA) and Noida Industrial Development Authority (NOIDA) lease land for group housing and commercial projects. These lands are often leased to wholly owned special purpose vehicles (SPVs) of real estate development companies. When Corporate Insolvency Resolution Process (CIRP) proceedings are initiated against a real estate company, this creates a precarious situation for allottees and creditors. Even if the land is leased directly to the real estate company, recent Supreme Court judgments, such as Greater Noida Industrial Development Authority vs. Prabhjit Singh Soni and Anr, have clarified that statutory authorities like NOIDA and GNIDA, constituted under the U.P. Industrial Area Development Act, 1976 (the 1976 Act), hold a charge over the lands they lease to third parties. Consequently, under Section 13A of the 1976 Act, these authorities are considered operational but secured creditors. As a result, the dues owed to these statutory authorities, which typically amount to crores of rupees, have a higher priority than the claims of allottees, who are unsecured financial creditors, under the waterfall mechanism outlined in Section 53 of the Insolvency and Bankruptcy Code.
In the Prabhjit Singh Soni case, the Supreme Court noted that when a resolution plan involves the use of land owned by statutory authorities like GNIDA, which are governed by their own statutory rules and regulations, there needs to be increased scrutiny of the plan's feasibility and viability. This scrutiny, usually within the domain of the Committee of Creditors (CoC), must be thorough.
A common issue is that statutory authorities like GNIDA often fail to file their claims with the Resolution Professional (RP) within the stipulated time frame. They also frequently engage in litigation to demand higher pay-outs for their outstanding dues. This practice delays the resolution of the corporate debtor, as the construction of stalled projects cannot proceed until these litigations are resolved and the necessary permissions and sanctions are granted by the authorities. Coupled with the element that the claims of these statutory authorities, who have statutory securities is actually the principal amount due to them, extended manifold due to the levy of interests, penal charges and the like. That the entire burden of such claims are ultimately to be borne by other creditors, who would further be entitled to higher haircuts.
Conclusion
The Indiabulls case reinstates the vitality and the purport with which the concept surrounding Real Estate Insolvency and its innovative means, viz., Reverse Insolvency / Project Wise Insolvency were conceptualised and have naturally gained momentum. Unlike our traditional CIRP, if such innovative judicial interceptions were not paved, there would no possibility of gaining possession of the projects. However, what is under-discussed or rather, what the IBBI as well as the Hon’ble Courts been silent on completely have been the lack of regulation, the stark discrimination against Financial Creditors, complete flouting of Section 29A of the Code and the lack of assurance on the actual success of a Project Wise Insolvency / Reverse Insolvency.
The ongoing challenges faced by real estate insolvencies, despite numerous judicial interventions, underscore the critical need for legislative and executive action. The judiciary has consistently provided directives to protect the interests of allottees and ensure the proper implementation of the Insolvency and Bankruptcy Code, as evidenced by landmark cases and innovative solutions like Reverse CIRP, but on a case to case basis. However, these judicial measures cannot substitute for comprehensive legislative reforms and proactive executive oversight. The separation of powers mandates that the legislature must step up to address the gaps in the current legal framework and ensure more effective and streamlined processes for real estate insolvencies. Relying solely on the judiciary to resolve these complex issues is neither sustainable nor in line with the principles of governance. It is imperative for the legislative body to enact clearer and more robust regulations, and for the executive to enforce these regulations effectively, ensuring that real estate insolvencies are managed efficiently, thereby providing certainty and protection to all stakeholders involved.
It is vital that IBBI takes a cue from the legislature in the United Kingdom whereby the advent and spread of COVID-19 saw the enactment of Corporate Governance and Insolvency Act of 2020 that enabled the concept of a “payment holiday” on selective legal sanctions during the moratorium wherein the moratorium followed a “debtor-in-possession” model. It is unavoidable that the owner of a project would be the best guide to lead to the completion of the project. The Amitabh Kant Expert Committee talking on the viability of Project Wise Insolvency had categorically opined that Real Estate Project Wise Insolvency is a concept that can be envisioned for all projects as all projects are mandatorily pre-registered with the Real Estate Regulatory Authority.
As such at this stage an amendment is not only a legitimate expectation but rather a need of the hour to address the needs including project wise admission process, resolution time, delivery time limit, remedies, allowing homebuyers to represent as Resolution Applicants, carving out the limitation of Section 29A of the Code, developing further on the concept of “interim financing”, amongst others.
The above article is authored by Mr. Jyoti K. Chaudhary, Partner, along with Ms. Yashodhara B. Roy, Senior Associate and Ms. Shreya Mishra,Intern.
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