Project wise Resolution Plan: A new key to Resolution in Real Estate Insolvency
“Insolvency and Bankruptcy Code is not a Panacea for all the ills, however for its effective implementation it requires a regular holistic and systematic assessment[1]”–Dr. M.S Sahoo
Shubham Saini and Dhawal Desai
Associates, Wadia Ghandy & Co.
Abstract
Insolvency and Bankruptcy Code, 2016 [“IBC”] has propounded an up to date and fresh approach towards the resolution of insolvency status of companies in the country. It was inter alia enacted to consolidate and amend laws relating to the reorganization and insolvency of corporate entities. The IBC repealed the erstwhile Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 and apart from this the Code also made substantial amendments to various other legislations including Companies Act, 2013 and Indian Partnership Act, 1932 etc. to align the provisions of various statutes. Indeed, it was felt by the legislature to enact “a code” rather than “an Act” to provide one stop solution to all the issues relating to insolvency, henceforth the IBC “as a complete code” was enacted. Even though the Code addresses most of the muddles in insolvency resolution effectively but from practical implementation of the Code over the period of nearly 6 years, there appears to be one tight spot related to its sector agonistic approach over all corporate persons. Whereas with time it has been depicted that certain sectors would require a differential treatment for their resolution.
One of such sectors is Real estate, which as per the data prepared by Insolvency and Bankruptcy Board of India [“IBBI”] accounts for the second highest number of insolvency resolution cases with 21 percent of share after Manufacturing sector[2]. The Real estate sector plays a pivotal role in any economy. Pertinently, the real estate sector plays a dual role in every economy by not only serving it by enhancing its infrastructure, but also reflects its well-being. Lately, it has come to the light that problems of this sector have aggravated due to numerous reasons such as corporate mismanagement and Liquidity issues. The poor state of the sector has affected the economy at large but the appallingly suffered are the home buyers. Foreseeing this condition numerous steps are taken by the legislature and the judiciary to balance the interest of the promoters and the homebuyers. Recently, the Supreme Court of India have authenticated the concept of “Project wise insolvency” in India Bulls Asset Reconstruction Company Limited v. Ram Kishore Arora and Ors. (2023) ibclaw.in 68 SC [3]. Indeed, the authors through this paper will delve into the implications of this newly propounded resolution in real estate insolvencies and will also try to propose a framework to harmonize the long-standing conflict between the developer and homebuyers.
I. Introduction
Going by the data relating to Corporate Insolvency Resolution of companies in Indian Jurisdiction, Real estate accounts for the second highest accounts for the second highest number of insolvency resolution cases with 21 percent of share after Manufacturing sector. It is also delineated by the report of Grant Thornton Bharat that only 13% is the rate for successful resolution[4]. Accordingly, the jurisprudence for successful resolution of these companies under IBC is still evolving. The legislature and judiciary are continuously taking measures to improve these aforementioned figures. In this backdrop various amendment specifically for real estate companies were introduced by the legislature. For instance, Insolvency and Bankruptcy Code (Amendment) Act, 2018 [for introducing homebuyers as financial creditors] and the Insolvency and Bankruptcy Code (Amendment) Act, 2020 [for setting a threshold for home buyers in filing petition under section 7 of IBC] which indeed have now become the settled law. In addition to this the Judiciary has also been exercising its inherent powers in suggesting innovative solutions for fair and effective resolution of issues cropping up in insolvencies of real estate companies. However, any step taken to conciliate the stakeholders in real estate companies under IBC have always protested by other side stakeholders.
The authors here will try to delve into the implications of recent judgment passed by Hon’ble Supreme Court of India which authenticated new way of resolution in real estate companies by “Project wise insolvency”. The research paper here is divided into various parts. first part will try to establish a nexus between the real estate companies and the IBC. In the second part the authors will analyze the evolving jurisprudence behind the “project wise insolvency in real estate companies”. Lastly, upon extensively analyzing the persisting issues authors will attempt to provide solutions for the same.
II. Real Estate Companies vis-à-vis Insolvency and Bankruptcy Code, 2016
As we know real estate sector is considered to be the significant contributor to the country’s economy. It consists of residential, commercial, and retail sector. For the decades it has been the fastest growing sector in the country’s economy. Moreover, it cannot be denied that 200 plus other industries are dependent on the real estate sector which consists of cement, steel and other construction materials and hence forms the vital part of the countries GDP. In fact, this has been substantiated by various reports which illustrates that the real estate sector’s contribution to the country’s GDP is immensely increasing over the years. Indeed, as per the National statistical office [“NSO”] it accounts for 7% of India’s GDP in 2020[5]. But if we look at the darker side due to capital intensive and prone to delays nature of the sector. Accordingly, the sector have shown an immense increase in the graph of insolvency in this sector. Henceforth the real estate insolvency is significant issue.
Insolvency and Bankruptcy Code, 2016 has played a significant role in real estate insolvencies. IBC was introduced in 2016 with a primary objective to streamline the resolution process of resolving insolvencies and it has been highly appreciated for its effectiveness in helping to resolve entangled insolvency cases. The IBC has provided a vital mechanism for providing a successful resolution of insolvencies in real estate industry. Pertinently, the IBC and the judiciary has been continuously applying a holistic and systematic approach while dealing with real estate industry insolvency cases. To ensure the successful resolution of real estate insolvency various amendment were introduced by the legislature such as, Insolvency and Bankruptcy Code (Amendment) Act, 2018 [i.e., introducing homebuyers as financial creditors] and the Insolvency and Bankruptcy Code (Amendment) Act, 2020 [i.e. setting a threshold limit to section 7 of IBC]. The author will now briefly examine both the amendments.
A. Insolvency and Bankruptcy Code (Amendment) Act, 2018
The nsolvency and Bankruptcy (Amendment) Ordinance, 2018 which was enforced on 6th June 2018 have clarified the long-standing issue on the status of homebuyers under the IBC. In this light, section 5(8)(f) of the IBC was amended to bring the homebuyers into the purview of “Financial creditors” as defined under IBC. Earlier, the journey of homebuyers under IBC began when they were neither treated as financial creditor nor operational creditor as defined under Section 5(7) and Section 5 (20) of IBC. Despite the fact that the major chunk of the money invested in the real estate project is of the homebuyers. Initially for 2 years the letter of the law was interpreted in black and white until and unless the tussle taken place after the ratio of Nikhil Mehta & sons (HUF) v. M/s AMR Infrastructures and Ors. (2017) ibclaw.in 27 NCLT [6]that contracts and agreements entered between the homebuyers and the real estate developers does not fall under the preview of financial debt defined under section 5(8) of the IBC[7].
In the meantime, various writ petition were taken together by the Hon’ble Supreme Court in Chitra Sharma v. Union of India [2018] ibclaw.in 37 SC, in this petition it was argued by the petitioner since non-inclusion of the homebuyers in the entire Corporate Insolvency Resolution Process [“CIRP”] have caused them immense prejudice and injustice due to the fact that the imposition of moratorium under section 14 bars any other proceedings made by homebuyers before other forums, which eventually make homebuyers remediless.
The Insolvency and Bankruptcy (Ordinance), 2018, was passed a week after Chitra Sharma’s case (supra), in which interim orders granted homebuyers the status of financial creditors. The Supreme Court of India used its power under Article 142 of the Constitution and decided these petitions in light of the 2018 amendment while bearing in mind the ordinance and seeking to provide adequate justice. However, the vires of this amendment was challenged in the Pioneer Urban Land & Infrastructure Ltd. v. Union of India [2019] ibclaw.in 13 SC[8]. Eventually, the constitution validity of the Insolvency and bankruptcy Code (Amendment) Act, 2018 was upheld by the Hon’ble Supreme Court of India in Pioneer Urban Land Infra’s case (supra).
B. Insolvency and Bankruptcy Code (Amendment) Act, 2020
As the 2018 amendment came into force in view of resolving the long-standing dispute between the homebuyers and the real estate developers. Surprisingly, this amendment has opened the floodgates of the real estate insolvency cases. There forth, fraudulent applications with the malicious intent were moved by the homebuyers to initiate insolvency proceedings for real estate sector. Thereby jeopardizing the real estate projects which were otherwise sound and solvent. Thus, by way of 2020 IBC amendment the legislature sought to restore a balance between the stakeholders and the developer.
Basically, the 2020 Amendment tailored section 7 of the IBC for the real estate allotees by imposing a threshold qualification for filing an application for initiating CIRP shall only be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent of the total number of such creditors in the same class, whichever is less.
However, the constitutional validity of this amendment was challenged in more than lion share of petitions on the grounds of contravention with Article 14, 19(1)(g), 21 and 300 of the Constitution. These petitions were heard together by Hon’ble Supreme Court of India in Manish Kumar v. Union of India (2021) ibclaw.in 16 SC [9] whereby, the Hon’ble Supreme court upheld the constitutional validity of the amendment and held that there is sufficient intelligible differentia with the object of amendment and the rationale for distinction is in line with the principle upheld by the Hon’ble Supreme Court in The State of West Bengal v. Anwar Ali Sarkar[10]
Certainly, most of the insolvency intellectuals considered this the end of the saga of the real estate amendments to the IBC but interestingly the time has shown various other grey areas in IBC to address the real estate insolvencies. In order to fill these grey areas judiciary has proactively tried to mold the black letter law of the IBC to provide justice to the stakeholder in these cases. One of such recent invention of the judiciary is “Project wise insolvency”. The Authors in light of this will now critically examine the evolving jurisprudence of “Project wise insolvency” in Indian real estate sector.
III. Project wise Resolution: The Evolving Jurisprudence
Recently, the Hon’ble Supreme Court of India have acknowledged the difficulty in conducting the usual CIRP in case of real estate companies because the code is sector agonistic in nature and it does not deal specifically with the problems of the sectors. In view of this the Hon’ble Supreme Court has attempted to evolve the concept of the CIRP to tailor made it for the real estate companies. Hence forth the concept of “Project wise resolution plan” evolved. The Project wise resolution as contemplated by the Hon’ble Supreme Court is a Corporate Insolvency Resolution Process that is limited to a particular real estate project, and should not affect the other projects qua which default has not been established while initiation of the corporate insolvency. To get the better picture of the aforementioned resolution process authors will now critically examine the instances from where the concept of “Project wise resolution” was evolved.
A. Flat Buyers Association Winter Hills- 77 v. Umang Realtech (P.) Ltd. [2020] ibclaw.in 166 NCLAT [11] [“Umang Realtech”]
Umang real tech case being the first matter where the concept project wise resolution was upheld by the Hon’ble National Company Law Appellate Tribunal [“NCLAT”]. The Hon’ble NCLAT while weighing the interest of the stakeholders in an equitable manner and by applying its inherent power under Rule 11 of National Company Law Appellate Tribunal upheld the concept of Project wise resolution of insolvency in real estate sector.
Facts
One Mr. Ajay Singh and Mrs. Rachna Singh [“Real estate Allottees”] had moved an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiating CIRP against M/s Umang real tech and the same application was allowed by the National Company Law Tribunal [“NCLT”] vide order dated 20th August 2019. In the Meanwhile, Flat Buyer Association of one winter hills project of Umang Realtech filed an appeal under Section 61 of the IBC before NCLAT on the ground that initiation of CIRP against Umang Realtech is causing grave difficulties in completion of another Project i.e., being winter hill.
Accordingly, one of the promoter entities of the Umang Real tech proposed to remain outside the CIRP process. Consequently, the promoter will act as a lender to the winter hills project to ensure that the units are delivered to the Appellant homebuyers timely accordingly the Appellants agreed to the proposal made by the promoter.
Issue raised
Whether a Project wise resolution plan is tenable in real estate insolvency cases?
Arguments
The Appellant inter alia argued that the development of the units of the project winter hills was almost completed, However the rights of the other homebuyers were affected on account of the CIRP initiated by the financial creditors against the Corporate Debtor i.e., Umang Realtech. Respondents on the other side objected to the arguments made by the appellant on the ground that insolvency against a specific project is not under the essence of the IBC.
Decision
Accordingly, the NCLAT observed, if allottees (financial creditors), financial institutions/banks (other financial creditors), or operational creditors of one project initiate CIRP against a real estate company (corporate debtor), it should be limited to only that specific project and should not affect any other projects of the same real estate company in other locations with different land owners, allottees, financial institutions, and operational creditors. So, according to the plan approved by the relevant authority, CIRP should be on a project-by-project basis and should not affect any other project(s) of the same real estate company in other places having different land owners, allottees, financial institutions and operational creditors.
The NCLAT while construing the basic objective of the IBC i.e., to maximize the value of the assets of the stakeholders and in order to balance the interest of all the stakeholders taken the middle way on the equitable ground and have initiated the CIRP specifically to single project.
B. Discussion Paper by IBBI dated 18.01.2023[12]
While the Judiciary is continuously attempting to fill the gaps in IBC for dealing with the real estate insolvency cases. Simultaneously, IBBI also considering the need to have a legislative backing to such provisions has released a discussion paper proposing to introduction of “Project-wise- resolution” in the cases of insolvency in the real estate sector. Particularly, IBBI had proposed following recommendations in lieu of improving the picture of real estate insolvency cases.
- When a corporate debtor who is the promoter of a real estate project files an application to initiate the CIRP and one or more of its real estate projects are affected by the default, the adjudicating authority may, in its discretion, accept the case but only apply the CIRP provisions to those defaulted real estate projects. Therefore, such projects must be acknowledged as separate from the broader body for the specific purpose of resolution.
- The necessary amendments be made to the code to install the “Project wise resolution” in the Real Estate Sector.
C. Indiabullss Assets Reconstruction Company Limited v. Ram Kishore Arora & Ors. [“Supertech”]
Recently, the Hon’ble Supreme Court Authenticated the concept of “Project wise Resolution Plan”. Additionally, The Hon’ble Supreme Court has attempted to put on freeze the controversy surrounding the application of Project wise Resolution Plan n India bulls Assets Reconstruction Company Limited v. Ram Kishore Arora & Ors. (2023) ibclaw.in 68 SC [13]. However, the Hon’ble Supreme Court have attempted to address the issue pertaining to the application of the project wise resolution, a comprehensive solution is still lacking. In light of this let us critically examine the instant case law.
Facts
Super tech Ltd. [“Corporate Debtor”] is a real estate entity engaged in the construction of various projects in Delhi-National Capital Region. Moreover, the corporate debtor had availed the credit facilities from Union Bank of India for the development of “Eco Village – II” [“Project”]. Meanwhile on 25th March 2022, the Corporate Debtor was admitted into CIRP by Adjudicating Authority. Consequently, the order dated 25th March 2023 was challenged before NCLAT. Accordingly, on 10th June 2022, the NCLAT passed an interim order confining the CIRP to the Project. In the meantime, other financial creditors challenged the NCLAT order dated 10th June 2022 before the Hon’ble Supreme Court on the grounds that the NCLAT is neither empowered nor allowed to limit the CIRP to a particular Project under IBC.
Issue raised
Whether a Project wise resolution plan is tenable as interim relief in real estate insolvency cases?
Arguments
The Appellants financial creditors here inter alia argued that the financial institutions, including the appellants have funded the corporate debtor as a single corporate entity regardless of the fact that the said amount had been utilized for a single project. Henceforth, the amount infused by the appellant does not amount to a project finance thereby allowing the resolution by project-based insolvency. Secondly, it was argued by the Appellant that the scheme and the black letter of the IBC does not envisages the concept of Project-wise resolution instead it uses the concept of CIRP of the whole corporate entity that is to be carried out only through CoC mandated to be constituted for the corporate debtor as a whole.
Additionally, it was put forth by the Appellants before the Hon’ble Apex court that if such resolution is allowed without any guidelines and legislative backing it will cause grave confusion in conducting the resolution successfully. In light of this the Appellant have shed lights on the issues that may be raised if such process is allowed to be conducted. For instance, the imposition of moratorium under section 14 of IBC and the inclusion of the erstwhile management will render Section 29 A requirements for eligible resolution applicant void.
On the other hand, the respondent homebuyers argued that the intent of the IBC is “Resolution” and to put back the “Corporate debtor” on wheels in order to protect the interest of all stakeholders. Accordingly, the adoption of “Project-wise resolution” for real estate sector is within the ambit of the broad objective of IBC.
Decision and Observations
The Hon’ble Supreme Court while interpretating the object of the IBC has opined that the intent of the IBC is “Resolution” and to put back the “Corporate debtor” on wheels in order to protect the interest of all stakeholders in consequence the approach to adopt “Project wise resolution plan” is within the objective of the IBC. The Supreme Court also opined that if the CIRP is initiated against the entire entity it would not reach to any conclusion instead like many other cases the resolution of the corporate debtor will be stalled.
Moreover, the Hon’ble Supreme Court while relying on the decision of chancery division in Films Rover International Ltd. v. Canon Film Sales Ltd.[14] held that the course adopted to grant interim relief on must carry lower risk of injustice whilst, ultimately in the appeals, the Court may find it other way round.
IV. Challenges
Indisputably, it is seen that legislature and judiciary are proactively taking measures to improve the real estate insolvency cases under IBC. One of such measure is “Project wise resolution plan”. However, it has come to light that there are various lacunas in the implementation of “Project wise resolution” in real estate cases. In light of this the authors will now discuss the challenges faced while implementing this newly adopted resolution process for real estate industry.
- The IBC by way of Section 7, 9 and 10 contemplates the initiation of corporate insolvency resolution process against the corporate debtor. Although the corporate debtor is defined as a corporate person under Section 3(8) read with Section 3(7) of the Code as a registered company under Companies Act, 2013, a LLP, or any other person incorporated with limited liability under any law for the time being in force. However, the concept of “Project-Wise-resolution” as applied by the Hon’ble courts drift away from the abovementioned definition.
- It can be seen from the above discussed cases where the concept of “Project-wise resolution” is applied the Hon’ble Courts in these cases have based its entire decision on the ground that real estate cases debts of the corporate debtor are always specific to a real estate project and thus the default can only be attributed to a particular project of the corporate debtor. However, it can be safely concluded that these courts have ignored the possible instances where debt may not be attributable to a particular project.
- There is no clarity on the fact that if an insolvency is triggered against a particular project of an entity, then the moratorium under Section 14 of IBC will be imposed on the assets and the liabilities of whole entity or it will just be limited to a particular project. This indeed will lead open the floodgates of the litigations and thereby stalling the resolution process. For instance, the Hon’ble NCLAT had observed the same in Mr. Vijay Kumar Pasricha v. Mr. Manish Kumar IRP of Project “Winter Hills[15]”.
- These judgements failed to provide the concrete law to conduct “Project wise resolution”. Moreover, triggering of such process without the legislative backing and guidelines will open the floodgates of the litigation and consequently stalling the successful resolution of such cases in time bound manner.
- Another issue that might come up in the way is that the founding fathers of the IBC describe the code as a sector agonistic law carving such an exception to the real estate entity will affect the essence of the Code.
V. Conclusion and Suggestions
Undoubtedly, “Project wise resolution” process did address the real estate allotees issues. However, the legislative backing to this process is the need of an hour. The cases discussed above lays down the equitable solution to the issues related to the real estate allottees but to provide for a concrete mechanism there is a dire need of the legislative guidelines and backing to implement this process efficiently. In view of this certain suggestions are made by this research, which are as follows:
The current case study and the available literature on the issue clearly show that the no legislative backing to the concept act as a hurdle in the effective implementation of “Project wise resolution”. Thus, in light of this the definition of the “Corporate debtor” as provided under Section 3(7) of the code shall be amended with to include the particular real estate project in its ambit, and alternatively a separate chapter like that of Personal Guarantors shall be incorporated under the code which specifically applies to real estate insolvency cases.
However, if the alternative approach as discussed above shall be taken by the legislators it will come onto the cost of the primary essence of the code which is its sector agnostic approach. Henceforth, a middle ground shall be searched for to incorporate and provide sufficient backing to the “Project-wise-resolution” of insolvency in real estate cases without effecting the essence of the IBC.
Reference
[1] IBC not a panacea for all ills, needs holistic assessment, Business Standard, dated 3rd September, 2021 available at https://www.business-standard.com/article/economy-policy/ibc-not-a-panacea-for-all-ills-needs-holistic-assessment-ibbi-chief-sahoo-121090201016_1.html
[2] IBBI Newsletter [Jan-March, 2023] Pg. No. 10-13
[3] (2023) ibclaw.in 68 SC
[4] Real estate firms stuck in insolvency courts have a slower resolution rate, The Economics Times, dated 29th May 2023 available at https://economictimes.indiatimes.com/industry/services/property-/-cstruction/real-estate-firms-stuck-in-insolvency-courts-have-a-slower-resolution-rate-study-shows/articleshow/100580982.cms?from=mdr
[5] Economic Survey 2022-2023, Pg No. 92-97 available at https://www.indiabudget.gov.in/economicsurvey/doc/echapter.pdf
[6] (2017) ibclaw.in 27 NCLT
[7] 2018 18 SCC 623
[8] [2019] ibclaw.in 13 SC
[9] (2021) ibclaw.in 16 SC
[10] 1952 SCR 284
[11] [2020] ibclaw.in 166 NCLAT
[12] IBBI discussion paper dated 18th January 2023, Pg. No. 8-9
[13] (2023) ibclaw.in 68 SC
[14] (1986) 3 All ER 772
[15] Order dated 24.03.2023 in I.A. No. 1987 /2020 in CA (Ins) AT No. 926 / 2019 by NCLAT
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