Viability of Reverse Corporate Insolvency Resolution Process: Addressing India’s Real Estate Insolvency Crisis
Gautam Jha & Anushka Sharma
4th Year, B.A. LL.B, NMIMS, Indore
Introduction and Background
The Indian Real estate sector plays an essential role in contributing to the country’s economy, which is expected to reach US $1 trillion (of market size) by 2030. Despite contributing significantly to the nation’s GDP and employment, in recent years the sector has battled with significant issues, including delayed project completions, a lack of transparency in financial dealings, and an increase in developers’ insolvency cases. Especially, the stakeholders involved, including homebuyers, suffer the most because of the continuous delay in the delivery of the possession of flats, stalled construction, and fraudulent acts by the developers.
The advent of the Insolvency and Bankruptcy Code, 2016 provisions were undoubtedly a giant leap in enhancing the insolvency framework across sectors inter alia the real estate industry. It was a major step forward to treat the homebuyers as financial creditors for the first time which enabled them to participate in the resolution plans as well as allowed them to be members of Committee of Creditors. However, even with all these developments in the last few years, the traditional CIRP model was not effective enough to address the unique homebuyers’ problems.
CIRP developed for homogeneous industries with simpler types of financial arrangements often gets in trouble in case of real estate projects as there are conflicting parties involved. On the one hand, home buyers want their project to get completed on time, on the other hand, financial creditors such as banks or financial institutions are more concerned about loan recovery. This discrepancy often results in a standstill and delay in the completion of the project as well build up a state of uncertainty for the home buyers as to whether their investment will ever turn into anything positive.
Reverse CIRP: Advent of Judicial Innovation
To address this particular issue, the National Company Law Appellate Tribunal (NCLAT) took an innovative step by introducing the concept of reverse CIRP. Although not explicitly provided under the IBC code, the approach was introduced to cope with the differences between the financial priorities of creditors and the needs of homebuyers.
The approach of Reverse CIRP was first implemented in Flat Buyers Association Winter Hills- 77 v. Umang Real Tech Pvt. Ltd. (2020) ibclaw.in 166 NCLAT. The idea provides that in case of real estate companies, the promoters are allowed to inject funds for the completion of the project rather than paying off creditors first. It ensures the completion of stalled projects, which eventually preserves the value of the asset and increases the chances of recovering the debts, thus securing the interests of both the homebuyers and the financial creditors.
Project wise CIRP: A targeted approach to Real Estate Insolvency
NCLAT, looking at the effectiveness of this approach, ruled that Reverse CIRP should be implemented on a project- by- project basis for real estate companies., This approach of NCLAT’s project-specific model was later upheld by the Supreme Court, allowed the CIRP to focus on individual projects rather than the company as a whole. This means that instead of all of a developer’s projects being grouped together in a single insolvency resolution process, each project can be handled separately, facilitating more efficient and effective resolutions. In Swiss Ribbons Pvt. Ltd. V. Union of India (2019) ibclaw.in 03 SC, highlighted that the object of the Code is reorganisation and insolvency resolution of Corporate Debtors and therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns.
Building on this, the Insolvency and Bankruptcy Board of India (IBBI) on Feb 15, 2024 issued an amendment IBBI (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (Amended upto 15.02.2024) to streamline the existing CIRP for the real estate sector by adopting a project-wise approach. Prior to this amendment whenever a company entered into the CIRP, all the ongoing projects were dragged together into a single insolvency proceeding and moratorium was imposed on all at once. This resulted in every project of the developer being brought under CIRP, thereby causing immense hardships for the homebuyers associated in other projects, accentuating cash flow issues and deter potential resolution applicants.
Challenges to implement Reverse CIRP
While Reverse CIRP has been promising in some of the long- standing issues but its implementation, on the other hand, is slightly more challenging. This approach allows promoters to contribute in the completion of the project, which eventually aligns with the interests of all the stakeholders. However, being a new idea where especially the process is largely undefined and where there is a need for supervision of these processes, ensuring the successful execution of the approach still remains a challenging task.
One of the foremost challenges of Reverse CIRP is its lack of statutory foundation. Although the process has emerged from judicial interpretations, it is not yet formally recognized in the Insolvency and Bankruptcy Code (IBC). This gap leads to uncertainties in its application and creates inconsistencies in the implementation of Reverse CIRP across different cases. Legislative intervention is needed to provide statutory clarity and ensure uniform application across tribunals, which would ultimately increase the confidence of stakeholders in the process.
Another aspect that is deeply concerning or not sufficiently addressed is the fund utilisation by the promoters. In the Flat Buyers case, the tribunal allowed the developers to contribute as lenders, the requirement to maintain 70% of the funds in a separate account as per RERA was overlooked. Similarly, in the case of Anand Murti V. Soni Infratech Ltd. (2021) ibclaw.in 648 NCLAT and Amit Katyal v. Meera Ahuja (2020) ibclaw.in 326 NCLAT the tribunal upheld the idea of Reverse CIRP but did not touch upon the requirement given under RERA.
This oversight created room for potential fund mismanagement, was seen in other case of Suspended Director of M/s. Supertech Ltd. v. Union Bank of India (Supertech Case) (2022) ibclaw.in 455 NCLAT. Although such a safeguard was ordered in this case but was not uniformly applied. The risk of misallocation or siphoning off funds by the promoters cannot be curtailed without a robust and standardized monitoring mechanism, consequently undermining the effectiveness of Reverse CIRP.
The concept of project-wise CIRP (Corporate Insolvency Resolution Process) focused on the insolvency of individual real estate projects, has its own set of challenges. The process complicates funding and management, as insolvency professionals must handle each project independently. This often leads to resource fragmentation, making it harder to attract resolution applicants who prefer company-wide solutions. Additionally, the process may result in conflicting interests among stakeholders such as homebuyers and creditors, slowing down the resolution process and increasing administrative burdens.
Also, it is impossible to carve out the financials of a particular real estate project from the balance sheet of the corporate debtor. Despite bridge funding in absence of specific rules and regulations any reverse insolvency model will not bode well.
Conclusion & Recommendations
The effectiveness of the constructs such as Reverse Insolvency and Project-wise Insolvency in dealing with the insolvency issues in real estate was brought out in the case of Indiabulls Housing Finance Limited vs Revital Reality Pvt. Ltd. (2023) ibclaw.in 339 NCLAT. These judicial pronouncements have been beneficial for the homebuyers, as otherwise, they would have remained in limbo with no probability of delivery of possession. Despite these innovations there remains overlooked issues such as paucity of regulatory safeguards, bias against financial creditor rights, bypassing of section 29A of IBC disregarding the legislative intent.
While judicial innovations like Reverse CIRP have offered temporary relief on a case-by-case basis, the ongoing challenges highlight the pressing need for legislative and executive intervention. Courts alone cannot be expected to resolve such complex, systemic issues. To ensure consistency, protection for all stakeholders, and the effective resolution of real estate insolvencies, it is crucial that the legislature steps in to address the current legal gaps. Given the complexities and gaps, it would be reasonable to constitute a ground level committee comprising experts in the field of insolvency, representatives of homebuyers and financial creditors, and other legal practitioners to study the ongoing problems faced by the allottees, promoters, financial creditors and other stakeholders during the process and further to provide recommendations to the legislature.
Additionally, it is required to incorporate formal recognition of Reverse CIRP and Project-wise CIRP within the Insolvency and Bankruptcy Code (IBC) through legislative amendments. Along with that, for better understanding and clarity of these processes, and for effective implementation the procedures must also be instituted in these amendments. There have been amendments previously for the benefit of the stakeholders and it is pertinent in this case as well. Furthermore, an exception to Section 29A must be made to provide promoters to allow them to act as financial creditors and to lend money in specific cases in order to protect them from the disqualification under Section 29A which is under the traditional approach.
In practice, it is found that there are instances where because of the default in one project, the CIRP is instituted against the whole company. Because of which other solvent projects of the company are also stalled affecting the interests of all the homebuyers and financial creditors involved with the company. Thus, it is felt that the Code should provide a specialised framework to deal with cases involving Corporate Debtors that are promoters of real estate projects.
In conclusion, while judicial interventions have provided some relief, they are not a sustainable long-term solution. Legislative reforms, backed by executive enforcement, are essential to address the systemic issues plaguing real estate insolvencies. Such reforms will not only streamline the process but also offer greater certainty and protection to homebuyers and creditors alike. A comprehensive legal framework that embraces innovative concepts like Project-Wise and Reverse Insolvency, while providing necessary safeguards, is crucial to ensure the successful resolution of insolvencies and the protection of all stakeholders involved.
