Recently, the central government and the Insolvency & Bankruptcy Board of India (IBBI) released a discussion paper on January 18, 2023, which will form as the basis for amending the Insolvency and Bankruptcy Code, 2016 (IBC), proposing and recognizing project specific Corporate Insolvency Resolution Process of a Real Estate company with defaulted projects, which will ensure that homebuyers unable to get possession of their properties, won’t be stuck in long legal battles, overturning the National Company Law Tribunal, Chennai Bench’s order dated 25th of April, 2022 in the case of Mr. N. Kumar v Tata Capital Housing Finance Ltd.[1], where the NCLT, Chennai bench had held that project-wise CIRP of a real estate company is not covered under Insolvency and Bankruptcy Code, 2016 (IBC) and is outside the purview of the IBC, 2016.
Introduction
According to the Insolvency and Bankruptcy Board of India (IBBI), real estate sector accounts for the second-highest number of Insolvency Resolution Cases, a total of 21 percent, only after the manufacturing sector, with the highest share of percentage at 40 percent. Real estate accounts for more Insolvency Resolution Cases than both the construction (11 percent) and the trading (10 percent) sectors combined.
Real Estate Consultancy firm Anarock and Khaitan & Co. released a joint report on the situation of Insolvency Resolution cases in the real estate sector in India. According to the report, real estate not only has one of the highest numbers of Insolvency Resolution cases, but also the lowest resolution rates, i.e., most of the cases are either unresolved and are still pending, making it cumbersome for homebuyers, who invest their entire life savings purchasing real estate.
CIRP stands for Corporate Insolvency Resolution Process, which is a process governed by the Insolvency and Bankruptcy Code, 2016 (IBC). It is a process for the resolution of insolvency of companies, partnership firms and individuals. A real estate company may go through a CIRP if it is unable to pay its debts and creditors have filed for its insolvency. The CIRP process for a real estate company would typically involve the appointment of an interim resolution professional (IRP) who would take control of the company’s assets and operations, asses its financial position and come up with a resolution plan for the company’s revival or its orderly winding up.
A real estate company CIRP would also involve the submission of claims by creditors, the identification and valuation of assets, the submission of resolution plans by interested parties and the selection of a resolution plan through voting by the Committee of Creditors (CoC).
Corporate Insolvency Resolution Process of a Real Estate company prior the amendment
The April 2022 order in Mr. N. Kumar V Tata Capital Housing Finance Ltd held that project-wise Corporate Insolvency Resolution Process of a real estate company is outside the purview of the Insolvency and Bankruptcy Code, 2016 (IBC), and there is no such concept of project-specific resolution process as per the Code of 2016.
The NCLT, Chennai also went against the NCLAT’s decision in Flat Buyers Association v Umang Realtech Pvt[2], which had set out the concept of ‘reverse CIRP’, and stated that the precedent cannot be applied to the present case since the concept of reverse CIRP was ‘too peculiar’ to the facts and circumstances of that case. The application in the case was rejected since NCLT, Chennai came to the decision that project-wise resolution process is outside IBC, 2016 and thus not maintainable. This decision, was against the affected homebuyers in general, who were left with no recourse in cases of CIRP against the real estate company.
Will amendments to Insolvency and Bankruptcy Code, IBC (2016) help homebuyers?
The discussion paper released on January 18 includes various changes to the code, including fast-track resolution processes, an online digital e-platform with low human intervention and changes to bring in project-wise Corporate Insolvency Resolution Process of a real estate company under the purview of the Insolvency and Bankruptcy Code, 2016 (IBC).
The new amendment as per the discussion paper will ease the resolution process. Now, in case an application for initiation of Corporate Insolvency Resolution Process is filed against the Corporate Debtor, who is the promoter of real estate company, due to defaults in certain projects of the company, CIRP will only be initiated against the specific project, that has defaulted, instead of the whole company.
This will have various benefits. Firstly, it will reduce hardships for the homebuyers/allottees who are often caught in the legal battle. Secondly, the defaulted projects can be resolved separately and the real estate company(debtor) can focus on other projects, where the debtor has not defaulted. If the application is filed against a company that has multiple projects, where one of the projects has defaulted, the company can still work on the other projects as the resolution process would not affect them. Thirdly, since this resolution will be allottee and project specific, not only will it ensure expeditious resolution, but also a tailored resolution suited as per the defaulted project.
Allottees are Financial Creditors
Home buyers and property allottees in any real estate project are considered as Financial Creditors. Not only that allottees are also a part of the Committee of Creditors (CoC). However, there arises a key difference between other financial creditors and property allottees. Unlike other financial creditors, property allottees prefer ownership and possession of the property/defaulted project.
In most of cases where a resolution process is initiated against the real estate company, most of the allottees prefer ownership of the property, rather than a reduced repayment of the money they’ve paid already to the builder as per the Flat/Property Buyer’s Agreement. However, after a Corporate Insolvency Resolution Process initiates, the moratorium period starts, as per Section 14 of the IBC, 2016. Due to this moratorium period, the allottee’s request of ownership or possessions of a real estate project cannot be granted. The discussion paper proposes that this area should be looked into, and with the permission of the Committee of Creditors (CoC), the resolution professional could transfer the ownership to the allottee.
Reverse CIRP
The concept of reverse CIRP in real estate is not a new concept and was previously presented in Flat Buyers Association v Umang Realtech Pvt by the NCLAT in the year 2020. Reverse CIRP in real estate focused primarily on completion of the defaulted project, so that the allottee could be handed over the possession or ownership of the property. However, it is on the National Company Law Tribunal’s discretion to decide whether the concept of reverse CIRP will be applied or not, considering whether the real estate company would be able to complete the project, barring the defaults.
Conclusion
The concept of project-wise CIRP is not new in the real estate sector. The 2021 case of Manish Kumar v Union of India[3], had previously stated the legislative need of project-wise CIRP in the real estate sector. Differences in defaulted projects can be of varied stages, therefore it makes more sense to have specific resolution processes for specific project. This increases the chances of a successful and expeditious resolution as the focus can be on the specific default rather than the company as whole, which can also continue with the other non-defaulted projects, which would have been impossible if CIRP would have been initiated the company as a whole.
Legislative backing to project-wise CIRP in real estate sector will protect homebuyer’s interests and will subsequently reduce the burden on courts and tribunals responsible for resolution process.
As per various reports of IBBI, only around 13 percent of the insolvency resolutions have been resolved, highly affecting the homebuyers, leaving them with no available legislative recourse, however the new amendments to the IBC, 2016 will definitely help the homebuyers. While each matter will still be decided on a case-by-case basis, one can expect more clarity with the clarifications once the practical difficulties of implementation arise.
[1] Mr. N. Kumar v Tata Capital Housing Finance Ltd. IA(I.B.C.)/1245(CHE)/2020 In CP(IB)/889(CHE)/2019
[2] Flat Buyers Association V Umang Realtech Pvt MANU/NL/0077/2020
[3] Manish Kumar V Union of India Writ Petition (C) No. 26 of 2020
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