Expert Speaks by: Mr. Sandeep Bhuraria, Senior Partner at ZEUS Law
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MC Explains: Will tweaks in insolvency law help homebuyers?

The government has proposed changes in the Insolvency and Bankruptcy Code aimed at reducing the hardships of homebuyers caught in time-consuming legal battles with real estate developers, which delays possession of their homes.

A key change proposed is project-wise resolution – if an application is filed against a builder that has multiple projects, proceedings will be initiated only against the specific project on which there is a default.

The proposed amendments are intended to ensure expeditious resolution of stalled projects and provide legislative backing to the concept of ‘reverse corporate insolvency resolution process’ and ‘project-wise CIRP,’ legal experts said. They will help increase the chances of successful resolution because the focus will be on specific distressed assets rather than the broader company.

Real estate accounts for the second-highest number of insolvency resolution cases, according to the Insolvency and Bankruptcy Board of India (IBBI). The manufacturing sector has the highest share at 40 percent, real estate accounts for 21 percent, construction 11 percent, and trading sectors 10 percent.

The resolution rate of real estate cases is among the lowest, according to a joint report by property consultants Anarock and law firm Khaitan & Co.

What are the proposals?

The proposed changes announced on January 18 include fast-tracking the process, expanding the scope of the pre-packaged framework, and developing an electronic platform with minimal human interface. Changes with respect to the resolution process for real estate projects have also been proposed.

The resolution of corporate debtors that promote real estate projects has posed a major challenge due to the peculiarities of the sector. Though allottees in a real estate project are considered financial creditors and a core part of the committee of creditors, at times their interests do not align with the scheme of the CIRP, according to the discussion paper.

Unlike other financial creditors, allottees prefer ownership and possession of the plot, apartment, or building rather than a reduced repayment of the advance they paid or commencement of the liquidation process. There is an inherent tension between the interests of other financial creditors like banks that would accept repayments, even with a reduction, or agree to liquidate the corporate debtor, and the interests of allottees, noted the discussion paper, which will form the basis for amendments to the IBC.

It said that to protect the interests of allottees, several judicial experiments have been conducted to adapt CIRPs to the nature of the real estate sector, such as ‘reverse CIRP’ and ‘project-wise resolution.’ In practice, it was observed that because of a default in one project, CIRP was initiated against the entire company.

“This is counterproductive as other solvent projects are also stalled post-commencement. It is also noted that in real estate cases, the default often pertains to specific projects (while other projects continue to do well). Thus, it is felt that the Code should provide a specialised framework to deal with cases involving CDs that are promoters of real estate projects,” the discussion paper said.

Therefore, it is being considered that 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 to projects that have defaulted. Such projects shall be distinct from the larger entity for the purpose of resolution, the discussion paper said.

This will serve two purposes. Firstly, the stressed projects can be resolved separately and the debtor can continue to focus on other projects where it has not defaulted. Secondly, a suitably tailored resolution can be achieved based on the status of  the real estate project and the objectives of the relevant stakeholders, which will primarily include the allottees, it said.

Another proposal is to enable the resolution professional to transfer the ownership and possession of a plot, apartment or building to the allottees with the consent of the committee of creditors.

“It is observed that allottees may, during a CIRP or a project-specific resolution process as being considered herein, request ownership and possession of a completed unit of the real estate project, which cannot be permitted during the moratorium under the Code,” the notice said.

The IBC, which came into force in 2016, provides for a market-linked and time-bound resolution of stressed assets. The code has already undergone various amendments.

Recognition of ‘reverse CIRP’

The proposed amendments to the IBC aimed at real estate cases are a formal recognition of the ‘reverse CIRP’ that was propounded in February 2020 by the National Company Law Appellate Tribunal in the matter of Umang Realtech.

Reverse CIRP is an unconventional step for the resolution of stalled projects that allows promoters to infuse funds into such projects. This process was apt for certain projects that needed resolution as opposed to the whole company. It focused on the completion of the affected project rather than revival, which meant that while legally the company may have been under insolvency, the economic solution was limited to the affected project.

During the proceedings against real estate developer Supertech for defaulting on payment of Rs 431 crore to a consortium of banks, the NCLAT said in June 2022 that the committee of creditors will be limited to the company’s Eco Village project and not its other projects.

“It seeks to balance the competing interests of banks and flat buyers as the latter are proposed to be given the right to take possession of and get transfer in ownership of the flat/apartment/building even during the moratorium period,” said Shailesh B Poria, a partner at Economic Laws Practice.

However, it is for the National Company Law Tribunal to decide whether the revised procedure would apply, taking into consideration aspects including  the overall financial health of the company and its ability to complete projects where no default has taken place, he said.

While each matter will be decided on a case-by-case basis, more tweaks and clarifications can be expected once the practical difficulties of implementation arise, he added.

“The Insolvency and Bankruptcy Board of India has recognised that CIRP proceedings of real estate companies are divergent from other sectors… One of the proposed amendments to the code is project-wise CIRP. The raison d’être of the proposed amendment is the fact that allowing allottees to trigger CIRP of the corporate debtor as a whole, which may also include solvent projects of the said corporate debtor, is counterproductive to the scheme of the code,” said Sandeep Bhuraria, a senior partner at Zeus Law Associates.

The touchstone of project-wise CIRP was laid down in the Manish Kumar judgment of January 2021. The idea was that grievances with respect to various projects may be different in terms of stage of construction or delivery of possession and hence, CIRP must be confined to the project under default.

Bhuraria said the judiciary has carved out mechanisms through various pronouncements to balance the interests of the allotees vis-a-vis the real estate companies. Project-wise CIRP allows for a stressed project to be resolved separately and provides for a suitable tailor-made resolution based on the status of the real estate project and the objectives of the relevant stakeholders and allottees, he added.

According to Girish Rawat, a partner at Luthra & Luthra Law Offices India, the proposed amendments are intended to provide legislative backing to the concepts of “reverse CIRP” and “project-wise CIRP” introduced via judicial pronouncements of the adjudicating authority. The proposed amendments will ensure expeditious resolution of a stalled project without hampering the interests of buyers of other projects of the developer, he said.

These proposed changes in the IBC will likely allow for more targeted and efficient resolution of financial distress in real estate companies.

By allowing proceedings to be initiated only against specific projects that have defaulted, it could help to minimise the disruption to the company’s operations and potentially preserve value for stakeholders, said Prashant Thakur, senior director and head – research, at ANAROCK Group.

“It may also reduce the burden on the courts and other authorities responsible for overseeing the resolution process. Additionally, it may help to increase the chances of successful resolution as the focus can be on specific distressed assets rather than the broader company,” he said.

Not a new concept

The concept of project-wise insolvency, or reverse insolvency, is not new in the real estate sector. This approach has already been adopted by the NCLT and NCLAT in numerous matters. Protecting the homebuyers’ interests has been the primary reason for this, considering their position in the waterfall of creditors. Legislative backing to this will certainly bring more clarity to the process, said Aditya Parolia, a partner at PSP Legal, Advocates & Solicitors.

Further, issues related to multiple projects of a corporate debtor being at different stages of construction do create hardships during the CIRP process and unnecessary challenges for homebuyers whose projects are either complete or almost complete.

Challenges related to corporate structure, accounting and liability will have to be looked into while formulating the law as ultimately, the projects belong to one single company and their absolute segregation will have its own complexities, he added.