Author name: CBCL

[By Kaustubh R Kulkarni & Harsh Pandey] The authors are students of National Law University Odisha.   Introduction  The Insolvency and Bankruptcy Code 2016 (Code) was enacted to bring about a framework which would bring down the complexity which was associated with the Insolvency framework for creditors. Be it, the multiplicity of applicable laws or the multiple fora which one had to deal with. With the introduction of the Code this was set to radically change.  However, the real estate sector was not well received by the Code, there were multiple complexities associated with homebuyers and resolution of their problems under the Code. For instance, the conundrum around whether a homebuyer could be considered a Financial Creditor (FC), and issues surrounding whether there has to be a project-wise insolvency resolution process. The Code in this regard has been witness to continuous change by way of amendments or by way of making and amending regulations. The Insolvency and Bankruptcy Board of India (IBBI) to this extent notified a discussion paper on 6 November 2023 proposing several amendments to the existing Corporate Insolvency Resolution Process (CIRP) and Liquidation regulations in the light of real estate-related proposals. The authors argue that the discussion paper proposes a much-needed Project-Wise insolvency regime, but simultaneously dispenses with effectively resolving the convoluted Liquidation Estate tussle.  Project-Wise CIRP: A Judicial Experiment  Homebuyers or allottees have been granted the status of FC in relation to real-estate insolvency through the Insolvency and Bankruptcy (Second Amendment) Act 2018 by amending sub-Section (8) of Section 5, which defines “financial debt”. Further, the validity of the amendment was upheld by the Supreme Court (SC) in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. Nonetheless, disputes continue to arise between the beneficiaries and other creditors (banks, etc.). It is significant to highlight that there are differences between the types of insolvencies that occur in real estate and other sectors.  It is observed that allottees are usually more interested in obtaining their homes, apartments, or flats back during the insolvency processes than they are in recovering the money they invested in the project. Nonetheless, banks and other lending organizations are more likely to take a cut when they get their invested money back. Furthermore, if one of the Corporate Debtor’s (CD) projects defaulted, the CD’s other projects would also be roped in, leading to unnecessary hassles for the homebuyer.  Introduced in Flat Buyers Associations v. Umang Realtech, project-wise CIRP was deemed to be a potential solution to maximize the value of the assets to balance the rights of different creditors. In this light the Ministry of Corporate Affairs also published a Consultation Paper on 18 January 2023 which specifically highlighted that the Adjudicating Authority shall have the authority to apply CIRP provisions project-wise to only such projects, which have defaulted. Buttressing the same, the SC in IndiaBulls Asset Reconstruction Company Limited v. Ram Kishore Arora and Ors upheld the validity of the NCLAT, New Delhi order allowing project-wise CIRP. Project-wise CIRP is a solution to the substantial problems of both the homebuyers and developers, in as much as it allows them an opportunity to settle their woes quickly and more so for the developers as it prevents stalling the construction of other real-estate projects.  The Proposed Changes  The discussion paper proposes several measures in order to ensure that Homebuyer does not face the brunt of the procedure of the Code. First of them being that the Interim Resolution Professional/Resolution Professional has to ensure that the real estate project be registered with Real Estate Regulatory Authority as a matter of mandate in terms of Section 17(2)(e) of the Code. This will ensure that there is transparency and accountability for a successful resolution. Establishing a separate bank account for each project during the CIRP ensures efficient repayment to homebuyers, thereby heralding project based insolvency as solution to real-estate insolvency disputes.  Secondly, the paper puts forward the execution of registration/sublease deeds with approval of Committee of Creditors (CoC) during the CIRP. This allows the allottees to get their apartments in the case where they have fulfilled all their obligations as against the instrument of transfer. It empowers the homebuyer to obtain the units of the apartment in a “as is where is” basis alongside on the payment of balance amount, if the same is due.  Third and most prominent change, the RP now shall have the power to propose to the CoC to examine and invite separate plans for each project. An amendment hence has been suggested of the CIRP Regulations to insert a clarification right under Regulation 36A(4). This is set to give succor to homebuyers who are usually concerned with a specific project and on the other hand would benefit the developer by ensuring that his other projects are not stalled due to the moratorium if an Insolvency petition is admitted for a single project.   Lastly, the paper proposes exclusion of property in possession of homebuyers from the Liquidation Estate (Estate). This ensures and affords an opportunity to the homebuyer to occupy the units “as is where is” in order for it to not form part of the Estate, which would otherwise entitle the creditors to make a claim and sell the same in order to realize the liquidation value.  Implications and Challenges  The implementation of the discussion paper’s proposals would have far-reaching ramifications and implications for homebuyers and developers. It will affect not only those homebuyers who have their units pending in a particular project (P1) which itself has defaulted but also those homebuyers whose units are pending in other projects, who will be affected by the cascading effects caused by default in P1. By making a provision of taking the possession of the units from the developer in “as is where is”, it gives discretion to either receive a payment with a haircut or to obtain the units even if the construction is incomplete.   The proposed amendment under Section 36 of the Code provides to exclude those

 [By Naman Kasliwal & Vaibhav Kesarwani] The authors are students of Gujarat National Law University.   Introduction In a recent case of Ramkrishna Forgings Limited v Ravindra Loonkar & Anr., the Supreme Court has set aside an order of the NCLT and NCLAT that had put the approval process of a resolution plan on hold. While the judgment has been lauded for its affirmation of the commercial wisdom of the Committee of Creditors (“CoC”) and the limited scope of judicial interference, a critical examination reveals underlying pitfalls that demand our attention. This blog seeks to delve into the intricacies of the judgment, shedding light on inherent drawbacks. By doing so, it aims to provide a comprehensive understanding of potential repercussions that could extend well beyond the immediate case, significantly impacting the landscape of insolvency resolution practices in India.  Background of the Case  ACIL, the Corporate Debtor, underwent the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency Bankruptcy Code (“IBC”). The CoC approved the Resolution Plan submitted by Ramkrishna Forgings Limited, referred to as the Successful Resolution Applicant (“SRA”). Subsequently, the Resolution Professional submitted an application under Sections 30(6) and 31 of the IBC to the NCLT, seeking approval for the resolution plan.  On September 1, 2021, the NCLT passed an order instructing the revaluation of the Corporate Debtor’s assets. As a result, the application seeking approval of the Resolution Plan was kept in abeyance, and the Official Liquidator was instructed to furnish exact value of assets. Against this order of NCLT, an appeal was filed by the SRA before the NCLAT under section 61 of the IBC. The NCLAT dismissed the appeal while noting the discovery of an avoidance transaction worth approximately Rs. 1000 Crores, justifying intervention due to the involvement of crores of rupees. Aggrieved by the NCLAT order, the SRA filed an appeal to the Supreme Court, arguing that the IBC inherently includes a mechanism for asset valuation of the Corporate Debtor, as outlined in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Thus, the appointment of an Official Liquidator for asset valuation, which is a creation of the Companies Act, 2013, is unnecessary.   Supreme Court’s Ruling  The Supreme Court, in its judgment, addressed the core issue of the extent of the NCLT’s jurisdiction and the role of the CoC in the insolvency resolution process. The Court emphasized that the Adjudicating Authority, in this case, the NCLT, has a limited role, primarily focused on approving resolution plans that align with the requirements of the IBC.  The Court rejected the NCLT’s order for re-valuation, highlighting that there were no objections raised by any party regarding the valuation or the resolution plan. It underscored the importance of the CoC’s commercial decision-making, stating that unless the resolution plan violates the provisions of the IBC, the NCLT should refrain from intervening. The Court referred to previous judgments, such as K Sashidhar v. Indian Overseas Bank, reinforcing the principle that the CoC’s decisions should not be subject to unnecessary judicial scrutiny unless there is a clear violation of statutory provisions, particularly the Sections 30 and 31 of IBC.  In allowing the appeal, the Supreme Court set aside the orders of both the NCLT and the NCLAT, directing the NCLT to pass appropriate orders on the approval application within three weeks. The Court’s ruling essentially upheld the commercial wisdom of the CoC, emphasizing that interference by the NCLT should be limited to cases where statutory provisions are infringed upon.  Harmonizing CoC Autonomy with Stakeholders Rights  Undoubtedly, the court’s emphasis on recognizing the commercial wisdom of the CoC is deeply rooted in the conviction that those with a significant financial stake are inherently best positioned to navigate the complexities of decisions in insolvency resolution processes. This recognition reflects an acknowledgment of the CoC’s intimate understanding of the financial intricacies involved and their vested interest in ensuring a successful resolution.   However, while this emphasis on financial acumen appears logical on the surface, it sparks legitimate concerns about potential biases within the decision-making framework. The considerable influence wielded by financial creditors, if left unchecked, introduces a risk of decisions that prioritize their interests at the expense of other stakeholders, particularly operational creditors or minority shareholders. The autonomy granted to the CoC, if not subject to adequate checks and balances, carries the inadvertent risk of fostering a decision-making culture that might lack the ethical scrutiny necessary to ensure fairness and equity. Striking a delicate balance between financial prudence and ethical considerations becomes paramount in maintaining the integrity of insolvency resolution processes and safeguarding the interests of all stakeholders involved.  The ruling in the Ramkrishna Forgings case appears to adopt a positivist stance on judicial intervention in the CoC’s decision-making process. The court underscores that the resolution plan does not exhibit any of the specific flaws outlined in section 31. However, this approach needs to be assessed in the context of the low recovery rates observed under the IBC. Instances exist where creditors are compelled to walk away with minimal returns, experiencing haircuts as substantial as 99%. Such outcomes might potentially result in non-financial creditors losing faith in the CIRP, as they lack a voice in endorsing resolution plans that entail significant haircuts. This might inadvertently create a chilling effect on challenges to CoC decisions. Stakeholders, including dissenting voices or those with legitimate concerns, may feel discouraged from raising objections if they perceive a reluctance on the part of the judiciary to intervene. This potential deterrence poses a risk to the checks and balances essential for a fair and transparent insolvency resolution process. The fear of facing an uphill battle against entrenched decisions could stifle dissent and hinder the constructive scrutiny that is integral to refining and improving the resolution process.  The potential drawbacks of unquestioningly relying on the commercial wisdom of the CoC have been acknowledged by the Insolvency and Bankruptcy Board of India (IBBI), which has therefore come up with a Code of Conduct and ethical framework for the

[By Nidhi & Pratham Mohanty] The authors are students of National Law University, Jodhpur.   Introduction  Over the years following the enactment of the Insolvency and Bankruptcy Code, 2016 [“IBC”], the position of the creditors has been strengthened with respect to realizing their dues, including in the case of the position of personal guarantors under the Indian insolvency regime. Personal guarantors were incorporated under Part III of the IBC related to individuals and partnerships firms vide Central Government Notification dated November 15 2019, which was upheld in the landmark Lalit Kumar Jain v. Union of India.  Through another significant decision in Dilip B. Jiwrajka v. Union of India [“Judgement”], the Hon’ble Supreme Court [“Court”] has upheld the validity of Section 95 to Section 100 under Part III of the IBC, pertaining to the insolvency of individuals, including personal guarantors. The judgement brought an end to the long-standing debate regarding the constitutionality of the key provisions related to the insolvency of personal guarantors.   Personal guarantors under IBC  Under the law of contract, the liability of the principal debtor and the guarantor is co-extensive. However, IBC allows creditors to move against the personal guarantors at various stages, including after the conclusion of the Corporate Insolvency Resolution Process [“CIRP”] of the principal borrower. In Lalit Kumar Jain v. Union of India, the Supreme Court clarified that the discharge of the principal borrower upon the sanction of a resolution plan or conclusion of CIRP does not lead to ‘discharge’ of the liability of the guarantor. This can be justified because often the creditors are driven to initiate IRP against the personal guarantors to remedy excessive haircuts incurred in the CIRP of the principal borrower. Due to such dynamics, the creditors are afforded enhanced rights to invoke personal guarantees.   Furthermore, the NCLAT has clarified that “guarantors cannot exercise the right of subrogation conferred upon them in contract law, since proceedings under IBC are not recovery proceedings” as in the cases of Lalit Mishra v. Sharon Biomedicine Ltd. and in State Bank of India v. Jayaprakash, by excluding guarantors from the ambit of secured creditors under the code. Moreover, the right of subrogation can be extinguished in the resolution plan while preserving the liabilities of the personal guarantors.  As the judiciary continued curtailing the rights of personal guarantors, they tried challenging the very provisions governing their insolvency under the IBC. Before understanding the recent judgement, it is important to understand the scheme of insolvency provided under Chapter III, Part III of the IBC, governing personal guarantors.   The Operation of Chapter III of Part III of IBC  The procedure provided under the Insolvency Resolution Process [“IRP”] for Corporates and Individuals, under Part II and Part III of the IBC, respectively, differs substantially.   Unlike Part II, under Part III of the Code, upon filing an application for IRP under Section 95, the following steps automatically take place, without admission of the same by an Adjudicating Authority [“AA”]:  An automatic interim moratorium:  As per Section 96 of the IBC, upon filing of an insolvency application under Section 95, an automatic interim moratorium is put in place in relation to all the debts of the debtor, and any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed.  The appointment of a resolution professional  Section 97 provides for the appointment of a Resolution Professional [“RP”], by the AA nominated by the Board. On the other hand, if the application is filed through a RP, the Board shall confirm his/her appointment.   Report by the Resolution Professional  The RP is required to investigate the application and furnish a report to the AA, recommending approval or rejection of the application. Only after the submission of such a report by the RP are the doors of the AA are knocked open for judicial determination to confirm the validity of the application.  The Judgement: Dilip B. Jiwrajka v. Union of India  On November 9th, 2023, the Supreme Court, in the landmark decision of Dilip B. Jiwrajka v. Union of India, upheld the validity of Section 95 to Section 100 of the IBC, pertaining to the insolvency of individuals, including personal guarantors.   Arguments by the Petitioners  The petitioners challenged the validity of Chapter III of Part III of the IBC, primarily on the following three grounds:  Firstly, the scheme under Part III provides for the appointment of a RP, even prior to the admission of the petition and without judicial determination of jurisdictional questions such as the existence of debt by the AA.   Secondly, the powers provided to the RP under Section 99 of the IBC are too wide and are judicial in nature, making them ultra vires to the object of the IBC.   Thirdly, the appointment of the RP and the initiation of an interim moratorium without providing an opportunity for the PG to be heard in front of a judicial body are arbitrary, a violation of principles of natural justice, and a violation of Art. 14 of the Constitution.   Judgment of the Court  The court analyzed the contentions of the petitioners and divided its observations into primarily four parts, covering primarily four issues. The judgement can thus be summarized as follows:  The role of the resolution professional in corporate as opposed to individual insolvency  The Court, in its analysis, noted that the RP exercise any judicial role under Part III, but that of a facilitator and is limited to the collection of information. The Court highlighted that the IBC specifically used the terms “examine the application,” “ascertain,” “satisfies the requirements,” and “recommend” in relation to the acceptance or rejection of the application. These statements clearly indicate that the resolution professional is not meant to engage in an adjudicatory role or make any judicial determinations regarding facts.   It further noted that since the threshold of default for filing an application is only Rs. 1000, as per Section 78 of the IBC, the AA would be overburdened if all amounts of alleged defaults as low as one thousand