Dilemma Over Voting Share: Insolvency And Bankruptcy Code, 2016

[By Samriddh Bindal]

The author is an associate at Saikrishna & Associates.

 

Introduction

The Insolvency and Bankruptcy Code, 2016 (‘IBC’) is regarded as one of the most significant economic legislations implemented in recent times. Unlike previous legislations, the IBC introduces a creditor-centric framework for restructuring the assets of the Debtor. It aims to expedite the process of creditors recovering funds from the Debtor and also seeks to enhance India’s ranking in the ‘ease of doing business’ index. In the present article, the author emphasizes the necessity of allocating differential voting rights to the allottees of a real estate project based on the established principle of debt that is due and payable. The author argues that such an approach is crucial for ensuring fairness and equity among the allottees, taking into consideration their individual claims and obligations. By implementing this principle, the author suggests that the voting rights can be allocated in a manner that aligns with the financial positions and interests of the allottees, thereby promoting a more just and balanced resolution process.

As per the provisions of IBC when the National Company Law Tribunal (‘NCLT’) initiates CIRP and appoints IRP, The IRP collates the claims of the creditors, constitutes the Committee of Creditors (‘CoC’), and also assigns the voting share to each creditor within the CoC. The CoC plays a significant role in making key decisions regarding the CIRP process, including the appointment of the Resolution Professional (‘RP’), CIRP costs, interim finance, Form G, and approval of the Resolution Plan, among others.

Additionally, as per Section 21(6A) of the IBC, an Authorized Representative (‘AR’) is also appointed to represent the financial creditors- in class before the CoC. In the case of CIRP for a real estate project, it is often observed that a majority of the creditors are financial creditors- in class, which is also in line with the Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors, [WP (C) No. 43/2019]. It is trite that the Insolvency Professionals as a matter of practice, admit the claims of the allottees, without acknowledging the fact that such allottee(s) have received possession of their respective units or what is the stage of the buyer-builder agreement(s) executed between the allottee(s) and the Corporate Debtor.

Need for differential voting rights

In a real estate project, the allottees/financial creditors in class can be categorized into different segments based on the amount due and payable as on the insolvency commencement date. The following segments can be considered:

  1. Allottees who are yet to receive possession of their units.
  2. Allottees who have received possession of their units but are yet to receive the completion certificate and/or have pending execution of the registration deed for their units, etc.
  3. Allottees who have received possession of their units without fit-outs or without basic amenities such as electricity, water supply, connecting roads, etc.

In view of the above, each segment of the allottees as mentioned above will have different claims against the Corporate Debtor on the basis of what is due from the Corporate Debtor. This disparity arises due to variations in the progress of the buyer-builder agreements across different segments. As a result, the RP will be required to admit the claims of these allottees based on the remaining performance obligations, i.e., the outstanding debt in terms of the agreement yet to be fulfilled. Consequently, each segment of the allottees will hold a different voting share.

The above classification is indeed justified, considering the varying amounts of debt due for each segment. When a Resolution Applicant invests in the Corporate Debtor through its Resolution Plan, each segment of the allottees is treated differently, since it requires different amount of investment. This means that the Resolution Applicant will need to allocate more funds towards the segment of allottees where the units are yet to be constructed. On the other hand, in cases where the allottees are only seeking fit-outs and/or the execution of their respective documents, the Resolution Applicant will have to invest a significantly lower amount.

It is pertinent to mention that the Hon’ble Apex Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., [W.P. (C.) 37 of 2019] has held that a creditor can file its ‘claim’ when the ‘debt’ is ‘due’. Hence, it seems unjustified that the total claim of the allottees is admitted even though they have received possession of their respective units.

Against the above backdrop, it is relevant to mention the judgment passed by the Hon’ble NCLAT in the matter of Gajraj Jain & Ors. Vs. Shivgyan Developers Pvt. Ltd., [Company Appeal (AT) (Ins.) No. 1265 of 2019], wherein the allottees of a real estate project had filed a Section 7 application contending that ‘legal possession’ has not been received by the allottees in the absence of Occupancy Certificate/ Completion Certificate, registration cannot be completed. The Hon’ble NCLAT held that the Ld. NCLT has rightly dismissed the application filed under Section 7 of the IBC since the construction of the said project stands complete. Therefore, admission of the complete claims of the allottees who have received possession by the Corporate Debtor, seems unjustified and hence a mechanism should be introduced for accepting such claims.

It is seen that there has been a divergent view of the Insolvency Professionals regarding the admission of claims of the allottees. However, it is pertinent to mention that in the CIRP of Supertech Limited, the Resolution Professional has made classifications amongst the allottees on the basis of (a)Allottees who are yet to receive possession of their respective unit(s); (b) Possession given however sub -lease deed or registry is pending of the respective allottees is pending; and (c) Sub Lease deed or Registry is executed, however, delay compensation is yet to be given to the allottees. Accordingly, the Insolvency Professional has not admitted the total claims of the allottees who have received possession of their respective units. The list of creditors as available on the website of Supertech Limited is available here.

Conclusion

The Insolvency Professionals have been adopting a incorrect uniform approach in admitting the total claims of the allottees, without considering the established principles of debt that is due and payable as on the insolvency commencement date. It is crucial to admit claims based on the remaining performance of the buyer-builder agreement, as the Resolution Applicant will be required to fulfill the obligations of the Corporate Debtor and complete the remaining part of the agreement. Therefore, in cases where construction is already completed, the Resolution Applicant should not incur costs for constructing the building, and consequently, allottees of such units should be given a lower voting share. Additionally, it is important to differentiate between allottees who have already received possession of their units and those whose units are still under construction; they should not be treated as part of the same group. Accordingly, it is crucial to acknowledge that the claims of each allottee may differ, and thus, admitting the claims of all allottees in full is inappropriate and contrary to the provisions of the law. A relevant example can be observed in the case of Supertech Limited, where a list of creditors was prepared, and different segments of allottees were granted varying voting shares based on the debt that is due and payable. This approach recognizes the varying circumstances and obligations of the Resolution Applicant qua allottees and also ensures a fair and equitable distribution of rights and responsibilities during the insolvency proceedings.

The nature of the claims and the remaining performance of the agreement should be taken into account when assessing and admitting their respective claims. For example, where the Resolution Applicant does not have to invest in the units of the Corporate Debtor but only has to execute the documents in favour of the allottees, then in such case, the claim can be admitted at a notional value of Rs. 1.

In cases involving financial creditors (excluding allottees) or operational creditors, the Insolvency Professional typically admits claims for the amount that is due and payable as of the insolvency commencement date. Therefore, there is a growing need for Insolvency Professionals to adopt a more comprehensive approach whilst admitting claims from allottees or homebuyers and strictly adhere to the concept of debt that is due and payable. This approach will also ensure that all the creditors are treated equally, in accordance with Article 14 of the Constitution of India, 1950. Hence, this approach will help ensure fairness and address the specific concerns of homebuyers during the CIRP.

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