[By Ayush Mathur]
The author is a student of National Law School of India University, Bangalore.
Introduction
As a penultimate step towards incorporating the amendments in the Insolvency and Bankruptcy Code (IBC), the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper for comments on the proposed amendments. The 28th of November marked the deadline for these comments, and now the Ministry of Corporate Affairs is a step closer to deciding on the amendments to the code. The proposed amendments largely concern the real estate insolvency process, which has gained attention due to concerns expressed by the courts, promoters, and homebuyers regarding the scope and interpretation of sections related to real estate insolvency.
There are 5 amendments to the code , including the one where the Committee of Creditors (CoC) will be allowed to invite separate plans for each project. However, while this project-wise CIRP is suggested, the Amendment overlooks Reverse CIRP. This analysis focuses on the absence of Reverse CIRP in the proposed Amendment. The author advocates for its incorporation, providing a structured framework and supporting rationale.
Reverse CIRP
Reverse CIRP, introduced by the NCLAT in Flat Buyers Association Winter Hills v Umang Realtech Pvt. Ltd., is initiated when project homebuyers apply for CIRP through the project’s funding bank. The project’s promoter submits a resolution plan, ensuring timely project resolution, requiring external funds infusion as a lender. The CoC, comprising homebuyers and banks, assesses the plan’s viability.
Unlike regular CIRP, Reverse CIRP doesn’t invite third-party resolution plans. After successful project completion, the Resolution Professional (RP) applies for CIRP application disposal under Section 7 of the IBC. If delays or funding issues arise, the RP resorts to regular CIRP. The Court designed Reverse CIRP to address the lack of homebuyer expertise, ensure project continuity, achieve quicker resolution, and acknowledge the need for debtor management assistance. In real estate insolvency cases, Reverse CIRP is deemed more suitable than the original CIRP.
No Circumventing Section 29A Without Amendment
It is often argued that Reverse CIRP allows the promoter to act as a financial creditor. This defeats the purpose of section 29A of IBC, which was inserted to prevent defaulting promoters from gaining unauthorized re-entry to their companies by submitting a resolution plan through a back-door route. It is contended that the principle of reverse CIRP goes strictly against the section’s aim and scope. The author of this section elaborates on the same with case precedents and highlights the importance of the incorporation of Reverse CIRP in the code, as without finding this principle in the book, the existence of this essential legal principle remains uncertain.
In the case of Chitra Sharma v. Union of India, the Supreme Court declined to create an exception that would enable promoters to assume control of the resolution. The Court expressed the view that Section 29A was enacted with the broader public interest in mind and to enhance corporate governance. Allowing promoters to engage in the resolution process, according to the Court, would undermine the positive objectives and intent of the IBC. Despite its potential benefits, the Court held that such an allowance could compromise the fundamental purpose of the IBC.
In ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, the Supreme Court advocated a balanced interpretation of Section 29A, emphasizing its purpose. The court directed the business owner (promoter) not to directly participate in the CIRP, and act only as a lender. While the order lacks clarity on ‘stays out of the CIRP,’ it implies an independent person (IRP) will oversee the process, even if the business owner contributes funds. Payments must be authorized by check, ensuring proper fund usage, and the business owner must cooperate. Despite efforts to limit their involvement, the order recognizes the business owner’s expertise in decision-making during resolution, a departure from regular proceedings where management powers are fully suspended. Although the court order includes safeguards, it permits the business owner some managerial involvement during the resolution process.
It’s important to highlight that the Reverse CIRP procedure described in the Order is specifically tailored to the details of the case, making it inappropriate as a general model for other real estate insolvency situations. The decision to use or bypass Reverse CIRP depends on the unique circumstances of each case. Essentially, Reverse CIRP acts as a trial resolution process, and if it doesn’t work, the NCLAT then resorts to the regular CIRP process. This emphasizes the need to not leave this decision solely to the court’s discretion. If done so then uniformity in court’s decision cannot be achieved. As demonstrated above, in Chitra Sharma case the court refused to allow promoters a stage in the insolvency process while in Arcelor Mittal case a middle ground was specifically made by the court. Therefore, the status quo underscores the necessity for the legislature to include this principle in the code, creating an exception to Section 29A and specifying the conditions under which the court can utilize this legal tool.
Reverse CIRP: Urgency for Amendments and Strategic Implementation
It is important to note that the principle of Reverse CIRP is nowhere to be found in the code de; if anything, it is often argued that it lies against both the scheme of the code de and particularly against section 29A of IBC. Incorporating the principle of Reverse CIRP into the code is crucial due to the delicate future standing of this principle. An amendment could contribute significantly to achieving uniformity in the application of reverse CIRP.
In Winter Hills case, the NCLAT addressed the challenges faced by homebuyers within the CIRP framework, acknowledging the inadequacy of the IBC in providing the desired remedy for allottees as Financial Creditors. While praised for adapting to the unique concerns of homebuyers, the decision in Winter Hills raises concerns about deviating from the established CIRP process under the IBC, as the NCLAT’s decision lacks a solid foundation within the IBC provisions or even under its inherent powers outlined in Section 11 of the NCLAT Rules 2016.
In Chitra Sharma v Union of India, it was stated that the mechanisms in IBC should never be supplanted by substituting them with a mechanism under judicial discretion. However, Courts have frequently deviated from IBC provisions to achieve its goals. For example, in Rajesh Goyal v. Babita Gupta, the NCLAT permitted external funding from promoters to complete a project, safeguarding stakeholder interests. Further, in Aditya Kumar Tibrewa v. Om Prakash Pandey, the NCLAT viewed Regulation 35A’s time period as directory, aligning with the code’s objective of maximizing assets. The Supreme Court, in Swiss Ribbons v. UOI and Essar Steel India Ltd., stressed the need for economic experimentation and innovation. In summary, the judiciary consistently employs experimentation and purposive interpretation to uphold the objectives of the IBC, with Reverse CIRP being a notable example.
Therefore, deviation from the code has been a little common in IBC when the aim was to uphold the objectives of the Act. The primary objective of the IBC is to ensure the survival and continuity of the CD as a going concern. Consequently, the IBC is designed to apply to the legal entity, and proceedings should be directed against the real estate company rather than a project that ceases to exist after completion. Reverse CIRP should be viewed as a method for resolving insolvency on a project-wise basis within the CD rather than initiating proceedings against a specific project. With the inclusion of provisions for project-wise insolvency in the proposed Amendment, the ideal opportunity arose to integrate Reverse CIRP into the code. While the project-wise insolvency process provides a pathway for the court to apply Reverse CIRP, it remains true that Reverse CIRP lacks a solid foundation. Its application, based solely on judicial discretion, conflicts directly with Section 29A of the code.
The paper suggests that the amendment incorporating Reverse CIRP (in future) should consider that when a company is going through CIRP, the first steps should involve gathering information about the entire company’s projects and finances. After this, the most suitable method for resolving the insolvency, like Reverse CIRP for certain projects, should be chosen based on a thorough assessment. The period during which certain actions are restricted (moratorium) should be focused on the projects going through the resolution process. To stay true to the goals of the IBC, Reverse CIRP can be seen as an alternative to CIRP in specific situations. It should be applied carefully, considering the overall financial health of the company, so that it doesn’t interfere with the objectives of the IBC.
Conclusion: A New Proposal for the Future Amendment
This paper contends that endorsing Reverse CIRP offers substantial advantages and recommends an amendment to the IBC for its formal incorporation. Such an amendment would achieve the dual objective of anchoring Reverse CIRP within the IBC framework and establishing clear boundaries for its application. Currently lacking an explicitly defined protocol, the use of Reverse CIRP may extend to cases not meeting the factual criteria of Winter Hills, posing a potential threat to the legislative intent of the IBC. The paper suggests that the Amendment should precisely outline the essential prerequisites for Reverse CIRP application. This includes a requirement for unanimous creditor agreement on the promoter’s infusion of funds to rescue the project and ensure the promoter’s participation in CIRP complies with Section 29A or, if goes against then have a non-obstante clause.
In essence, using Reverse CIRP as a tool today is clearly going against Section 29A of the code and precedents. To solve this discrepancy, it is pertinent that the government adds a section for reverse CIRP thereon; with simple rules of interpretation and harmonious construction, it would not be difficult for section 29A and the Reverse CIRP section to exist coincidentally.
In conclusion, the blog underscores that Reverse CIRP can seamlessly fit within the court’s framework. Therefore, it is imperative for the upcoming Amendment or a future amendment to include it in the code. Failure to do so may subject it to judicial discretion, resulting in not only a lack of consistency but also raising doubts about the fundamental viability of this legal framework.