[By Aishwarya S & Meenakshi Gopakumar]
The authors are students of National University of Advanced Legal Studies, Kochi.
INTRODUCTION
The Insolvency and Bankruptcy Code (IBC) has been under judicial scrutiny since its inception. The judiciary has played a crucial role in the influence of IBC on real estate for the benefit of the homebuyers and the Corporate Debtor (hereinafter “CD”) by introducing two novel methods, namely “Reverse CIRP” and “Project-wise CIRP”. These methods have been explored as plausible solutions to the conflict of interest between homebuyers as financial creditors (hereinafter “FCs”) and the other FCs under the IBC. Though these methods are still being debated as viable solutions for homebuyers under the IBC, the Ministry of Corporate Affairs released a consultation paper on 18th January 2023 (hereinafter “consultation paper”), wherein one of the proposals provides for the inclusion of Project-wise CIRP within the IBC framework. Project-wise CIRP refers to the initiation of the CIRP process for a specific real estate project with the objective of resolving the insolvency of the project and completing the project in a time-bound manner. It deviates from the general practice in the sense that this form of CIRP can be initiated only against the defaulted project(s) of the company instead of the entire company. Though this process is prima facie simplified, all the projects rest with one entity, and their segregation into different projects during CIRP may pose certain challenges. Through this article, the authors seek to analyse the practical implications of Project-Wise CIRP in IBC and show that it is a welcome step to balance the interests of the key stakeholders in the resolution process.
JUDICIAL DEVELOPMENTS SO FAR
The idea of project-wise CIRP was explored by the judiciary for the first time in the case of Flat Buyers Association v Umang Realtech Private Ltd. (hereinafter “Winterhills” case). It was observed that the asset maximization of a particular project should take place for balancing the creditors, such as allottees, financial institutions, and operational creditors. In light of the same, the Adjudicating Authority proposed that the CIRP be project-basis. The rationale for the adoption of project-wise CIRP was elaborated in the case of Manish Kumar v. Union of India. It was held that the complaints by the allottees in various projects might be of different nature. Therefore, such inclusion of all the projects in CIRP, regardless of whether a default has been committed or not, is more cumbersome. This method has been adopted widely in recent cases like Whispering Tower Flat Owner Welfare Association vs. Abhay Narayan Manudhane and RP of Corporate Debtor Ram Kishor Arora, Suspended Director of M/s. Supertech Ltd. v. Union Bank of India & Another. However, in the case of Mr. N. Kumar RP of M/s. Sheltrex Developers Pvt. Ltd. Vs. M/s. Tata Capital Housing Finance Ltd., it was pointed out that the Winterhills case cannot be taken as a precedent for project-wise CIRP since the said case had unique facts and circumstances and that there is no concept of limited CIRP or project-specific CIRP under the IBC. Though there has been one dissenting judgment so far, it is seen that the judiciary has mostly leaned towards the practice of project-wise CIRP in the interest of all the stakeholders, especially the homebuyers.
POSITIVE AND NEGATIVE IMPLICATIONS OF PROJECT-WISE CIRP:
Project-wise CIRP has been carried out for more than two years, and it has significantly helped in the evolution of IBC in the context of real estate. In this section, the authors will be focusing on the practical implications of the same to two key stakeholders: CDs and homebuyers.
A. BENEFITS
(i) Projects which have not been at default can still be continued:
In the consultation paper released, the justification provided for introducing project-wise CIRP is two-fold: firstly, the default is often project-specific, and the other projects can still continue to do well. To this end, the initiation of CIRP of specific projects which have defaulted will help the CD to focus on other projects which are still performing well; secondly, a tailored resolution can be achieved based on the status of the project and the objectives of the stakeholders, primarily the allottees of the relevant project.
The aforementioned rationale serves to balance the interests of the multiple stakeholders in the real estate project. This will benefit most of the stakeholders, if not all, in the following ways: (i). the CD can still continue to work on the non-defaulted projects in a smooth manner, and with reverse CIRP (if successful), it can complete the defaulted projects. (ii). the homebuyers of the defaulted projects get their possession based on a tailor resolution where their preference is given primacy. (iii). in the event of initiation of CIRP against the entire company, the homebuyers of projects (which are performing well) will also be negatively affected via the insolvency process.
(ii) Homebuyers will get possession after the completion of the project
The homebuyers, as FCs are treated differently compared to other FCs, where the homebuyers prefer ownership and possession of the plot, apartment, or building rather than repayment of the amount with suitable haircuts or commencement of the liquidation process. The homebuyers, as financial creditors of the defaulted project, will get possession after the completion of the project through the methods of reverse and project-Wise CIRP.
(iii) Courts can monitor the projects individually
The ideas of project-wise and reverse CIRP have been borne out of judicial wisdom. Though the Interim Resolution Professional (hereinafter “IRP”) oversees these methods for the completion of the defaulted projects, the courts also play a crucial role by closely monitoring the status of the completion of the projects and allotment. They lay down strict timelines and direct the IRP and the management to file status reports. This will ensure the timely completion of the projects and ensure accountability on the part of the CD. The process can be carried out in an efficient manner if there is a clear segregation of the projects.
B. CHALLENGES
(i) There is a lack of traceability in finance
A real estate company hardly distinguishes between the management of an ailing project and that of the healthy projects. In such a situation where a holding company owns and develops all the projects, the assets cannot be ring-fenced. There will be a resultant pooling of assets of all projects of a company, and this would pit lenders and homebuyers of one project against those of other projects. It may pose a challenge in ensuring transparency of fund utilization during the insolvency process. This may not pose a problem in cases where the projects are taken by Special Purpose Vehicles (hereinafter “SPVs”). In a non-SPV framework, it becomes necessary for the funds to be separated. Perhaps, a proviso can be added to Sec.18 of the IBC under the category of exclusion of certain assets within the control of the RP, stating that “assets specific to a real estate project must not be used for the purpose of resolution of another project of the same company and vice-versa”.[i]
Another way to ensure that the funds are properly utilized is for a company to take up real estate projects with the help of SPVs. There has been an increase in the trend of the creation of SPVs in the real estate sector, which separates projects of the holding company. In an SPV framework, the SPV acts as an independent entity of the holding company by isolating its liabilities and assets under its project from other projects of the company. The SPV maintains a separate balance sheet and accounts from those of the holding company. Therefore, it is easier to separate the funds of the SPVs in a holding company. The insolvency process working based on this framework automatically makes it project-specific.
(ii) It falls outside the purview of IBC
The methods of Reverse and Project-wise CIRP have been argued to fall outside the ambit of the IBC framework. It has been argued that there is no mention of the practice of project-specific CIRP in the IBC. However, it is relevant to examine the proviso to Sec.7 of the IBC inserted by virtue of the Insolvency and Bankruptcy (Amendment) Act 2020, where it mentions that “for a real estate allottee to qualify as an FC, the Sec.7 application needs to be filed jointly by “not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project”. Though the crux of it is about the minimum threshold for the allottees to file an application under Sec.7, the usage of the phrase “same real estate project” indicates that the IBC envisages project-wise CIRP in the real estate sector.
CONCLUSION AND WAY FORWARD:
The main objective of IBC is value maximization which mirrors the value-based theory. This is highlighted in the two key principles for CIRP mentioned in the Bankruptcy Law Reforms Committee (BLRC) Report, namely, (a) the liabilities of all creditors outside the process of CIRP must also be met; and (b) the rights of all creditors must be respected equally. On the basis of these principles, the proposal for the inclusion of Project-wise CIRP within the framework of IBC is a welcome step since it secures the interests of the key stakeholders in the resolution process, especially the homebuyers.
The authors seek to give certain practical suggestions to further simplify this method. Firstly, the companies can prepare audited accounts and balance sheets in a project-wise manner. This will help in the analysis of the assessment of the viability of the project and formulation of a resolution plan balancing the interests of all the stakeholders of the project. Secondly, certain critical sectors like real estate, which increasingly use IBC, can be identified, and sectoral laws can be added to the IBC to ensure that they are consistent with the provisions of the code. It will ensure that the different insolvency processes for specific sectors can be practised as long as it fulfills the objectives of IBC.
[i] Rachita Shah & Arundhati Diljit, Real Estate Developers and Homebuyers: Finding a Harmony under the IBC, 2020 NLS Bus. L. REV. 79, 101 (2020).