[By Yash Arjariya]
The author is a student at Hidayatullah National Law University.
Introduction
In a series of cases like Chitra Sharma v. Union of India, Bikram Chatterji v. Union of India, etc., the Supreme Court (“SC”) has been tasked with adjudicating the claims and rights of house owners in the real estate sector as against the processes of the Insolvency and Bankruptcy Code (“IBC”). The adjudications have been favourable to the house owners, with their rights elevated to a safer pedestal, providing representation of their interests in the Committee of Creditors (“CoC”) formed for the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor. However, the introduction of the concept of reverse CIRP, now moulded in the form of project-wise CIRP after the decision of the SC in Indiabulls Assest Reconstruction Company Limited vs. Ram Kishore (“Supertech Ltd.”), has added a new nuance to the insolvency processes in the real estate sector.
Reverse CIRP, as propounded by the National Company Law Appellate Tribunal (“NCLAT”) in Flat Buyers Association Winter Hills-77 v. Umang realtech Private Limited (“Umang Realtech”), accords an opportunity to the promoter of a real estate entity to revive the entity and act as lender or financial creditor by fusion of finances. The SC in Supertech Ltd. has furthered the reverse CIRP as a project-wise CIRP, i.e., there is fundamental participation of the promoter in the CIRP, but such a CIRP does not operate over all the projects of the corporate debtor but only a specific project. This first part of this article identifies the basis of the judgement given in Supertech Ltd. and then goes on to comment on the utility of such a process in insolvency in the real estate sector. Furthermore, the legality of reverse CIRP is then tested on the statutory principles laid out by the IBC. This piece then concludes as a critical note on the processes of reverse CIRP and project-wise CIRP while remaining speculative about the future jurisprudence on this issue.
Factual Underpinnings in the Insolvency Regime: The Vidarbha Effect?
The recent judgement of the SC in Supertech Ltd., upholding the NCLAT’s rationale, has nuanced the reverse corporate insolvency resolution process, in effect turning the corporate insolvency resolution process into a project-wise insolvency process. The constitution of the committee of creditors was restricted only to a single project of the corporate debtor, precluding any impact on the several ongoing projects of the real estate entity. It may be argued that the concept of project-wise insolvency is alien to the IBC; however, the court fortified the tenability of the scheme by balancing convenience and practical viability. Visualising a contrary landscape, the court opined that allowing the CIRP against the corporate debtor as a whole will compromise and prejudice other ongoing projects of the debtor, and more importantly, greater inconvenience would be weighed upon the homebuyers as the efforts of the debtor to ensure continuous flow of funds into the project through personal undertaking would cease.
This creative culmination of practical utility and viability into a new beginning of project-wise insolvency schemes in the Indian Insolvency landscape can be said to be a corollary effect of the Vidarbha Industries v. Axis Bank Limited (“Vidarbha’) judgement. Though the judgement related to the discretionary power of the adjudicating authority to admit applications by financial creditors under Sec. 7 of the IBC, it necessarily opened a new epoch of factual underpinnings in the Indian insolvency landscape. The judgement vacated enough room as an example for the courts to mould the insolvency process to ensure that parties are not prejudiced if the factual matrix warrants otherwise. The SC in Vidarbha fathomed the factors of feasibility of initiation of CIRP, financial health of the stakeholders, viability of the corporate debtor, etc. with respect to CIRP. Much akin to the same understanding, the SC in its recent judgement devised a new scheme, not contemplated by the IBC but on account of facts warranting the same.
The test of circumstances: Utility of Reverse CIRP
The NCLAT, in its ruling in Umang Realtech, appropriately acknowledged that homebuyers, in contrast to other financial creditors, lack the commercial acumen to make informed judgments about which resolution plan would be most advantageous to them. The Reverse CIRP effectively addresses this concern by maintaining the existing management structure of the company while guaranteeing that the promoter mobilizes financial resources to successfully complete the project. Even the SC in Supertech Ltd. explained that reverse CIRP does not create any additional rights in favour of ex-management. Reverse CIRP involves oversight by the Insolvency Resolution Professional (“IRP”) coupled with efforts made for the infusion of funds with the active assistance of the ex-management, as in Supertech Ltd. Hence, the reverse CIRP offers an opportunity for real estate company promoters to revive a project without automatically removing them from the operational aspects of the company. Moreover, the project-focused approach ensures that only the assets associated with that particular project are brought into resolution, thereby preventing any undue burden on the company and averting potential uncertainties surrounding other projects.
Further, the Reverse CIRP process, or project-wise CIRP, propounded by the SC is one that is shaped by the facts of the case. As a result, it cannot be considered an ideal model for all other instances of real estate insolvency. The decision of whether or not to employ the Reverse CIRP will hinge on the factual circumstances surrounding the case. The Reverse CIRP can be likened to a trial-like resolution process. Even in Supertech Ltd., the NCLAT in the impugned order was experimental, suggesting that project-wise resolution may be started as a test to find out the success of such resolution. Thus, as a logical conclusion, on failure of resolution by the Reverse CIRP, the NCLAT would proceed with the normal CIRP process.
Testing Waters: The Legality of Reverse CIRP
Section 29A of the IBC bars the promoter of the entity (the corporate debtor) from being the resolution applicant. The purport of this provision is to forbid the initial defaulters from regaining control of the entity. However, essentially, in all the processes of reverse CIRP, the ex-management of the entity has a crucial role while the IRP runs the project, including but not limited to the arrangement or fusion of finances. Since the scheme of reverse CIRP or project-wise insolvency is not contemplated by the provisions of the IBC, judgements like Supertech Ltd. are bound to open debates on the contravention of Section 29A. In Supertech Ltd., the promoter undertook to fuse finances in a project-wise CIRP. Thus, the position may seem to be at loggerheads with the express position of Sec. 29A. Further, even the SC in Arcelor Mittal vs. Satish Kumar Gupta took a purposive interpretation of Sec. 29A, which goes an extra mile in precluding the operation of processes like reverse CIRP in light of Sec. 29A.
In fact, the appellants did contend in Supertech Ltd. that NCLAT did not have the power to accept the resolution plan presented by the promoter without giving the CoC the opportunity to study the commercial viability of the plan. The Court, however, as the author submits, ruled only on the consideration of practical viability and balance of convenience in project-wise CIRP and hence did not have the opportunity to test the contours of reverse CIRP against the bar envisaged by Sec. 29A. Hence, although the Reverse CIRP holds significant benefits, its application would contravene the steadfast principle of Section 29A within the IBC.
Conclusion
The deviation from the normal process of CIRP, be it reverse CIRP or project-wise CIRP, has been devised to ensure timely resolution in the real estate sector without compromising the interests of homebuyers. Prima facie, these processes may look to be accommodated by the spirit of the IBC, but they are canvassed against the specific statutory rule given in Sec. 29A of the code. The jurisprudence with respect to Reverse CIRP has not even vegetated but developed exceptionally in extraordinary factual circumstances. Thus, neither the NCLAT nor the SC have had the opportune moment to weigh the budding processes against the statutory enactment but have only left it as a carving of rare circumstances. The author remains speculative about the legal soundness of such extra-legislative processes devised by NCLAT and now the SC as well, and opines that they may not circumvent the bar of Sec. 29A.