Insights into Real Estate Insolvency under the IBC: Empowering Homebuyers and Ensuring Efficient Resolution

The Real Estate market in India is expected to reach a projected value of US$40.94 trillion by 2024, with Residential Real Estate holding the largest share at US$35.47 trillion. This segment is anticipated to grow at an annual rate of 4.19% from 2024 to 2028, reaching US$48.24 trillion by 2028[1]. With this promising growth, it is crucial to establish a robust mechanism for real estate insolvency. ?The CIRP for real estate companies is distinct from other sectors due to the varied stages of construction and the diverse geographical spread of projects. This necessitates a flexible and innovative approach to resolution. Judicial interventions aim to balance the interests of project allottees while adhering to the spirit of the IBC[2]. Approximately 33% of admitted CIRPs are related to the real estate and construction sectors, underscoring the sector’s significance in economic terms[3].

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Allottees as Financial Creditors: Empowering Homebuyers in Insolvency Proceedings

The Insolvency Law Committee Report (2018) recommended treating allottees of real estate projects as financial creditors[4]. This recommendation led to the 2018 amendment, which clarified that any amount raised from an allottee under a real estate project would be considered to have the “commercial effect of borrowing,”[5] thereby recognizing the debt owed to allottees as financial debt. The IBC also introduced provisions to ensure the representation and participation of allottees. Section 21(6A)(b)[6] authorized the induction of an Authorized Representative (AR) to represent allottees in CoC meetings, and Section 25A[7] mandated that the AR cast votes based on the majority decision taken by allottees and their prior voting instructions.

The Supreme Court, in the Pioneer Case[8], upheld the constitutional validity of the 2018 amendment. This decision classified homebuyers as financial creditors, granting them the right to initiate insolvency proceedings against real estate developers and a voice in the COC. ?To streamline the initiation of CIRP, a 2020 amendment introduced a minimum threshold in Section 7[9]. It stipulated that proceedings can be initiated jointly by not less than 100 allottees or 10% of the total number of allottees under the same real estate project, whichever is less[10].

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Innovative Resolution Practices: Empowering Promoters and Focused Resolution

The concept of Reverse CIRP was introduced by the NCLAT in the case of Winter Hills – 77 Case[11]. Inspired by the Supreme Court’s decision in Swiss Ribbons Case[12], Reverse CIRP allows promoters of financially distressed real estate companies to propose a plan for completing stalled projects without a third-party resolution plan, subject to creditor and stakeholder approval. This approach aligns with the primary objective of the IBC[13], ensuring protection for allottees while giving promoters a chance to regain control of their company.

The concept was consolidated further in various cases[14] and in M/s Supertech Ltd. Case[15], the NCLAT explored project-wise resolution, emphasizing its role in safeguarding the interests of allottees and ensuring project completion, thereby supporting sector employment and the economy. It allowed the formation of a specific CoC and empowered the IRP to oversee project completion, stressing the importance of separate accounts and compliance with RERA guidelines. The directions also included supervision of expenses, with all payments requiring IRP approval and funds strictly allocated for project-specific purposes. Recent amendments to the CIRP Regulations allow for separate resolution plans and bank accounts for different projects[16], although they do not mandate project-specific resolutions, necessitating judicial intervention to ensure efficient resolution.

Protecting Allottees’ Interests: NCLAT’s Emphasis on Late Claims and Sale Deeds During CIRP

In the case of Puneet Kaur Case[17], the NCLAT addressed the rejection of late claims by allottees, emphasizing the need for the RP to include debts reflected in records in the Information Memorandum, even if claims are filed late. The CIRP Regulations now require announcements to all creditors based on the corporate debtor’s last available accounts, enhancing transparency[18]. In the case of Alok Sharma Case[19], the NCLAT addressed an appeal by allottees seeking the registration of their sale deeds, overturning the NCLT decision and facilitating the sale deed registrations during CIRP. Recent changes to the Liquidation Regulations[20] exclude real estate units handed over to allottees from the liquidation estate, protecting homebuyers’ interests[21].

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Challenge: Ownership Structures and Statutory Authorities

Real estate companies often use special purpose vehicles (SPVs) or subsidiaries to own project land, complicating CIRP. Section 18 excludes project land from CIRP if owned by subsidiaries, affecting effective resolution. Despite the Supreme Court’s ruling in Victory Iron Works Case[22]? that development rights are corporate debtor assets, these rights are difficult to enforce without the project land. Without joint CIRP for both developer and landowner, litigation complicates the process, making CIRP uncertain.

In the NCR, authorities like GNIDA and NOIDA lease project lands to SPVs of real estate companies. When these companies enter CIRP, allottees and creditors face difficulties. According to a recent Supreme Court ruling in Prabhjit Singh Soni [23], authorities like NOIDA and GNIDA, under the U.P. Industrial Area Development Act, 1976, are secured creditors due to their charge over leased lands.

Thus, their dues take priority over allottees’ claims, as per Section 53 of the Code. The Supreme Court also noted that resolution plans involving third-party authority lands need scrutiny to avoid litigation and ensure feasibility.

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Suggestions for Effective CIRP in Real Estate

i.??????????????????? Relaxation of Section 18 Exclusions: to address the exclusion of assets of subsidiaries or special purpose vehicles in CIRP.

ii.????????????????? Amendments to Prioritization of Statutory Authority Dues: to clarify the ranking and order of priority for debts owed to statutory authorities like GNIDA and NOIDA under Section 53 are needed to ensure fair treatment of all creditors.

iii.??????????????? Swift Adoption of Amendments proposed by IBBI[24]: mandatory registration of real estate projects under the Real Estate (Regulation and Development) Act, 2016, and statutory recognition of handing over the possession to allottees will ensure a more efficient resolution process.

[1] Statista, Real Estate-India, Outlook, April 2024? Available at: https://www.statista.com/outlook/fmo/real-estate/india (Accessed May 24, 2024)

[2] Flat Buyers Association Winter Hills – 77, Gurgaon Vs. Umang Realtech Pvt. Ltd through IRP and Ors, 2020 SCC OnLine NCLAT 1199

[3] IBBI, The Quarterly Newsletter of Insolvency and Bankruptcy Board of India, IBBI (Vol. 27, April- June, 2023) Available at: https://ibbi.gov.in/en/publication (Accessed May 24, 2024)

[4] Ministry of Corporate Affairs, Report of the Insolvency Law Committee, March 2018 Available at: https://www.ibbi.gov.in/ILRReport2603_03042018.pdf (Accessed May 24, 2024)

[5] The Insolvency and Bankruptcy Code 31 of 2016, §. 5, Explanation, Inserted by Act 26 of 2018, §. 3 (w.r.e.f. 06-06-2018)

[6] Inserted by Act 26 of 2018, §. 15 (w.r.e.f. 06-06-2018)

[7] Inserted by Act 26 of 2018, §. 19 (w.r.e.f. 06-06-2018)

[8] Pioneer Urban Land and Infrastructure Ltd. Vs. UOI, 2019 SCC OnLine SC 1005

[9] Proviso, inserted by Act 1 of 2020, §. 3 (w.r.e.f 28/12/2019)

[10] Manish Kumar v. UOI, LL 2021 SC 25

[11] Winter Hills – 77, supra note 1

[12] Swiss Ribbons Private Limited and Anr. Vs. Union of India and Ors, 2019 (4) SCC 17

[13] IBC, supra note 4, Statement of Objects and Reasons

[14] Rajesh Goyal v. Babita Gupta & Ors., Company Appeal (AT) (Insolvency) No. 1056 of 2019 and Anand Murti vs. Soni Infratech Pvt. Ltd. & Anr., 2022 SCC OnLine SC 519.

[15] M/s Supertech Ltd. - R. K. Arora vs. Union Bank of India, Company Appeal (AT) (Insolvency) No. 406 of 2022

[16] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Reg. 4D, Inserted by Notification No. IBBI/2023-24/GN/REG113, dated 15th February 2024 (w.e.f. 15/02/2024)

[17] Puneet Kaur Vs. K.V. Developers Pvt. Ltd. and Ors, Company Appeal (AT) (Ins.) No.390 of 2022

[18] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Reg. 12As, Inserted by Notification No. IBBI/2020-21/GN/REG070, dated 15thMarch, 2021 (w.e.f. 15-03-2021)

[19] Alok Sharma, Authorized Representative of Commercial Space Buyers Vs. M/s. IP Construction Pvt. Ltd. through Resolution Professional, Anju Agarwal, Company Appeal (AT) (Insolvency) No. 350 of 2022

[20] Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016

[21] Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, Reg. 46A, Inserted by Notification No. IBBI/2023-24/GN/REG112, dated 12th February,2024 (w.e.f. 12.02.2024)

[22] Victory Iron Works Limited Vs. Jitendra Lohia, Company Appeal (AT) (Ins.) No. 1155 of 2023

[23] Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr., 2024 Livelaw (SC) 111

[24] IBBI, Discussion Paper on Real -Estate Related Proposals-CIRP & Liquidation, November 6, 2023 Available at: https://ibbi.gov.in/uploads/public_comments/Discussion_Paper_Real_Estate_November2023_Final.pdf (Accessed May 24, 2024)