INTRODUCTION
Since its inception in 2016, the Insolvency and Bankruptcy Code ("IBC") has played an instrumental role in the evolution of India's insolvency regime. However, the insolvency resolution of Corporate Debtors ("CD") that are promoters of real estate projects has been a major challenge due to the peculiarities of this sector. In the absence of any statutory backing, judicial experiments have been conducted to adapt the Corporate Insolvency Resolution Process ("CIRP") to the nature of the real estate sector, which include "project-wise resolution" and "reverse-CIRP" to protect the interests of the allottees. The recent ruling of the Supreme Court ("SC") in Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora, where the SC upheld the "project-wise resolution" of Supertech Limited, comes as a silver lining for homebuyers and can be seen as a formal acceptance of one of the biggest demands of the industry.
The author of the present article will analyse the above ruling and discuss its possible implications, considering the previous judicial conflict on the issue, the recent proposed amendments to the IBC by the MCA, and other challenges.
BACKGROUND OF THE CASE
In the present case, the CD ("Supertech Ltd.") is a real estate company engaged in the construction of various projects in the National Capital Region. The CD had availed credit facilities from Union Bank of India ("the bank") and Bank of Baroda for the development of its "Eco Village-II" project in 2013, for which the bank's total exposure was Rs. 100 crore. As a result of the CD's default on the loan repayment, the account was declared a 'Non-Performing Asset' by the bank on 20.06.2018. The bank on 20.03.2021 accordingly filed a Section 7 petition seeking initiation of CIRP against the CD. The petition was accepted by the NCLT on 25.03.2022. However, the order was challenged before the NCLAT.
On 10.06.2022, the NCLAT passed an interim order converting the CIRP into a "project-wise CIRP' and thereby confining the CIRP to the Eco Village-II project alone. The NLCAT directed that the Committee of Creditors ("CoC") should be formed only with respect to Eco Village-II, and the said project was to be completed with the assistance of ex-management. It further ordered that the other projects on the CD should be continued as ongoing projects.
The Financial Creditors challenged the NCLAT order before the SC. It was contended that the NCLAT is neither empowered to allow project-wise CIRP under IBC nor empowered to accept a resolution plan presented by the promoter without giving the CoC the opportunity to study the commercial viability of the plan.
DECISION OF THE COURT
The SC, while dismissing the appeal for grant of interim relief, refused to interfere with the NCLAT's order for 'project-wise resolution' and said that constituting a CoC for Supertech Ltd. as a whole would affect the ongoing projects and cause immense hardship to the homebuyers. The principle of "balance of convenience" played a big role in guiding the SC to come to this order. The court in its order reemphasized the principles laid down in Union of India v. Raj Grow Impex LLP, which state that while granting interim relief, the court should prevent any irreparable or serious injury that normally cannot be compensated in terms of money and ensure that the balance of convenience is in favour of the one seeking such relief.
Applying these principles to the present case, the court was of the view that the course adopted by the NCLAT in constituting the CoC only for Eco-Village II appears to carry a lower risk of injustice. On the element of "balance of convenience”, the court was of the opinion that greater inconvenience is likely to be caused by passing any interim order of constitution of the CoC in relation to the CD as a whole, which may cause irreparable injury to the home buyers. The court observed that such an order is likely to affect the ongoing projects and thereby cause immense hardship to the home buyers while throwing every project into a state of uncertainty.
ANALYSIS
1. Conflict of judicial opinion
To understand the significance of the ruling, it is imperative to examine the previous decisions of the courts on this issue given the fact that there is no provision in the IBC that permits "project-wise resolution" of CD. The case of Flat Buyers Association v. Umang Realtech Private Limited was one of the earliest attempts by courts at introducing the concept of "project-wise resolution and reverse-CIRP. In this case, the NCLAT Delhi was aware of the peculiarities of the real estate sector and found it counter-intuitive and against the spirit of IBC to drag the entire company into CIRP because of a single defaulting project. However, a contrary view was taken by NCLT Chennai in Mr. N. Kumar v. Tata Capital Housing Finance Ltd., where it was held that the concept of limited CIRP or project-wise CIRP for a real estate CD is out of the purview of the IBC and thus not maintainable. In light of these conflicting judicial views, the present judgement of the SC settles the dust surrounding the legality of "project-wise resolution" under IBC. But it can be argued that the facts of the present case were too peculiar for the SC to permit project-wise resolution in the present case, and thus, it doesn't become a settled precedent for future cases. Thus, the contention can only be cured by specific legislative intervention.
2. MCA's proposed amendment to IBC
It is heartening to see that the legislature has recognised these demands of the industry in its recently released proposed amendment to the IBC. The Ministry of Corporate Affairs ("MCA") noted that the insolvency resolution of CDs that are promoters of real estate projects has been a major challenge due to the peculiarities of this sector, with regard to which several judicial experiments have been conducted to adapt CIRPs to the nature of the real estate sector. Therefore, the MCA intends to amend the code to provide a specialised framework to deal with cases involving CDs that are promoters of real estate projects.
The first proposal is that when an application is filed to initiate the CIRP in respect of a CD who is the promoter of a real estate project, the AA, at its discretion, shall admit the case but apply the CIRP provisions only with respect to such real estate projects that have defaulted. Secondly, it is noted that some allottees may request ownership and possession of a completed unit of the real estate project, which cannot be permitted during the moratorium under the Code. To benefit such allottees, it is proposed that Section 28 of the Code be amended to enable the RP to transfer the ownership and possession of a plot, apartment, or building to the allottees with the consent of the CoC.
It is expected that these proposed amendments will have a positive outcome for the industry. However, some concerns still remain unaddressed. One can clearly see that while the proposed amendments will immensely benefit homebuyers, due regard has not been given to the interests of financial creditors, such as banks. There is a possibility that the CD might take a dismissive stance towards rejuvenating the failed project and deliberately prevent banks and other creditors from recovering their rightful money from other projects that have been protected from CIRP. Thus, there is a need to strike a balance between the interests of the financial creditors and other stakeholders. Further clarification is needed on how the bifurcation of assets, liabilities, and creditors will take place for each project.
WAY FORWARD
There is no doubt that the present ruling of the SC is a silver lining for many homebuyers in India. The court rightly recognized the immense hardships that will be caused to homebuyers of other projects if CIRP is started against all projects of a real-estate CD rather than specific ailing projects. "Project wise insolvency” and "reverse-CIRP” have been a much due demand of the industry and thus it is expected that after the SC's recent pronouncement, the legislature takes swift action to incorporate these demands in the IBC. These changes will help achieve more targeted and efficient resolution of financial distress in real estate companies which is also the underlying scheme of the IBC i.e., 'maximisation of value.'
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