Insolvency and Bankruptcy Code needs a separate regime for the real estate sector

The Insolvency and Bankruptcy Code, 2016 was promulgated for reviving debt-ridden entities. The purpose of the Code was to address the issue of the increasing NPA-crisis which was plaguing the economy.

Since its inception in 2016, the Code has been instrumental in resolving insolvent entities across different sectors like infrastructure, telecom, energy and real estate, to name a few.

While the Code universally applies across different sectors, past experience suggests that there is an urgent need to have a separate mechanism for insolvency resolution for the real estate sector. This is because unlike other sectors, a large chunk of the creditors are homebuyers who are not institutional lenders. Further, the assets of the Corporate Debtor in many cases are spread across various states in the form of housing projects and are not limited to one specific geographical area.  

Two cases demonstrate why the real estate sector needs to have a separate mechanism in a Corporate Insolvency Resolution Process (CIRP). The first being the decision of the National Company Law Appellate Tribunal (NCLAT) in Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd. in which it was observed that a majority of the financial creditors who are vested with the power to vote upon a resolution plan were allottees in the real estate project who did not have any expertise to assess 'viability' or 'feasibility' of a Corporate Debtor. Resultantly, the allottees lacked commercial wisdom akin to that of a financial institution/bank.

The lack of commercial wisdom of the allottees coupled with the fact that the Corporate Debtor had multiple real estate projects at different stages, in different locations, having different commercial requirements, the NCLAT devised a new procedure called “reverse insolvency/project-wise insolvency”. Under this process, if the allottees wished to initiate CIRP against the Corporate Debtor, they would be confined to a particular project of the Corporate Debtor.

Recently, the NCLAT followed the judicial precedent laid down in Umang Realtech and passed orders allowing project-wise insolvency of Corporate Debtors. It is pertinent to note that there exists no such procedure in the Code till date which allows such project-wise insolvency of a Corporate Debtor. The said concept is an outcome of judicial invention by NCLAT with no legislative backing. Therefore, there is a need for legislative reforms wherein a specific procedure ought to be laid down for insolvency of real estate projects.

The second problem often faced by creditors, specifically allottees/homebuyers, is the problem of information asymmetry. Since most of the allottees are unaware about the workings of the Code and its time-bound nature, they are unable to file their claims in time. Furthermore, some of the allottees are not even residing in the jurisdiction where the real estate project is being undertaken and are resultantly unaware about the status of the project. Public announcement of the Corporate Debtor under Section 15 of the Code therefore becomes redundant since it is only made in a newspaper which has a wide circulation in the geographical area where the registered office of the Corporate Debtor is located.

As a result of the above, the allottees often approach the NCLT at a belated stage seeking inclusion of their claims. This delays the CIRP and goes against the “time bound” objective of the Code and also adds to the CIRP costs.

The issue of filing delayed claims by homebuyers was highlighted by the NCLAT in Puneet Kaur v. KV Developers (P) Ltd. In this case, the NCLAT took into account the settled legal principle that creditors cannot file claims after the resolution plan is approved by the Committee of Creditors (CoC). However, in order to give relief to the allottees/homebuyers who had filed their claim at a belated stage, the NCLAT indirectly allowed the belated claims of homebuyers after the CoC had approved the resolution plan.

The NCLAT categorically recorded that it was not setting aside the order of the NCLT rejecting the belated claims of the homebuyers as the same was passed keeping in mind the settled legal principles. Instead, the NCLAT gave an expansive meaning to Regulation 36 of CIRP Regulations - which is for preparation of information memorandum by the Resolution Professional (RP). NCLAT held that allotment of residential units to allottees/homebuyers was a liability in the books of accounts of the Corporate Debtor and, therefore, the RP was obligated to include the same in the information memorandum.

Finally, the NCLAT directed the RP to provide all details of homebuyers along with their claims as reflected from the record of the Corporate Debtor to the resolution applicant within one month. The resolution applicant was directed to create an addendum based on the aforesaid details and place the same before the CoC within a further period of one month. The CoC was directed to consider the addendum in its meeting and place it before the NCLT within a month from the date of submission of the addendum by the resolution applicant to the CoC.

The resultant effect of the decision was that it delayed the CIRP by three months. While the judgment in KV Developers acknowledged the limitations of the current framework of the Code, it did not resort to procedural invention. NCLAT used Regulation 36 of CIRP Regulations to make it incumbent upon the RP to include all dues which are mentioned in the books of accounts, thereby protecting those homebuyers who have belatedly filed their claims. It is pertinent to note that the judgment of KV Developers highlighted the systematic failure of the Code in addressing the problem of information asymmetry.

Recently, the Ministry of Corporate Affairs (MCA) proposed amendments to the IBC. One of the key amendments suggested is to have a crystallized framework for project-wise insolvency. This shows that even the legislature has considered that the “one size fits all” approach under the Code cannot be a long term solution. In its proposed amendments, MCA has suggested that NCLT, based on the facts and circumstances of each case, should have the discretion to decide whether a real estate Corporate Debtor could be resolved through project-wise insolvency.

There is an urgent need for the legislature to promulgate substantive and procedural amendments for project-wise insolvency. Specific provisions/regulations should be added to the Code to allow NCLTs to segregate projects of the Corporate Debtor and admit only those projects which warrant insolvency, while keeping other projects outside the purview of the Code.

The amendments should also focus on reducing the problems of information asymmetry. Explicit provisions should be added to make it incumbent upon the IRP/RP to take affirmative steps to contact homebuyers and inform them about commencement of CIRP.

Further, Section 15 of the Code read with Regulation 6 of the CIRP Regulations should be amended to ensure that public announcement is not only restricted to newspapers with wide circulations, but also news channels and any other means by which the allottees can be informed about the commencement of CIRP. Additionally, in order to ensure quicker and efficient outcomes, administrative steps, such as creating specialized NCLT Benches for real estate insolvencies, will also go a long way.

Shivkrit Rai is a lawyer practicing before the National Company Law Appellate Tribunal and National Company Law Tribunal in Delhi.