Is Modifying the Insolvency and Bankruptcy Code a Real Solution for Real-Estate Bankruptcy?

Challenges & Judicial steps:

The court faced the issue for the first time in the case of Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd., where the court observed that the majority of the financial creditors were the allottees themselves who did not know about the “viability” or “feasibility” of a corporate debtor. And they were given the voting right to vote on the resolution plan. The court saw a lack of financial knowledge as compared to the established financial institutes such as banks, etc.

The court introduced the concept of “reverse CIRP” or “Project-wise CIRP”. The initial applicants who received allocations wanted CIRP but did not wish to accept any plan submitted by a third party, i.e., a resolution applicant. To guarantee that the CIRP is successful and the allottees receive their flats or apartments, one of the promoters agreed to inject money into the corporate debtor and act as a lender. The Hon’ble NCLAT approved reverse CIRP and set a deadline for the promoter to complete the project, observing that it will be finished in 4-5 months. According to this reverse CIRP procedure, the allottees would only be able to pursue CIRP against the corporate debtor concerning a specific project.

Following this case, the NCLAT passed orders allowing the projects to use Project-wise CIRP for corporate debtors. It is important to highlight that there is currently no mechanism under the Insolvency Bankruptcy Code that permits the insolvency of a Corporate Debtor on a project-by-project basis. The aforementioned idea is a result of NCLAT’s judicial innovation, which lacks legislative support.

The Hon’ble NCLAT permitted project-wise insolvency in Whispering Tower Flat Owner Welfare Association vs. Abhay Narayan Manudhane, RP of Corporate Debtor, while noting that the CoC, in its commercial wisdom, had approved the division of the corporate debtor’s assets into eight projects to examine the possibility of project-wise resolution. Most recently, Ram Kishor Arora Suspended Director of M/s. Supertech Ltd. v. Union Bank of India & Anr., it was decided to enable project-specific CIRP rather than company-wide CIRP and to instruct that the other projects’ construction continue while being under the overall control of the IRP.

In the latest case of Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora, The Court ruled that the CoC was to be established for the corporate debtor in defiance of the NCLAT’s directives, which was likely to have an impact on those current projects and put every project in a state of uncertainty and cause great hardship for the homebuyers. The Court further stated that, on the other hand, the IRP maintained its other programs and made efforts to inject money with the active support of the former management, but without giving the former management any new rights. Therefore, the Court believed that any temporary decision establishing the CoC would be more likely to cause trouble for the corporate debtor as a whole and might harm homebuyers irreparably.

Another challenge faced by the court is addressing “the issue of filing delayed claims”. It was highlighted in the case of Puneet Kaur v. K V Developers Private Ltd., where the Hon’ble NCLAT said that no claims can be filed by the approval of a resolution plan by the CoC. However, the court later took into consideration that the majority of the creditors were homebuyers who owned different homes at different locations across India. The court allowed later claims for the homebuyers only. Regulation 36 of the CIRP Regulations, which deals with the creation of information memoranda by the Resolution Professional (RP), was given a broad interpretation by the NCLAT. The NCLAT ruled that giving residential units to allottees or purchasers constituted a liability in the Corporate Debtor’s financial records, and as a result, the RP was required to mention this in the information memorandum. These directions led to a delay in the CIRP process by 3 months. The judgment helped the homebuyers but the challenge remained the same. “It didn’t resort to procedural invention”.