Due to rising costs and pandemic-induced lack of demand, many real estate companies have gone bankrupt. As of June 2022, of the 2,000-odd cases under corporate insolvency resolution process (CIRP), a staggering 436 cases were from the real estate sector.
The resolution of insolvency in the real estate sector presents unique difficulties due to the sector’s peculiarities. While initially homebuyers were categorized as “other creditors”, there was a sea-change in the legal position after the Supreme Court’s decision in Chitra Sharma v. Union of India and Bikram Chatterji v. Union of India wherein homebuyers were recognized as essential stakeholders in the insolvency resolution process of real estate enterprises. After the 2018 IBC amendments, the real estate allottees were recognized as financial creditors. Further, an explanation was added to Section 5(8)(f) of the IBC in which the amount spent by homebuyers in a real estate project was described as financial debt.
Lenders v Homebuyers
The inclusion of homebuyers in the class of financial creditors was challenged in Pioneer Urban Land and Infrastructure Limited v. Union of India. However, the SC upheld the 2018 amendment of the IBC. While homebuyers are now considered to be financial creditors, homebuyers and lenders take different pathways. For instance, home buyers prefer taking possession of the properties to asking for return of the advance they paid or settle for hair-cuts. Thus, an inherent tension always lies between home buyers and the lenders. This was somewhat addressed by the 2020 IBC amendments, whereby a minimum threshold of 100 allottees or 10 per cent of the total allottees, whichever is lesser, was set as the essential prerequisite for initiation of CIRP against a real estate enterprise.
To overcome the issues of insolvency resolution of real estate enterprises, many judicial experiments have been conducted with the object of adapting the insolvency resolution process to the complex nature of the real estate sector. Two such experimental concepts include “reverse” and “project-wise approach”, first introduced in Flat Buyers Association Winter Hills v. Umang Realtech the NCLAT. In that case, the homebuyers had initiated CIRP against a real estate company for failing to complete the construction in the prescribed time. In what can be best described as an innovative solution, the NCLAT allowed one of the promoters of the real estate entity to act as an external lender and infuse funds into the corporate debtor to ensure that the project is completed, and the units are handed over to the homebuyers.
The concept of reverse CIRP has been subsequently upheld by the Supreme Court in Anand Murti v. Soni Infratech and Amit Katyal v. Meera Ahuja.
In a project-wise approach, the focus is on only the insolvent projects and not the whole entity. In a recent decision in Indiabulls Asset Reconstruction Co v Ram Kishore Arora, the SC opined that if the corporate debtor as a whole were to be subjected to insolvency proceedings, all of the ongoing projects would be thrown into uncertainty. Accordingly, in the interest of the homebuyers, a project-wise approach to resolving insolvency was allowed.
Steps taken by Centre
In January 2023, the Ministry of Corporate Affairs invited comments from the public on proposed amendments that were being considered under the IBC regime. One of these changes includes codification of the reverse CIRP and project-wise resolution. The Ministry proposed amending Section 28 of the IBC to enable the resolution professional to transfer the ownership and possession of units to the allottees with the consent of the committee of creditors.
Considering the unique challenges of the real estate sector, there is a need for a specialized resolution framework tailored to address the complexities of the real estate sector.
This framework should consider all stakeholders’ interests and provide mechanisms for efficient asset management, completion of projects, and timely allotment or compensation to homebuyers. The involvement of qualified professionals, such as insolvency practitioners, real estate experts, and legal advisors, can significantly contribute to the effectiveness of the resolution process.
(The authors are lawyers with Trinity Chambers)