The Paradigm Of Real Estate Insolvencies: Judicial Trends, Roadblocks, And The Way Ahead

The Insolvency and Bankruptcy Board of India (“IBBI”) states that as on 30.09.2023, there are 7054 cases wherein the corporate debtors have been admitted into CIRP. A sectoral division of the admitted CIRPs showcases that real estate and construction sectors are cumulatively the second largest contributors with 33% of the CIRPs being admitted against corporate debtors engaged in the said sectors. The Committee constituted by the Ministry of Housing and Urban Affairs published a Report in July 2023 on the 'Legacy Stalled Real Estate Projects' which indicates that there are approximately 4.12 lakh stressed dwelling real estate units with investments to the tune of 4.08 lakh crores in the said units. The said Report further estimates that if 75% of the said stressed units are resolved, it will add about three lakh units to the housing sector. The resolution of these stressed units will not only provide the much-needed respite to the estranged allottees but also significantly contribute towards the economic growth of the country.

The inference that can be drawn from the data and statistics at hand is that the real estate sector is laboring and still trying to recover from the aftermath of the COVID-19 pandemic. Having said that, it is the second largest sectoral contributor to stalled recoveries, bad debts, and insolvency in the country. If the current trend does not change, the real estate sector shall very soon outrun the largest stressed sector, i.e., the manufacturing sector.

The present article traces the genesis and peculiarities of the insolvency of a real estate corporate debtor vis-à-vis the rights of the allottees with special emphasis on the judicial trends and the amendments to the Code and accompanying regulations. The rights of allottees in the insolvency resolution of a real estate company have come a long way from when it was first given statutory flavor in the year 2018 to its present form. However, the words of the famous poet, Robert Lee Frost sums up the journey forward in the best possible way – “The woods are lovely, dark and deep, but I have promises to keep and miles to go before I sleep”.

Real Estate Sector and Insolvency: The Road Map

1. Allottees as Financial Creditors in a Class:

The year 2017 witnessed the initiation of CIRP proceedings of real estate giants like Jaypee Infratech Limited and Amrapali Group by the National Company Law Tribunal (“NCLT”) which prompted very significant amendments in the Code. With widespread concern amongst estranged allottees of the real estate projects, the Report of the Insolvency Law Committee published in March 2018 recommended that the Code be amended seeking to clarify, as a matter of law, that allottees of real estate projects are financial creditors. The said report also highlighted that delay in under-construction apartments had become a common phenomenon and the amount raised from allottees under their respective contracts contributed significantly to financing the construction of the said real estate project.

Based on the recommendations of the Insolvency Law Committee, the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 (“Amendment Ordinance”) was promulgated with effect from 06.06.2018 which, inter alia, proposed amendments to the Code categorizing allottees as financial creditors. Pursuant thereto, the Legislature in its wisdom on 17.08.2018 passed the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (“2018 Amendment”) which for the very first time clarified that the allottees of a real estate project are financial creditors under the Code.

The 2018 Amendment introduced an explanation to the definition of 'financial debt' under Section 5(8)(f) of the Code which stated that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the 'commercial effect of a borrowing'. Hence, the debt owed to the allottees of real estate projects was statutorily recognized as 'financial debt'.

Further, considering that allottees of a real estate project are a heterogenous group of financial creditors in a class, Sections 21 (6A) (b) and 25A were also introduced to induct an Authorized Representative (“AR”) as the mouthpiece of said allottees to participate and vote in the meetings of the Committee of Creditors (“COC”). The AR is mandated by the Code, to cast his vote in accordance with Section 25A(3A) based on the majority decision taken by the allottees and the prior voting instruction received from the said allottees.

The vires of the 2018 Amendment were challenged before the Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited and Another Vs. Union of India and Others^[1]. In the said case, while noting that protection of the interests of the allottees was of paramount importance, the Supreme Court upheld the validity of the 2018 Amendment to the Code. The said judgment also analyzed the interplay of the Code vis-à-vis the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”) and held that both are beneficial legislations that operate in completely different spheres. The remedies available to allottees under the Code and the RERA Act are to be harmoniously construed and are not in derogation of each other. However, in case of a conflict, the Code is bound to prevail.

2. Threshold for Initiation of CIRP by Allottees: A Step Forward

The 2018 Amendment to the Code, albeit a welcome move, opened floodgates of litigations granting unparalleled powers to a single disgruntled allottee who was then capable of initiating the CIRP proceedings of an entire real estate company having multiple projects.

The aforesaid events prompted the Legislature to pass the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“2020 Amendment”) with effect from 13.03.2020. The 2020 Amendment, inter alia, amended Section 7 of the Code and introduced a minimum threshold to initiate CIRP proceedings against a corporate debtor by the allottees of a real estate project of the said corporate debtor. In terms of the said amendment, the CIRP proceedings can be initiated jointly by: -

1. not less than 100 of such allottees under the same real estate project; or
2. not less than 10% of the total number of such allottees under the same real estate project, whichever is less.

The constitutional validity of the 2020 Amendment was challenged and upheld by the Supreme Court in the judgment of Manish Kumar Vs. Union of India^[2]. Hence, the unprecedented problem created by the 2018 Amendment to the Code was put to rest by the 2020 Amendment and the significant judgment of Manish Kumar^[3] which also emphasized that allottees satisfying the minimum threshold of the same real estate project can jointly initiate CIRP proceedings of the real estate company under the amended Section 7 of the Code.

Judicial Interventions: Carving Out Innovative Mechanisms to Protect the Interests of the Allottees

1. Reverse CIRP: Tailor-made Niche for the Real Estate Sector

The Supreme Court in the landmark judgment of Swiss Ribbons Private Limited and Anr. Vs. Union of India and Ors.^[4] has opined that – “to stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.”

Taking a hint from the Swiss Ribbons^[5] judgment, the concept of Reverse CIRP was introduced by the National Company Law Appellate Tribunal (“NCLAT”) in Flat Buyers Association Winter Hills – 77, Gurgaon Vs. Umang Realtech Pvt. Ltd through IRP and Ors.^[6] The NCLAT in the said case recognized that the CIRP of real estate companies is peculiar and divergent from other sectors and hence, the NCLAT deliberated that if a corporate debtor engaged in the real estate sector could be resolved under the Code without the approval of a third-party Resolution Plan. These deliberations paved the way for the very innovative concept of Reverse CIRP wherein the promoters of the corporate debtor can overcome the bar prescribed under Section 29A of the Code and present a proposal for completing and delivering their stalled project subject to requisite approval of the creditors and stakeholders under the supervision of the Resolution Professional (“RP”) and the NCLT. In Reverse CIRP, the promoters are allowed to infuse funds as an investor thereby ensuring completion of the stalled projects of the corporate debtor. This concept not only safeguarded the interests of the allottees and all the creditors of the corporate debtor by ensuring the satisfaction of their claims by delivery of the units under the supervision of the RP and NCLT but also provided the ex-management of the corporate debtor with an opportunity to regain the control and management of their company and bring it back on its feet upon satisfying the claims of all the creditors.

The concept of Reverse CIRP has also been followed by the NCLAT in the case of Rajesh Goyal Vs. Babita Gupta and Ors.^[7] wherein the NCLAT while exercising its inherent powers conferred under Rule 11 of the NCLAT Rules, 2016, had allowed the promoter to make investments from independent sources in the corporate debtor as a financial creditor. In the said case, the affairs of the corporate debtor were run as a going concern so that the project in default could be completed and delivered to the allottees.

Subsequently, in the case of Anand Murti Vs. Soni Infratech Private Limited and Anr.^[8], the Supreme Court observed that the project completion proposal presented by the promoter of the corporate debtor would cater to the interests of the allottees. The Apex Court also remarked that there is a strong possibility that if regular CIRP was proceeded with, then the already estranged allottees may be subjected to payment of higher escalations in a third-party Resolution Plan. Hence, once again the promoter was permitted to invest and complete the stressed housing project under the supervision of the Court and the RP.

2. Project-specific Resolution: CIRP to be restricted to the 'Project in Default'

The NCLAT in the Umang Realtech^[9] judgment also propounded that the CIRP of real estate company should be restricted to the 'project in default' and other projects which may be at very different stages of construction or financially healthy and viable should not be subjected to unwarranted resolution under the Code. It was held therein that the assets of the project in default should be maximized for balancing the interests of the creditors of the project in default and achieving the object of the Code.

The concept of project-specific resolution of corporate debtors in the real estate sector has been followed by the NCLT in a plethora of cases like Umesh Chander and Ors. Vs. GRJ Distributors and Developers Private Limited (Project Avalon Rosewood)^[10], Anil Kaushal and Ors. Vs. Logix City Developers Private Limited (Project Blossom Zest)^[11] to name a few.

In Ajai Kumar Gupta Vs. Ashwani Kumar Singla (IRP of Ansal Properties and Infrastructure Limited)^[12], in the interim, the NCLAT vide Order dated 13.01.2023 was pleased to restrict the CIRP to the 'project in default', i.e., project FernHill, and thereafter affirmed the same vide Order dated 04.03.2024 while disposing of the said appeal.

Further, in CIRP of the real estate giant, Supertech Limited, the NCLAT vide interim order dated 10.06.2022 passed in the appeal of Ram Kishor Arora Suspended Director of M/s. Supertech Limited Vs. Union Bank of India^[13] restricted the CIRP proceedings to project Eco Village-II and directed the Interim Resolution Professional (“IRP”) to constitute the COC for the said project and invite Resolution Plans for the same. The said interim order was challenged before the Supreme Court in the case of Indiabulls Asset Reconstruction Company Limited v Ram Kishore Arora and Ors^[14]; however, the Supreme Court declined to interfere with the directions passed by the NCLAT concerning project Eco Village-II.

Even in the case of Ambika Prasad Sharma Erstwhile Director of Horizon Buildcon Pvt. Ltd. Vs. Horizon Buildcon Pvt. Ltd. and Ors.^[15], the NCLAT while adopting project specific resolution reiterated that CIRP should be restricted to a project in default.

The amendments brought about in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) with effect from 15.02.2024 provide for the invitation of different Resolution Plans for different projects of the corporate debtor subject to the approval of the COC.^[16] It also provides for opening and operating separate bank accounts for each real estate project to ensure transparency. ^[17]

The recent amendments in the CIRP Regulations are silent on providing for project-specific resolution of corporate debtors in the real estate sector or restricting the CIRP proceedings to the project in default. One of the reasons that may be weighing into the minds of the lawmakers while introducing such revolutionary measures as statutory provisions could be that the same may be misused by the corporate debtors to abandon the less lucrative projects. However, in the absence of such statutory safeguards, more often than not, the solvent and healthy real estate projects of the corporate debtors would be shackled with unwarranted resolution which may delay its completion and delivery to the estranged allottees of the said project. Furthermore, in the absence of statutory provisions, the only available remedy to the allottees or even corporate debtors is seeking judicial intervention which may allow CIRP proceedings to be project-specific and restricted to the project in default.

3. The Interest of the Allottees is Paramount

Time and again the NCLAT and the Supreme Court have intervened in order to safeguard the interest of the allottees of the corporate debtor.

In a significant judgment titled Puneet Kaur Vs. K.V. Developers Pvt. Ltd. and Ors.,^[18] wherein the allottees were challenging the rejection of their belated claims by the NCLT on account of the Resolution Plan being approved by the COC, the NCLAT noted that public announcements are often published in newspapers circulated in regions where the corporate debtor has its registered office and corporate office. The majority of the allottees who belong to the middle class often take loans from financial institutions to pay for the allotment of their units and are often scattered all over the country and may not have knowledge of the public announcement. Further, the NCLAT even remarked that the then-existing time frame to file the claims, i.e., on or before 90 days from the Insolvency Commencement Date in such cases may not be sufficient. However, the NCLAT noted that the RP who takes over the management of the corporate debtor has access to the records of liabilities of the said corporate debtor. Hence, in cases where allottees fail to file their claims within the statutorily prescribed time frame but their debts are duly reflected in the records of the corporate debtor, the same should be included by the RP in the Information Memorandum and the Resolution Applicants ought to have taken note of such claims.

As on date, CIRP Regulations with effect from 16.09.2022 require that the IRP shall make endeavors to send communications along with a copy of the public announcement to all creditors as per the last available books of accounts of the corporate debtor. Further, the stipulated timeframe for filing of claims has been amended with effect from 18.09.2023, to include all claims as the date of issuance of the Request for Resolution Plan or 90 days from the Insolvency Commencement Date, whichever is later.^[19]

In the case of Alok Sharma, Authorized Representative of Commercial Space Buyers Vs. M/s. IP Construction Pvt. Ltd. through Resolution Professional, Anju Agarwal^[20], the allottees filed an appeal before the NCLAT stating that they had approached the NCLT seeking directions upon the RP to facilitate registration of their sale deeds since the allottees had made entire payments towards the sale consideration of their respective units and were already in possession of the said units. However, the NCLT had refused to entertain the application on the premise that the execution of registered sale deeds in favour of the allottees would violate the provisions of moratorium under Section 14 of the Code and would be tantamount to alienating the assets of the corporate debtor during the CIRP proceedings. The NCLAT set aside the order of the NCLT and observed that the constructed units were a part of the continued business operations of the corporate debtor and the value of the sale of such units would be reflected in the Profit and Loss account statements of the corporate debtor under the heading of 'revenue from operations. Hence, the same were not 'assets' but instead were a part of the corporate debtor's business for the continuation of its operation as a going concern even during the CIRP. The NCLAT directed that the RP shall execute registration of the sale deeds of the allottees subject to payment of charges, if any, and also remarked that – “the rights of home buyers cannot be affected adversely in the 'corporate insolvency resolution process' and their interest is to be appropriately preserved and protected within the parameters of the I and B Code, 2016 “

Interestingly, in light of the aforesaid judgment of the NCLAT, the discussion paper of IBBI on 'Real-estate Related Proposals- CIRP & Liquidation' published on 06.09.2023 proposed amendments in the CIRP Regulations facilitating registration and execution of sale deeds of the units in the real estate project in favour of the allottees who are in possession of the said units subject to payment of the full consideration amount and approval of the COC with 66% voting majority.

However, the recent amendments carried out in the CIRP Regulation on 15.02.2024 do not incorporate the aforementioned suggestions of the IBBI. The proposal, if given a statutory flavor would have significantly alleviated the plight of the allottees considering most of the said cases would be in respect of projects that are on the verge of completion and thus, would provide an effective resolution of the claims of the allottees.

However, in a welcome move, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) have been amended with effect from 15.02.2024 to exclude units in a real estate project where the corporate debtor has given possession to the allottees from the purview of liquidation estate.^[21] Such provisions along with adequate safeguards if included in the CIRP Regulations would further the intent of the Code and provide the much-needed respite and speedier resolution to the allottees in the CIRP proceedings of the corporate debtor in the real estate sector.

Even the conundrum of differential treatment of allottees who have obtained decrees of refund from other allottees has been settled by the Supreme Court in the case of Vishal Chelani and Ors. Vs. Debashis Nanda^[22]. The Supreme Court in the said case has held that the allottees who are the decree-holders would be recognized as 'financial creditors' as there can be no further classification in a class of creditor.

Challenges and Roadblocks

It is important to address the peculiarities of the CIRP of a real estate company which is essentially divergent from companies in other sectors. It is common industry practice that the real estate company creates special purpose vehicles or subsidiary companies which are land owners of a real estate project to mitigate and proportionately distribute its business risks. Hence, in the said real estate project, even though the purchase of the project land, its development, and construction is entirely funded by the parent company and even large sums of monies are collected from the allottees by the parent company, the ownership, and title of the land vests with its subsidiaries. Resultantly, if the parent real estate company is admitted into CIRP without initiation of the CIRP of its subsidiary, the bar under Explanation (b) to Section 18 of the Code kicks in and the project land being an asset of the subsidiary company is excluded from the CIRP of the parent company. Consequently, the exclusion of the project land from the ambit of CIRP would result in rendering the CIRP of the parent company redundant.

Similar problems arise when the developer of the project and the owner of the project land are different companies that are counter-parties to the development agreements. Explanation (a) to Section 18 once again bars the inclusion of third-party assets held by the corporate debtor under contractual arrangements within the purview of CIRP of the corporate debtor. Even though the Supreme Court in the case of Victory Iron Works Limited Vs. Jitendra Lohia and Anr. ^[23] has held that development rights are a bundle of intangible rights vested in favour of the corporate debtor and hence, it is an 'asset' of the corporate debtor, the same may not provide a viable solution to the present problem. The development rights are an asset of the corporate debtor but in the absence of the project land, whose ownership vests with the third party, there are practical difficulties in enforcing the said rights and completing the stalled project of the corporate debtor. Needless to add, unless the developer and the land owner are undergoing joint CIRP, the CIRP proceedings will be riddled by various rounds of litigation. Hence, the fruition of CIRP of real estate companies where the land owner and the developer are different entities remains uncertain.

In the NCR, Statutory Authorities like the Greater Noida Industrial Development Authority (“GNIDA”), Noida Industrial Development Authority (“NOIDA”), etc., lease out project lands for group housing and commercial projects. Often these project lands are leased out in favor of wholly owned special purpose vehicles of the real estate developing company. This leaves the allottees and the creditors in a precarious situation when CIRP proceedings are admitted against the said real estate company. Even if the project land is leased by the Statutory Authority directly to the real estate company, in terms of the recent judgment of the Supreme Court in Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni and Anr.^[24], Statutory Authorities like NOIDA and GNIDA which are constituted under the provisions of the U.P. Industrial Area Development Act, 1976 (“1976 Act”) have a charge over lands leased by them to third parties. Hence, by virtue of Section 13 A of the 1976 Act, such authorities are albeit operational but secured creditors. Hence, the dues owed by the corporate debtor to such Statutory Authorities which generally run into crores of rupees would rank much higher in the order of priority to that of allottees who are unsecured financial creditors as per the waterfall mechanism detailed in Section 53 of the Code.

In the case of Prabhjit Singh Soni^[25], the Supreme Court observed that when a Resolution Plan envisages the utilization of land owned by a third-party Statutory Authority like GNIDA, which is governed by its own statutory rules and regulations, there needs to be greater scrutiny of the feasibility and viability of such a Resolution Plan which ordinarily would be within the exclusive domain of the commercial wisdom of the COC.

It has been a general trend that Statutory Authorities such as GNIDA and NOIDA are generally negligent in filing their claims with the RP within the statutorily stipulated time frame but also often resort to various rounds of litigations demanding higher pay-outs of their outstanding dues. This practice delays the successful resolution of the corporate debtor as unless the various rounds of litigations are decided and requisite permissions and sanctions are granted by the said authorities, the construction of the stalled project cannot be completed.

Even though the Report published in July 2023 on the 'Legacy Stalled Real Estate Projects' by the Ministry of Housing and Urban Affairs has categorically suggested that Statutory Authorities should also be open to taking proportionate haircuts like other creditors of the corporate debtor and should refrain from indulging in endless litigations demanding higher payouts, the reality is far from it.

The way forward

The legislative purpose and intent for inserting the Explanations to Section 18 of the Code is obviated in CIRP proceedings of real estate companies where the land owner of the project and the developer of the said project are different entities. Hence, in light of the established industry practices of the real estate sector, we feel that the bar of inclusion of assets of subsidiaries or third-party assets as provided in the Explanations to Section 18 of the Code should be relaxed in the CIRP proceedings of the said corporate debtors. In the absence of including the project land wherein the ownership may vest with subsidiary companies or special purpose vehicles, the CIRP proceedings of the parent real estate company will be redundant. Hence, there is an urgent need to revisit and issue clarification to the Explanations to Section 18 of the Code carving out statutory exceptions for the real estate industry.

It is a settled proposition that the Code is not intended as a mechanism to initiate blanket CIRP of solvent real estate projects thereby impeding the completion and delivery of the units to the allottees of such projects. Therefore, amendments to the Code and CIRP Regulations for initiation of project-wise CIRP of a real estate company thereby excluding healthy and viable projects from the purview of CIRP and restricting it to the 'project in default' would provide the much-needed statutory backing for a practice that has been adopted by the NCLT and the NCLAT in a plethora of cases.

Even in cases where project lands are leased out by Statutory Authorities such as GNIDA and NOIDA, who by virtue of the provisions contained in the 1976 Act and the judgment of the Supreme Court in Prabhjit Singh Soni^[26] are secured creditors, there is an urgent need to revisit the status of their dues as per the order of priority in Section 53 of Code. As per Section 53(1)(e)(i) of the Code, dues owed to Government Authorities rank lower than the debts of allottees who are unsecured financial creditors as per Section 53(1)(d). The Legislature in its wisdom created a separate heading and an order of priority with respect to the debts owed to the Government Authorities under the waterfall mechanism of Section 53 of the Code. Hence, a statutory clarification with respect to the creation of a charge by virtue of the operation of law over an immovable asset in favor of Government Authorities and the ranking of their debt as per Section 53 of the Code is urgently needed. The dues of Statutory Authorities such as GNIDA and NOIDA run into crores of rupees and if they are placed under the category of secured creditors as per Section 53(1)(b)(ii), the same may result in very exorbitant payouts under Resolution Plans or liquidation to satisfy their debt leaving little to nothing left for other creditors of the corporate debtor including the allottees. Hence, amendments clarifying the ranking and order of priority of the debts of Statutory Authorities such as GNIDA and NOIDA who have first charge over immovable properties, i.e., the project land by operation of law, need to be introduced in the Code.

Authors: Sandeep Bhuraria (Senior Partner) and Parijat (Senior Associate). Views Are Personal.

1. 2019 SCC Online SC 1005 ↑

2. LL 2021 SC 25 ↑

3. Ibid. ↑

4. (2019) SCC OnLine SC 73 ↑

5. Ibid. ↑

6. 2020 SCC OnLine NCLAT 1199 ↑

7. Company Appeal (AT) (Insolvency) No. 1056 of 2019 ↑

8. 2022 SCC OnLine SC 519 ↑

9. Ibid. at 6 ↑

10. Initiated vide Order dated 16.02.2023 by the NCLT, Delhi in C.P. (IB) No. 477/ND/2021 and affirmed by the NCLAT vide Order dated 12.04.2023 in Company Appeal (AT) (Ins.) No. 406 of 2023. ↑

11. Initiated vide Order dated 17.08.2022 by NCLT, Delhi in C.P. No. 440/ND/2021. ↑

12. Company Appeal (AT) (Ins.) No. 41 of 2023 ↑

13. Order dated 27.07.2022 of NCLAT in Company Appeal (AT) (Ins.) No. 406 of 2022 ↑

14. 2023 LiveLaw (SC) 436 ↑

15. Judgment dated 08.04.2021 in Company Appeal (AT) (Ins.) No. 1398 of 2019 ↑

16. Clarification to Regulation 36 A (1) ↑

17. Regulation 4D ↑

18. Company Appeal (AT) (Ins.) No.390 of 2022 ↑

19. Regulation 12(1) ↑

20. Company Appeal (AT) (Ins.) No. 350 of 2020 ↑

21. Regulation 46A ↑

22. 2023 LiveLaw (SC) 894 ↑

23. 2023 LiveLaw (SC) 193 ↑

24. 2024 Livelaw (SC) 111 ↑

25. Ibid. ↑

26. Ibid. ↑