Project-Wise CIRP: To Order or Not?

[Aarya is a student at Dr Ram Manohar Lohiya National Law University.]

The Insolvency and Bankruptcy Code 2016 (IBC) came in as a panacea for the ailing commerce of India. It was introduced with multi-fold objectives of resolving insolvency in a time-bound manner, maximizing the value of assets and balancing the interests of various stakeholders. It also marked the watershed beginning of creditor-in-control from the age-old and inefficient debtor-in-possession mechanism for resolution. IBC is not a sector-specific legislation, meaning it applies to all sectors equally. However, certain sectors have peculiarities and require bespoke provisions under the law.

This post outlines the real estate sector’s importance and elucidates the concept of project-wise corporate insolvency resolution process (CIRP) by analyzing various case laws on this aspect. Further, the author attempts to cull out a list of factors that tribunals can consider when ordering project-wise CIRP with the help of various judicial pronouncements. Lastly, the legislative intervention in the form of recent amendments to Insolvency and Bankruptcy Board of India. (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (CIRP Regulations) regarding project-wise CIRP has been discussed.

Real Estate Sector and the IBC

The real estate industry is the most apposite example of such a sector. It has its peculiarities, such as the relationship between a creditor and a debtor. In real estate projects, homebuyers (creditors) desire the projects to be completed within the stipulated deadline, whereas, in the traditional creditor-debtor relationship, the creditor pushes for a resolution to get back the due money from the debtor. Furthermore, homebuyers’ classification as creditors of the project owner has been a topic of debate since the inception of IBC. This legal conundrum was resolved by the amendment of 2018, which clarified and recognised homebuyers as financial creditors.

As per the data from the Insolvency and Bankruptcy Board of India (IBBI), the real estate sector has formed 21% of the total admitted CIRPs since 2016. Furthermore, 14% of the total resolution plans yielded till December 2023 are from the real estate sector alone. It has yielded the second-highest number of resolution plans, after the manufacturing sector, with a share of 48% in the total plans. Approximately, more than 45 resolution plans have been accepted in the real estate sector between October 2022 and December 2023. The number of total resolution plans approved during this period stood at 281. The above-quoted data from IBBI suggests the importance of the real estate sector with regard to the operation of IBC. Thus, it is necessary to clarify the existing legal and adjudicatory challenges.

Project-Wise CIRP: Investigating its Genesis and Existence

Project-wise CIRP is a critical issue that requires more clarity in the form of judicial or legislative intervention. Often, real estate developers have multiple projects that are being constructed simultaneously. As such, the general practice is to push all these projects into resolution in the event of the initiation of an insolvency proceeding against a developer. However, this position was slightly changed with the dictum of National Company Law Appellate Tribunal (NCLAT) in the Flat Buyers Association case. The NCLAT, for the first time, devised the mechanism of project-wise CIRP, which allows the (interim) resolution professional (IRP/RP) to proceed with a project-specific CIRP only for the ailing projects and not against all the projects of the corporate debtor (CD). Project-wise CIRP is peculiar to the real estate sector because of the fiduciary relationship between the homebuyer and the real estate developer. The tribunal did not expressly give any clarification or guidance on the factors that need to be considered for ordering a project-wise CIRP. Consequently, it has largely left this question to be decided after noting the peculiar factual matrix of every case.

The apex court in the Ram Kishor case approved the legal tenability of project-wise CIRP by not only allowing but also underscoring its necessity. In this case, an appeal was filed against an order of NCLAT, which ordered project-wise CIRP against the CD, a real-estate company with multiple projects around the National Capital Region. The Supreme Court of India found that an all-encompassing CIRP against all the projects of the corporate debtor would cause greater inconvenience and irreparable harm to the home buyers when compared to a project-wise CIRP for the ailing projects only. The court also ordered that a project-specific committee of creditors (CoC) should be constituted rather than having all the creditors of the CD on the CoC. This pronouncement supplemented the principle laid down in the Flat Buyers Association case by filling the unaddressed logical gaps in the process.

It is crucial to note that in all the above decisions, the judiciary did not expressly expound upon the threshold or checklist that needs to be taken into account before ordering a project-wise CIRP. Since the Flat Buyers Association dictum, tribunals have ordered project-wise CIRP in various other cases. It is crucial to analyze these orders to understand the rationale applied by the adjudicating authorities and the appellate authorities while permitting project-wise CIRP.

Elucidating on the Courts’ Pronouncement on Project-wise CIRP

The tribunals have been proactive in confining the CIRP only to the defaulted projects and not extending it to the whole real estate company's assets. The NCLAT, while ordering project-wise CIRP in the Flat Buyers Association case, carried out an anxious perusal of the facts of the case at hand. The CIRP should be limited to only the defaulted projects because every project has its own creditors, allottees, authorities, place of construction, etc. The tribunal was illustrated by an example of different projects of the same real estate company in different cities. Clubbing different projects situated at different geographical locations would be antithetical to the objective of value maximization. After considering the fundamental differences between the various projects of the CD, project-wise, CIRP for only ailing projects was ordered.

Further, the Kochi Bench of National Company Law Tribunal (NCLT), in the Nucleus Premium case, allowed project-wise CIRP for a real estate company with ten different projects. The home buyers contended that a common resolution process would lead to practical difficulty. The rationale behind this was the uneven progress of each project and the lack of enough registered units in these projects. Later on, in Ambika Prasad’s case, the NCLAT Delhi allowed project-wise CIRP by considering the maximization of asset value for the stakeholders. Here, it needs to be outlined that there should be maximization of the asset value of a ‘particular project’ to balance the interests of distinct stakeholders who are different for each project.

Distinctively, the NCLT Chennai, in the N Kumar case, rejected a similar plea of applying project-wise CIRP due to the strict reading of the IBC and the fact-specific nature of the Flat Buyers Association order. In this case, the CD was managing two projects located in Chennai. NCLT, without appreciating the merits of the case, found that the IBC or the regulations therein do not envisage a project-wise recovery of assets. Furthermore, unlike the Flat Buyer Association case, none of the promoters offered to infuse funds as a lender. For these reasons, the applicability of the Flat Buyer Association was found untenable, and the NCLT took a divergent approach by rejecting project-wise CIRP.

The judiciary has not expressly provided any list of factors or indices to be considered/satisfied before ordering project-wise CIRP. However, in all of the cases mentioned above, the tribunal has considered a few common factors that can be considered before ordering a project-wise CIRP. The distinction between approving authority, land, owners, allottees, and financial institutions of different projects was considered in the Flat Buyers Association order. Taking this dictum to the logical end, it can be understood that the criteria for carrying out separate CIRP is the glaring difference between the projects. Ergo, projects situated in different cities cannot be pushed into CIRP together. The NCLT Kochi based its decision on the practical difficulty that might be caused in a typical CIRP, where projects with differing progress would be pushed into CIRP. In Ambika Prasad's dictum, the NCLAT ordered project-wise CIRP to maximize the value of assets for the stakeholders of that particular project.

The Flat Buyer Association order was cited with authority in all the above-quoted cases. However, each one provides a different rationale for reaching the same end-point. The interest of stakeholders and their differing nature seems instrumental in ordering project-wise CIRP. Furthermore, every project with its own distinct approving authority and financial institutions, has its peculiarities and realities, which need to be catered to individually.

Recent Amendments to the CIRP Regulations: Incorporating Project-wise CIRP

The IBBI recently amended the CIRP Regulations to inculcate project-wise CIRP into the IBC ecosystem. Through these amendments, the RP can now invite separate plans for separate projects of the real estate CD. The above-discussed judicial precedents were delivered before these amendments were made to the CIRP Regulation. Nonetheless, the factors and principles laid down in these case laws remain essential in deciphering the validity of project-wise CIRP in every case. Another potential issue that may arise due to this would be the lack of judicial review due to the decision to invite project-wise CIRP falling within the purview of commercial wisdom. It is crucial to note that, as per the recent amendments, the decision with regard to the invitation of separate resolution plans has to be necessarily approved by the CoC. This sanction of the CoC on the project-wise CIRP makes it a decision taken under the commercial wisdom of the CoC, which is largely immune from judicial review. This might give rise to challenges regarding the power of judicial bodies to examine the viability of project-wise CIRP in every case. Further, this would seem paradoxical because project-wise CIRP is a judicial creativity, and reducing the ambit of judicial review on this aspect is antithetical to its core.

Conclusion

Since the recent amendments to the CIRP Regulations, there has been no dispute with regard to the viability of project-wise CIRP to date. However, as highlighted earlier, a situation might arise where the commercial wisdom doctrine is evoked to oust the judicial review power of the tribunals/courts. In this light, the potential disputes with regard to the new provisions may be resolved in light of the afore-discussed decisions.