[Aayush and Aditya are students at Gujarat National Law University.]
The recent decision of the National Company Law Appellate Tribunal (NCLAT) in the matter of Ram Kishor Arora v. Union Bank of India and Another, concerning the bankruptcy of Supertech Limited (Supertech) has once again erupted the issue of inclusion of reverse corporate insolvency resolution process (CIRP) for the real-estate companies under the Insolvency and Bankruptcy Code 2016 (IBC). As provided under IBC, the object of CIRP is to maximize the assets available; however, in real-estate cases, to protect the interest of home-buyers, only the particular project of a builder is subject to insolvency process by the adjudicating authority, and the rest is kept outside the scope of the CIRP, the same being regarded as reverse CIRP.
Recently, Supertech was declared bankrupt by the National Company Law Tribunal on the application filed by the Union Bank of India for a default of INR 432 crores. However, NCLAT granted some relief to Supertech and favored project-wise insolvency, i.e., the committee of creditors would be constituted only for the disputed project, Ecovillage II, located at Greater Noida, and would be under the insolvency process, while the remaining projects would be constructed by the promoter as a going concern, in the supervision of interim resolution professional.
This article aims to elucidate the provisions pertaining to this concept under IBC and the repercussions of the application of this process in light of the judicial pronouncements and legislative intent behind Section 29A of IBC.
Reverse CIRP: A Peculiar Concept vis-à-vis IBC Regime
IBC regime - a legislative intent contradictory to reverse CIRP
The concept of reverse CIRP does not find its place in the legislative text; on the contrary, in some places, it harms the spirit of IBC. The IBC clearly provides for the insolvency of the corporate debtor; there is no concept of project insolvency as such. Apart from that, Section 14 of IBC provides for the moratorium on activities of the corporate debtor, while reverse CIRP allows the continuation of other projects.
With the amendment to IBC in 2019, ‘home buyers’ are included in the category of financial creditors, and the amount raised from allottees under a real estate project is financial debt under Section 5(8)(f) of IBC. As such, the insolvency cases against the real estate developers have increased, although a limit of 10% or 100 members to file Section 7 applications against the builder prevents the opening of floodgates for such applications.
In the case of CIRP, as per IBC, when the moratorium period operates, the activities including construction by the builder are halted. This is disadvantageous for both the builders as well as home-buyers. The objective of home-buyers is to get their dream home, and their focus is not on effectuating the bankruptcy of the builder. Therefore, the concept of reverse CIRP was evolved by NCLAT to save the business.
Judicial pronouncement contradictory to legislative intent
Since the inception of IBC, the intention of the tribunal has been to make rulings within the scheme of IBC. The scheme of IBC has rightly been summed up in the Swiss Ribbons v. Union of India, as an effort to maximize the value of the corporate debtor’s assets through restructuring while allowing it to operate successfully as a going concern. However, the Supreme Court in the Essar Steel v. Satish Kumar (Essar Steel) noted that IBC being an economic legislation, the denial of the right to experiment is fraught with serious consequences to the nation.
The NCLAT, relying on the observation made in the Essar Steel case, did an experiment in Flat Buyers Association v. Umang Realtech Private Limited to introduce the concept of reverse CIRP. This judgment has been considered contradictory to the legislative intent as through this, it is being suggested that the resolution plan reach finality without the approval of the third-party resolution plans, which is contradictory to Section 29A of IBC. While the judgment was a welcoming step for the prosperity of the real estate business and the rights of the allottees, it is contradictory to the scheme that was contentious.
Supertech Case – An Experiment that Needs to be Halted?
Two years after the evolution of this concept, the legality and well as the practicality of this again came up in Supertech case. Taking a practical approach, this evolution is a better solution for the insolvency of real estate developers and builders. The regular CIRP would not work efficiently because allottees as financial creditors will not be able to appreciate the resolution plans put before them. In addition to this, there can be no possibility of hair cut in case of claims of allottees; hence regular CIRP may not work in such situation. If the builder goes into liquidation, the hope of getting possession of every project of the builder will go in vain.
However, a disadvantageous situation may occur in case of project-wise insolvency. If the developer knows that insolvency proceedings will not have an impact on other projects, it may have a reckless approach towards a particular project and may try to siphon off funds towards the other projects from the distressed project.
While focusing on the reasoning provided by the court in the Supertech case, stress has been put on the protection of the rights of the home-buyers. While the experiment by the court to ensure business efficacy is considered a good move by the industrialist, the same shall not go beyond the legislative intent of the makers of the IBC. In the year 2018, Section 29A was added in the IBC with the intention of strengthening corporate governance under the IBC by restricting the participation of the promoters in the corporate restructuring process, as the same would restrict the backdoor entry of promoters. However, the Supertech case allowed one of the promoters to act as a lender to assist the corporate debtor in completing the construction of flats outside the CIRP. Here, the court’s act of putting more prominence on business efficacy and the right of the home-buyers over legislative intent in the name of experiment could turn into a disastrous move.
Conclusion
The rationale behind the concept of reverse CIRP was that although the developer of various projects may be the same, the financial creditors and the operational creditors would be different. Since the other projects have no strings attached to the distressed project, there is no need for all the projects to be involved in CIRP to maximize assets. However, it is very much important to weigh both sides in a given case before arriving at a conclusion, and the same is with reverse CIRP. The rights and welfare of builders, as well as home-buyers, must be considered, and that too within the permissible limits of the legislative text.
The implausible reasoning of the court to allow the reverse CIRP in the real-estate cases is erroneous on the ground that in case the promoter failed to adhere to the guidelines provided under the reverser CIRP, the original process would be initiated, and the same would waste the time of the tribunal. Moreover, the power of the judiciary is to decide the case under the scheme of the legislation. This experiment should be given a second thought by the tribunals to bring the same in line with the scheme of the IBC.