I.           Introduction

On August 21, 2023, a committee constituted by the Ministry of Housing and Urban Affairs published its report (“Committee Report”) to examine stalled real estate projects and recommended ways to complete them^[1]. While the Committee Report’s recommendation to utilise resolution in terms of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as a “last resort” has made the headlines, the said Committee Report has dealt with multiple unanswered and difficult questions that have been thrown by the insolvency processes of real estate companies in India and tried to provide answers. This paper sets out the issues that continue to subsist in insolvency resolution of real estate companies and determine if the attempt to make IBC a panacea tool to resolve distress in real estate companies is worthy of an attempt or should that panacea be looked for elsewhere.

II.           The story thus far

As of June 2023, as per the Insolvency and Bankruptcy Board of India Quarterly Newsletter^[2], a total of 6815 companies have been admitted into IBC, of which 2073 companies have their CIRPs ongoing. Of the 4742 CIRPs that have concluded, 720 have resulted in successful resolution by approval of resolution plans culminating a successful resolution percentage of 15.18% with a recovery percentage of 68% against total claims of creditors admitted. Meanwhile, a total of 392 real estate companies have been admitted into IBC, of which 188 companies have their CIRPs ongoing. Of the 204 CIRPs have concluded, merely 22 have resulted in successful resolution by approval plans culminating in a meagre successful resolution percentage of 10.78%.

While the rate of resolution under IBC has been low, the rate of resolution of real estate companies under IBC has been abysmal. Multiple real estate developers undergoing insolvency under the IBC including Supertech Limited, Housing Development and Infrastructure Limited, Amrapalli Infracon, Jaypee Infratech have not been resolved despite several attempts to resolve them. These failures indicate a more systemic issue with the resolution of a real estate asset and the contours of the IBC.

III.           Real Estate Sector under IBC

Typically, a corporate debtor runs into distress when it is unable to service its debt obligations. In such a scenario, IBC is used as a tool to re-work the debt obligations that would make the said corporate debtor continue its operations without being saddled with unserviceable debt obligations. Unlike a typical corporate debtor, the distress in real estate companies arise on account of non-performance of obligations in timely delivery of real estate projects to homebuyers. Homebuyers have provided either part or whole of the monies required for purchase of the projects which are yet to be completed. Unlike operating companies which have cash flows to continue operations, real estate projects lack funds to complete the stalled projects.

This fundamental mismatch in objectives of resolution of a distressed real estate company as compared to a typical corporate debtor has resulted in multiple issues cropping up in the insolvency resolution of such companies under IBC. These issues include – (i) treatment of homebuyers as stakeholders with a say; (ii) stalled projects with various levels of completion housed within the same developer entity; (iii) unavailability of additional funding by incoming buyers to make projects profitable; (iv) inability of stakeholders such as homebuyers (who themselves have home loans) to undertake a haircut unlike financial institutions; and (v) reliance on the promoter to deliver the projects. As of now, these issues are being patched up with ad-hoc measures such as reverse CIRP^[3], project-wise resolution^[4] and transfer of possession of allotted units in projects to homebuyers during the corporate insolvency resolution process (“CIRP”)^[5]. These measures have evolved through judicial precedents as certain cases were impossible to be resolved in the manner in which insolvency resolution was originally contemplated under IBC.

In fact, the fundamental differences between a typical resolution of a corporate debtor as compared to a real estate company has resulted in multiple trips to the Hon’ble Supreme Court wherein treatment of homebuyers as financial creditors^[6], treatment of homebuyers as dissenting financial creditors^[7], liquidation value payable to homebuyers as dissenting financial creditors^[8] and the conflict between IBC and the Real Estate Regulatory Authority (“RERA”) have been covered^[9]. The key features and advantages that IBC provides such as a moratorium, clean slate from past liabilities, creditor-controlled resolution, cross-class cramdown, etc. are aimed at debt resolution of a distressed corporate debtor.^[10] However, in case of a real estate company, the above benefits are not attractive to its most important stakeholder being the homebuyer.

IV.           Resolution of multiple projects of the same developer entity

In order to make the IBC work for real estate sectors, novel suggestions such as project wise resolution have been mooted including by the Ministry of Corporate Affairs in its discussion paper dated January 18, 2023 on proposed changes to the IBC^[11] (“MCA Paper”). However, given that the IBC framework has been evolved keeping the resolution of a corporate entity as its main objective, project wise resolution would entail substantial amendments to be made to the basic framework of IBC.

Multiple real estate developers undergoing insolvency have housed multiple projects developed under one developer entity. The committee of creditors of these entities would constitute several homebuyers for projects at multiple stages of conclusions as well as lenders that have lent either to a particular project or to the entire group clubbed together as part of the same committee to resolve the entity as a whole. The creditors for these entities are either owed by the entire corporate entity (for e.g., tax dues) or have rights over only particular assets/projects (for e.g., project lenders/homebuyers). In order to avoid the difficulties of clash of interest that the project wise resolution has been suggested in the MCA Paper.

Unless real estate projects in India are housed in special purpose vehicles (“SPVs”) for each project, IBC may not be an attractive solution. SPVs for real estate project development have several structuring as well as tax considerations which may not always be solely influenced with the objective of a successful resolution under IBC.

There is no unique case that has been made out in favour of real estate projects to warrant a special resolution framework to be incorporated within the provisions of the IBC. Entertaining a specific demand for a sector could open up the pandora’s box of specific demands being made for other sectors which are under stress as well.

The Committee Report contemplates multiple funds to provide last mile funding to distressed real estate projects such as the SWAMIH fund and rehabilitation packages to be worked out by state government for salvaging real estate projects. Given the complications currently being seen with entities that have multiple projects, the proposal for rehabilitation packages and last mile funding could be attractive only in cases where the real estate projects are ringfenced within an SPV. If the real estate sector is indeed looking towards SPVs as the model for real estate development, amendments to the IBC to facilitate project wise resolution will very quickly become redundant.

An administrator appointed in terms of RERA for resolving distressed projects is one of the suggestions that has been mooted. The answer may very well lay in a state supported administrator taking control of real estate projects to deliver homes to the homebuyers. However, it would not be incorrect to conclude that having multiple real estate projects under one developer entity being resolved under IBC would be as good as sentencing such projects to the death row.

Given the reservations in proposing a separate resolution framework for resolving stress in real estate  entities, we could be better off by making minor tweaks to the existing framework. This includes allowing the committee of creditors (“CoC”) to sell projects as a whole to interested buyers instead of the corporate debtor as a whole. Real estate insolvencies could also be assisted with CoC having the power to sell completed units to its allottees to make funds available for the developer entity. These tweaks are in line with insolvency resolution processes undertaken globally and may be made available to all sectors instead of only real estate entities. Taking baby steps towards making the IBC framework work for the real estate sector while at the same time addressing the stress through RERA appointed administrators could be a better fix than creation of a separate resolution framework within the four walls of the IBC.

V.           Conclusion:

The real estate sector is one of India’s largest growth sectors. As India seeks to set itself on the path of becoming a $5 trillion economy by 2027^[12], the real estate sector will stand as one of the pillars on which this growth is going to depend upon. While it is necessary to have a strong resolution framework for this sector in order to ensure that large scale real estate projects are not left stalled and rotting for years without any hope of resolution, it may not necessarily be the best solution to fit that framework within the contours of IBC. Such a proposal could very well backfire given the struggles that have already been faced by real estate entities that were admitted into insolvency under the IBC. Looking at an administrator driven approach supported by the respective state real estate regulatory authorities while making minor tweaks to the existing framework under IBC may be a worthy start at addressing the issue at hand.

Footnotes:

[1] Report of the Committee to examine the issues related to Legacy Stalled Real Estate Projects, Ministry of Housing and Urban Affairs, August 21, 2023.

[2] Insolvency and Bankruptcy Board of India Quarterly Newsletter, April-June 2023.

[3] Flat Buyers Association v. Umang Realtech, 2020 SCC OnLine NCLAT 1199.

[4] Ram Kishor Arora v. Union Bank of India, 2022 SCC OnLine NCLAT 239.

[5] Asset Reconstruction Company (India) Ltd. v. Dagcon (India) (P.) Ltd., [2022] 145 taxmann.com 175 (SC).

[6] Chitra Sharma v. Union of India, Writ Petition (Civil) No. 744 OF 2017.

[7] Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd., (2022) 1 SCC 401.

[8] Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd., (2022) 1 SCC 401.

[9] Pioneer Urban Land and Infrastructure Limited v. Union of India, (2019) 8 SCC 416.

[10] The Report of the Bankruptcy Law Reforms Committee Volume 1: Rationale and Design, November 04, 2015.

[11] “Invitation of comments from the public on changes being considered to the Insolvency and Bankruptcy Code, 2016.” Ministry of Corporate Affairs, January 18, 2023.

[12] “India to become USD 5 trillion economy, third-largest by 2027: RBI DG Patra”, Economic Times, September 21, 2023. Available at: India to become USD 5 trillion economy, third-largest by 2027: RBI DG Patra – The Economic Times (indiatimes.com)