Sep 24, 2024Who Gets to Call the Shots: Constituting the Committee of Creditors in Project-Wise Corporate Insolvency in India
Introduction
The Insolvency & Bankruptcy Code, 2016 (IBC/Code) was enacted as a one-stop solution to all issues relating to insolvency and bankruptcy in India. While the legislature and the judiciary have made tremendous progress in amending and constructing the Code, respectively, to achieve a pragmatic and solution-based approach to various sectors, like always there is more to be done to achieve the essence of the Code. The agonistic approach under the Code requires reconsideration since the “one-size fits all” solution may not be a solution at all in a few scenarios. One such case scenario is the Corporate Insolvency Resolution Process (CIRP) of the corporate debtors involved in the real estate sector.
Project-wise CIRP: the Good with the Bad
When one thinks of a CIRP in respect of a Corporate Debtor (CD) who is a promoter of a real estate project, the following situations may unfold:
- the default pertains to one or more of its real estate projects, in which case the Adjudicating Authority (AA) admits the CD into a CIRP but restricts the CIRP provisions with respect to such real estate projects that have defaulted;
- the default of the CD (irrespective of whether the default is arising from one or more projects) results in the AA admitting the CD into a CIRP, followed by the comprehensive Committee of Creditors (CoC) of the CD thereafter taking a decision to initiate a project-wise insolvency; and
- in cases where certain projects of the defaulting CD have unsold inventory which in turn can realise value beyond the scope of the CIRP, in terms of both repayment to lenders and the completion of homes for the existing allotees, the AA may consider segregating such projects from a CIRP altogether.
Proposed Changes: a Significant Step or a Missed Opportunity
After the amendment of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (Regulations) in February 2024, the second point above finds a mention in Regulation 36A. While this amendment clearly indicates that the legislature is mindful of the specific issues surrounding the real estate sector, it is yet to commit to the specific mode and manner in which it can be achieved. As an example, while Regulation 36A of the Regulations provides for the project-wise insolvency of a project or group of projects of the CD, it is silent on the constitution of a CoC in such a situation.
If a CD has a comprehensive CoC encompassing all the stakeholders of all the projects, it will be almost impossible for the comprehensive CoC to be in agreement for a project-wise insolvency. Each project will have its own set of allotees, sometimes specific lenders to a particular project, and occasionally may also have unsold inventory in a particular project that can optimise value, thereby attracting prospective resolution applicants. If a comprehensive CoC is formed, the allottees and lenders to projects that do not have unsold inventory may attempt to thwart a project-wise insolvency since carving out of a value-intrinsic project may result in attracting prospective resolution applicants for that project alone with no interest for the remaining projects that have no unsold inventory.
“If a CD has a comprehensive CoC encompassing all the stakeholders of all the projects, it will be almost impossible for the comprehensive CoC to be in agreement for a project-wise insolvency.”
Therefore, for a logical outcome in a project-wise insolvency, it may be crucial to permit the stakeholders concerned/CoC of a particular project alone and not the comprehensive CoC to take the decision on project-wise insolvency, including the constitution of the CoC in relation to a particular project. In this manner, the projects that can be saved can be carved out and resolved within favourable timelines whilst ensuring that the projects that do not have a value proposition do not derail projects that can be saved.
The above thought process also finds mention in the decision of the Supreme Court in Indiabulls Asset Reconstruction Co. v Ram Kishore Arora & Ors., 2023 SCC Online 612. Interestingly, this decision of the Supreme Court precedes the amendment to Regulation 36A, which was introduced in February 2024. One way to harmonise the Supreme Court decision and the later amendment of February 2024 would be to read the judgment in consonance with Regulation 36A as it stood on that date.
“The projects that can be saved can be carved out and resolved within favourable timelines.”
With regard to the first and third points outlined above, it is essential to remember that the essence of the Code is to seek resolution in a time-bound manner to maximise the value of assets, to promote entrepreneurship and the availability of credit, and to balance the interests of all stakeholders – all of which is likely to be achieved if the legislature and the AA were to consider keeping healthy projects out of the basket of defaulting projects or were open to segregating a viable project wherein third parties have expressed an interest to take over, build, repay and hand over a particular real estate project.
In the situation mentioned in the third point above, the AA will be required to be mindful of the fact that, other than the relevant stakeholders to a project sought to be segregated (ie, homebuyers, lenders and the third party willing to take over such a project), no other interference ought to be entertained, including and especially from the erstwhile management of the CD and/or its promoters.
Conclusion – Amendments, Precedents or Both?
Therefore, in certain aspects, the judiciary is attempting to take a pragmatic and commercial approach by disregarding the “one-size fits all” formula but such attempts mostly do not meet with success because the Code itself is yet to catch up. However, there is hope that it will just be a matter of time before a particular case sets down the precedent for plugging the loopholes that have been discussed above, if the legislature does not beat the judiciary to it!