Overview and Applicability of Insolvency and Bankruptcy Code, 2016 to Real Estate Projects

The amendment to the Insolvency and Bankruptcy Code, 2016, (“IBC”) dated March 13, 2020, deemed to be in effect from December 28, 2019 (“IBC Amendment”), provides relief to homebuyers by considering homebuyers as ‘financial creditors’ and allowing them to initiate the corporate insolvency resolution process (“CIRP”) under the IBC against the developer. This article analyses the remedies available to homebuyers against the developers of a real estate project in context of the aforesaid IBC Amendment and vis-à-vis the Real Estate (Regulation and Development Act), 2016.

Precedence of proceedings under RERA and the IBC

While the homebuyers may initiate CIRP against the developers, in view of the IBC Amendment, however, CIRP may be initiated only if the application is filed jointly by not less than: (a) 100 (one hundred); or (b) 10% (ten percent) of the total number, of such allottees under the same real estate project, whichever is less.

Further, when any proceedings are initiated and subsequently admitted under the IBC, then the adjudication process envisaged under Real Estate (Regulation and Development Act), 2016 (“RERA”) may be done away with. However, the application as filed by the allottee before the National Company Law Tribunal (“Tribunal”) under the IBC (“Application”) should meet the eligibility criteria as laid down under the IBC and the allottee must be able to prove that the developer has defaulted[1]. The allottees should initially make out an application demonstrating a “default” which shall include amounts due and payable to the allottee.

Thereafter, the developer will be provided with a reasonable opportunity to counter the application filed against it. The developer as corporate debtor could oppose such an application filed by the homebuyer before the Tribunal inter alia on following grounds:

• The allottee is himself a defaulter, not being entitled to any relief including payment of compensation and/or refund and therefore, to cause a dismissal of the said application.
• The insolvency resolution process has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency.
• The allottee who has knocked at the doors of the Tribunal is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment.
• In a real estate market which is failing, the allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/apartment under RERA, but wants to exit from the project, by way of using this as a coercive measure and recovering monies already paid.

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tva Legal, Hyderabad has an experienced team of lawyers who, amongst other services, advise on transactions covering multiple practice areas such as insolvency and bankruptcy[TL1] , real estate transactions including RERA compliance, title due diligence[TL2] , and  real estate legal advice.

Upon hearing the parties, the Tribunal will either admit or reject the application. It is pertinent to note that the proceedings that are initiated by the homebuyers under the IBC must be restricted to the specific project under which the allottees/homebuyers had originally invested to purchase.

Opinion of the Courts and Tribunal

The Honourable Supreme Court in its landmark judgement in Pioneer Urban Land and Infrastructure Limited and Another vs. Union of India and others,[2] has upheld the constitutional validity of the amendment in the IBC of including homebuyers under the definition of ‘financial creditor’. This decision also clarified that the remedy available with homebuyers under RERA is in addition to and not in derogation of other laws (that is, remedies under RERA to allottees were intended to be additional and not exclusive remedies). The apex court further observed that the provisions of the RERA and the IBC must be held to co-exist and in the event of a conflict, provisions of the IBC shall prevail over the provisions of the RERA.

In another significant decision of National Company Law Appellate Tribunal (“NCLAT”) in Flat Buyers Association Winter Hills – 77, Gurgaon vs. Umang Realtech Private Limited through IRP & Others,[3] it was held that if the allottees (financial creditors) or financial institutions/banks (other financial creditors) or operational creditors of one project initiated CIRP against the corporate debtor (real estate company), the CIRP should be confined to that particular project, and it cannot affect any other projects of the same real estate company (corporate debtor) in other places where separate plans are approved by different authorities. The reasoning so put forth by the NCLAT is that: (a) the project land and its owner may be different; (b) the allottees (financial creditors), financial institutions, financial creditors, operational creditors are different for separate projects; and (c) the assets of the corporate debtor of that particular project should be maximized for balancing the creditors such as allottees, financial institutions and operational creditors of that particular project.

Restrictions under the IBC Ordinance 2020

The latest amendments dated June 5, 2020, to the IBC, promulgated vide the Insolvency and Bankruptcy Code Ordinance, 2020 (“Ordinance 2020”), provide restrictions on initiating any fresh proceedings against persons impacted because of COVID-19 for at least 6 (six) months that may be extended up to 1 (one) year.

The changes were made by incorporating Section 10A in the IBC, which provides that no application shall be filed for initiating CIRP of a corporate debtor, under Sections 7, 9 and 10, for any default arising on or after March 25, 2020 (“Defaulting Period”), for a period of 6 (six) months or such further period, not exceeding 1 (one) year from such date, as may be notified in this behalf. However, any defaults that occurred before the Defaulting Period can still be resolved under the IBC and proceedings can be initiated against such defaulters for reasons not related to COVID-19.

The Path Ahead

With substantial restrictions imposed by the legislature in raising the pecuniary limit, or inserting Section 10A in the IBC, homebuyers are left with options to approach RERA and the Consumer Forums alternatively, even for the defaults where the proceedings under the IBC cannot be initiated as per the Insolvency and Bankruptcy Code Ordinance, 2020. Further, the proceeding under the IBC will be a viable remedy for recovering the investment when the developer/ corporate debtor is not in a sound financial position and the corporate debtor is running short of finances.

As held by the Tribunal in Dhirendra Nath and Others vs. JC World Hospitality Private Limited,[4] RERA is an Act in force to: (a) protect the interest and to regulate the working and functioning of the real estate sector; (b) ensure that the buyers are not cheated by the developers; and (c) ensure accountability of developers. Whereas the purpose of the IBC is to either stabilise the companies which are not financially sound by changing their management through CIRP or to liquidate the company if the aforesaid is not possible depending upon the interest gathered by the corporate debtor/developer in the market. Consequently, the powers granted to the Tribunal under RERA and the IBC are also separate and distinct from each other.

Conclusion

In view of the above analysis, it would be prudent to state that while the IBC does give an opportunity to homebuyers/allottees to be treated as financial creditors, a remedy before RERA or consumer courts could be resorted to in case the homebuyer is unable to meet the eligibility criteria so imposed under Ordinance 2020 or the IBC Amendment.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] The Central Government vide a notification dated March 24, 2020 increased the threshold limit to Rs. 1,00,00,000/- (Rupees One Crore only) as the minimum amount of default for the purposes of the IBC.

[2] (2019) SCC Online SC 1005

[3] Company Appeal (AT) (Insolvency) No. 926 of 2019

[4] IB/256/ND/2019