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Project-Wise CIRP: A Necessary Evil?

The author is Ayush Kumar, a fourth year student at Hidayatullah National Law University, Raipur.


The Hon’ble Supreme Court through its recent ruling in IndiaBulls Asset Reconstruction Company Limited V. Ram Kishore Arora and Ors, (IndiaBulls Case) has once again recognised the rights of homebuyers in real estate companies and detonated the concept of Project-wise Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code 2016 (IBC). Interestingly, this concept also finds mention in the changes proposed by the Ministry of Corporate Affairs (MCA) through a consultation paper on 18th January 2023. The Homebuyers were included under the paradigm of financial creditors under Section 5(8)(f) of IBC through IBC Amendment Act 2020. Project-wise insolvency deviates from normal CIRP in the sense that it pertains to initiating CIRP only for defaulted projects and complete rest of the projects in a time bound manner. This process is seen as a viable solution to the tussle between Homebuyers (as financial creditors) and other financial creditors. However, its efficiency and practicality are still debatable. The author seeks to analyse the practicability of the process and the roadblocks to its successful implementation in light of the aforementioned judgement and the consultation paper.


Delving into the Past Jurisprudence


The Indian Courts have time and again showcased the need to experiment with the IBC regime. The Supreme Court (SC) in Esser Steel v. Satish Kumar opined that the denial of right to experiment in the IBC regime would have serious consequences on the nation owing to the economic nature of the legislation. Although, the Indian Jurisprudence on project-wise CIRP is very limited still the courts have given divergent opinions.. The NCLAT in Flat Buyers Associations v. Umang Realtech introduced the concept of project-wise CIRP for the first time. The rationale given was of asset maximisation to balance the rights of different creditors. In Manish Kumar v. Union of India, the SC elaborated on the reasoning behind the adoption of project-wise CIRP and opined that allottees can have different worries related to different projects, and including all the projects in CIPR would be burdensome. However, the Chennai Bench of NCLT in the case of N Kumar v. M/S Tata Capital Housing Finance Limited diverged from the previous judgements and held that this concept is fact driven and cannot be applied generally. The tribunal also opined that this is beyond the horizons of IBC and thus, not maintainable.


Factual Matrix


Supertech Limited, the corporate debtor (CD) was engaged in real estate activities. CD received credit facilities from various banks for development of the project "Eco Village-II". Due to default in payment by CD, the account was declared as a Non-Performing Asset. Thus, an application under Section 7 of IBC was filed. . NCLT admitted this application and ordered for initiation of CIRP. One of the respondents, filed an appeal in NCLAT against the order. The tribunal stayed the constitution of the Committee of Creditors (COC) and limited the constitution of COC to "Eco Village-II" only whereas other projects were ordered to be continued as ongoing projects. It was directed that promoters of CD shall be at liberty to bear any expense as requested by IRP. Dissatisfied by this order, the financial creditors of CD filed an appeal in SC.


Analysis of the Judgement


The SC while ordering for project-wise CIRP highlighted the importance of accepting a solution which is beneficial to the parties and does not cause grave injustice. If the court deviates from the order of tribunal i.e., allows the constitution of COC for all projects, it is likely to cause hardship to the homebuyers as the ongoing projects would remain uncompleted.. Unlike other financial creditors, the homebuyers prefer possession/ownership of completed projects over financial recovery of infused funds. Owing to this, the court ordered for continuation of projects under the aegis of IRP and ex-management, its employees and workmen. The court also allowed the infusion of funds by the promoters of CD, which was to be treated as interim finance and the IRP was directed to maintain a total account to it. The apex court in the present judgement has tried to do complete justice to the parties by giving the most viable solution. While the judgment is beneficial in many ways, it fails to comply with section 29A of the IBC by involving the promoters in this process.


Project-Wise CIRP: A Balancing Act?


Since the advent of this concept, there have been numerous cases which discussed the intricacies of it in length. Taking a cue from the IndiaBulls Case, it can be inferred that this evolution is a viable solution to the problems faced by the homebuyers. The regular CIRP would fail in this context because there would be no possibility of gaining possession of projects. However, one cannot ignore the roadblocks in its successful implementation. In this section the author delves into the prospective positive and negative impacts of implementing this concept in totality.


Why is Project-Wise CIRP beneficial?

Courts in numerous cases have discussed the benefits of this concept in detail. Some of it is discussed below:


(a) Differential Treatment of Projects

Real Estate companies have a number of ongoing projects at a given point of time. It is seldom the case that the company defaults in all of them, so project-wise insolvency safeguards the other projects and helps in resolving the defaulted projects separately. Moreover, it also caters to the needs of multiple stakeholders such as the homebuyers because they would be able to take possession of their flats, apartments etc.


(b) Supervising Mechanism by IRP

There are separate accounts made for defaulted and un-defaulted projects and the receivables with regard to different projects are maintained accordingly. The IRP looks after these accounts and no account of CD is allowed to be operated without counter signature of IRP which reduces the risk of siphoning of funds.


Roadblocks for efficient Implementation of Project-Wise CIRP

While Project-Wise CIRP is seen as a relief for homebuyers, there are certain inherent problems and ill-effects that can’t be ignored. Some of the major lacunae in the concept are mentioned below:


(a) No Guaranteed Success

The concept doesn’t provide any surety of successful resolution, which essentially means that if the ongoing projects are not completed or if the promoter doesn’t adhere to the guidelines of project-wise CIRP, the IRP would resort to regular CIRP. Eventually, taking a lot more time than usual and defeating one of the important purposes of CIRP, i.e., time-bound resolution.


(b) Against Section 29A of IBC

The suspension of powers of existing directors and promoters is one of the important functions of CIRP incorporated by the way of Section 29A. The rationale behind this is that the resolution professional is given a clean slate to lessen the financial burden of CD and to enable the COC to work efficiently in making plans. Project-Wise insolvency gives a backdoor entry to the promoters for infusing funds as interim finance for ongoing projects, thereby violating Section 29A of IBC.


(c) Discriminatory against other Financial Creditors

The SC has time and again identified allottees as a special category of financial creditors. The same is also provided under IBC Amendment Act 2020, which stipulates that at least one hundred or 10 percent of allottees are required to initiate CIRP. However, it is pertinent to note that formulating project-wise CIRP on the assumption that allottees are ill-informed about the financial viability of plans is highly out of place.


Conclusion: Way Forward and Learning the UK lesson


IBC is an economic legislation enacted with the intent to maximize the assets of CD. The same could be seen in the judgements of SC and NCLAT which advocate for project-wise CIRP. Although this new experiment seems to put a halt to the long felt worries of Homebuyers, it is advised to not observe it in vacuum and take into consideration the possible ill-effects. The author aims to provide some possible suggestions for the inherent problems. Firstly, legislative recognition of this concept would resolve a lot of difficulties faced by courts like making separate rules for each case. Currently, the court orders for project-wise CIRP after assessing the facts of the case. If the legislation mandates project-wise CIRP on fulfilment of certain conditions, timely resolution would always be on the cards, which is one of the prime objectives of IBC. Secondly, mandating separate accounts for projects would ease the CIRP owing to the susceptibility of real estate insolvency. A separate account would make it easy for the CD to carry on with the ongoing projects without having to spend time on making financial accommodations doing so after initiation for project-wise CIRP.


The Corporate Governance and Insolvency Act 2020 (CIAG) enacted by UK during the COVID-19 pandemic saw the addition of a new free-standing moratorium process which gives a breather to the companies from the actions of creditors. This gives the distressed companies a ‘payment holiday’ on selective debts to prevent the company from legal sanctions while the moratorium is in place. The moratorium procedure is a ‘debtor-in-possession’ process, which means that the director still remains in control of the management expect that a monitor (a licensed insolvency practitioner who acts as an officer of the court) keeps an eye on the functioning of the company so that resolution still remains a viable possibility. The approach taken by the UK could be seen as a solution for the problem faced in the Indian Jurisdiction. The primary concern of homebuyers is possession of the invested projects. This problem could well be resolved by putting such a moratorium which enables the company to go on with its functioning i.e., putting a free-standing moratorium which not only safeguards the assets of CD but also enables him to be in control of the management (Except for a supervisor) and complete the ongoing projects. Moreover, this would also ensure that timely resolution is always on the cards because parties would not have to resort to unnecessary litigation.

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