The Indian insolvency regime took a concrete shape only in the year 2016 when the Insolvency and Bankruptcy Code, 2016 (IBC/ Code) was enacted. However, the homebuyers and allottees of various properties were left in a very sui generis position when it was revealed that they did not have much of a say in the initiation of insolvency proceedings against the real estate companies. The present paper attempts to encapsulate tremendous developments and shed light on the pioneering work done by the judiciary and the legislature to protect the interest of the homebuyers in the real estate firms facing insolvency. The paper is also an attempt towards discussing the pre-packaged insolvency resolution process as an alternative to the traditional corporate insolvency resolution process for the real estate space.
TheCode was introduced at a time when the Indian economic system was stuck with defaults in debt piling up and the debt recovery laws were failing miserably. The Indian insolvency landscape was rather ineffective, time-consuming, fragmented, and scattered across multiple enactments leading to various jurisdictional issues. The former enactments which were enacted in India failed to address the problem of high erosion of asset value flowing from an unsuccessful and delayed winding up of the Company. The Code was introduced with the purpose of providing a systematic resolution framework for the corporate entities in India and further consequent death of corporate entities through winding-up proceedings. The introduction of the Code can be seen as beneficial legislation with the predominant aim to protect and preserve a commercially failing entity, to give it a new life through the insolvency resolution process, and put an otherwise ailing entity back on its feet.
In a country where it is common to find pre-colonial laws, which are more than a century old, the Code in a short stint of about half a decade has taken away the light from mere debt recovery laws to focus it on the insolvency resolutions and revival of corporate entities. The Code is envisioned as positive legislation that rehabilitates corporate entities, rather than acting as a recovery medium for creditors. Thesame view has been taken by the Supreme Court which it has observed that the principal objective of the Code is to safeguard the resurrection and continuity of the corporate debtor by preserving it from corporate death through liquidation. The purpose of the Code is to protect and preserve the value of the assets of the corporate debtor and to sustain the corporate debtor’s business as a going concern till the insolvency resolution process is complete.
It is critical to emphasize that the policy framework of the State must promote corporations’ freedom of (i) entering the market, (ii) conducting business, and (iii) completely stopping the business operations. Although the first two freedoms have long been acknowledged in India’s legislative environment, the freedom to depart received a real form with the passage of the Code, which establishes a process for troubled firms to obtain reliable way of exiting the market in a timely way. The Code reformed India’s legislative framework for business distress resolution, replacing it with a predictable, market-driven, incentive-based, and time-bound approach. It corrects market defects and eliminates information asymmetries, so empowering businesses to exercise their “right to depart”.
Guiding Principles under the IBC
The IBC was created to serve as a vital pillar in India’s transition to a mature market economy. It responds to the rising need for a comprehensive law that is successful at resolving debtor insolvency, maximizing the creditors’ asset pool, and facilitating the liquidation of unsustainable entities much needed in the real estate sector.The Code’s original aim is resolution. The second purpose is to optimize the worth of the corporate debtor’s assets, while the third purpose is to foster entrepreneurship, and credit availability all while balancing the interests of the key stakeholders. The sequence of these goals is inviolable. The Code through the following guiding principles have established an improved sense of fiscal and financial discipline:
- Time is of the essence
The Hon’ble Apex Court through the ruling in Kridhan Infrastructure reconciled two diametrically opposite concepts that arise during insolvency resolution proceedings. On one hand, it is a well-established idea that liquidation should be the last option. On the other hand, an infinite delay in resolving corporate insolvency is antithetical to the Code’s intended objective. The Supreme Court decided that it is vital to resolve the corporate debtor and that the liquidation of a debtor must be the very last option in the interest of the people. The Corporate Insolvency Resolution Process (CIRP) could not be permitted to drift towards an infinite delay since this would negate the law’s basic purpose.
- Insolvency resolution should aim at keeping the Corporate Debtor as a going concern
Following the implementation of the IBC, the issue of selling a Corporate Debtor as a going concern was first discussed in the case ofGujarat NRE Coke in which the National Company Law Tribunal (NCLT), Kolkata held that thecorporate debtor should continue as a going concern during its sale to preserve the jobs of 1178 personnel.
- Liquidation is the last resort
The Supreme Court stated inA. Navinchandra that the Code is unique legislation dealing with the resuscitation of failing businesses and is only used when all other means of revival fail. The Apex Court adopted a similar stance in the case ofKaledonia Jute Fibres, wherein it was held that allowing a company court to continue with the winding-up proceedings while the NCLT considered the petition brought before it underSection 7 of the IBC would defeat the fundamental purpose of the IBC.
PPIRP Model: The Balancing Regime
The insolvency resolution landscape, at the present juncture, can be described as a reliable and mature one providing a conducive environment for corporate insolvency resolution. The Code has very well delineated the part of all key stakeholders such as the corporate debtor, its creditors, and the insolvency professionals. The framers of the Code always envisaged the scope of experimentation within the Code with time. The amendment in the Code from time to time, reflects the resolute intent of the Parliament to make the system more productive in resolving corporate insolvencies. The introduction of thePre-Packaged Insolvency Resolution Process (PPIRP) under Chapter III-A of the Code has been brought to effect with the same intent.
The PPIRP acts as a marriage between informal settlements and formal court proceedings. The PPIRP is essential, a flexible model having both an informal and a formal element to revive the corporate debtor.
A Pre-Pack typically commences with discussions between the debtor and its creditors who attempt to arrive at a settlement which is akin to a resolution plan that may be put through a round of selection process. If the resolution plan of the corporate applicant stands out, it is allowed by the adjudicating authority in brief formal proceedings. In PPIRP unlike other modes of resolving insolvencies, a major proportion of the revival of the debtor occur prior to the formal statutory proceedings. Given that the resolution plan is predetermined and put through a selection process the PPIRP has a stricter timeline for completion compared to other modes such as CIRP.
This process is required to be completed in a maximum of 120 days which makes it a much quicker process than the CIRP which ranges from 180 days to a maximum of 330 days. The corporate debtor undergoing a PPIRP, unlike the CIRP, has the option to proceed for a settlement by proposing what is called abase resolution plan. That base resolution plan thereafter undergoes an elaborate competitive selection procedure along with other resolution plans. If the committee of creditors finds the base resolution plan as the most lucrative one, the same is approved and thereafter implemented pursuant to the assent of the NCLT.
The Company Control: A Divine Right?
Over time, many jurisdictions have come up with various mechanisms to deal with the asset pool of the debtor in their attempts for resolving the debtor through a CIRP. Broadly put, such mechanisms fall under two heads: (i) firstly, the debtor-in-possession model, and (ii) secondly, the creditor-in-control model.
The proponents of thedebtor-in-possession model believe that it provides a greater chance of insolvency resolution, given the familiarity and comfort of the debtor with its own organization. However, this perceived advantage comes into play only when the debtor conducts his business honestly and gains back the trust of its creditors.
The alternative to the debtor-in-possession model is thecreditor-in-control model. In the creditor-in-control model, the management of the debtor is completely displaced by a resolution professional who is guided by a committee of creditors to take charge of the business operations. The creditor-in-control model seeks to rely upon the business sense of the creditors to clean up the financial mess created by the debtor. However, the major concern under this model involves the handover failing entity in the hands of new management that is totally unacquainted with the affairs of the company at a critical juncture.
CIRP follows the creditor in control model of insolvency resolution. The rationale behind the creditor in control model is to ensure that the corporate debtor has a better chance of succeeding at the hands of the creditors while attempting to move out of insolvency. Given that the control of the debtor company is taken away from its management and put into the hands of the creditor, this scheme of operation relies strongly on the business sense and commercial wisdom of the creditors.
A committee of creditors is formed in the extension of the concept of the creditor-in-control model. InSwiss Ribbons Pvt. Ltd. the Supreme Court held that the Code was a piece of beneficial legislation which is aimed at the revival of corporate debtors. The supremacy of the committee of creditors during the CIRP proceedings flows from the principle that the control of a company is not a divine right and that when a business fails to repay its debt, management of the business should be transferred to its creditors.
The rationale behind giving supremacy to the committee of creditors lies in the fact that the Code was introduced at a time when India was piling up itsNon-Performing Assets (NPA) and the debtors would notoriously avoid the repayment of dues. When the debt recovery laws in India failed to address the situation, the provisions of the Code rested the management of the defaulting entity with the creditors, post its introduction.
As the jurisprudential landscape of the bankruptcy law has evolved over time, the PPIRP model has been introduced by the legislators as a healthy mix of both the creditor in control and debtor in possession model. Chapter III-A of the Code provides that in usual circumstances, the management of the debtor shall remain unaffected. However, there are certain conditions based on which the management of the corporate debtor may vest in the creditors. The debtor in possession model lets the control of the debtor remain with either the Board of Directors where the debtor is a company or the partners or if the debtor is aLimited Liability Partnerships (LLP).
The Real Estate Sector and the Code
The real estate sector has been in a distressed space, even before the COVID -19 pandemic took over the world. The Code in its original form found it challenging to serve the exigencies of the particular sector. The Indian real estate companies often operate without the say of the allottees regardless of them being vital stakeholders. However, the Code is one such legislation that has been proactive in responding to the needs of the industry. The Code since its inception has not only widened the ambit of the law but has also strengthened it further. More often than not, the judiciary has scrutinized various provisions of the Code through the lens of theaims and objects of the Code provided in its preamble.
The controversy regarding the rights of homebuyers in insolvency proceedings was first highlighted inJune 2017, when the Reserve Bank of India identified a list of the top 12 defaulters in the country, including one of the premier real estate company, viz. Jaypee Infratech Limited, that weredeclared to be in default of an amount approximately of INR 8000 crores to its lenders (the dirty dozen).
In thecase of Jaypee Infratech Ltd. (Jaypee), IDBI Bank Limited initiated an action against Jaypee which was admitted by National Company Law Tribunal, Allahabad Bench. Interestingly this petition was not opposed by Jaypee and its management. Consequently, the petition was admitted by NCLT, and an order for the moratorium was issued. The importance of homebuyers under a CIRP came to light when the order of moratorium created a cacophony amongst the homebuyers of Jaypee. The homebuyers approached the Supreme Court in a batch of writ petitions, seeking protection of their rights. The Supreme Court in that case formulated workable solutions in the interest of the general public, via its interim orders, wherein it directed the Interim Resolution Professional to proceed with the CIRP and appointed a representative to attend meetings of the committee of creditors on behalf of homebuyers and assist the committee of creditors in their interest. This was later introduced as anamendment to the Code.
The real estate allottees, including the commercial structure buyers and the homebuyers, were given the same stature as the financialcreditors with effect from 06 June 2018. The amendment strengthened the position of the homebuyers by assuring three significant rights under the law: (i) right to initiate CIRP; (ii) right to be in the committee of creditors and (iii) right to receive at least the liquidation value under the resolution plan.
The judicial decisions in the cases ofPioneer Urban Land & Infrastructure Ltd. andManish Kumar has further developed and clarified the law in relation to the real estate sector by balancing the interests of all the stakeholders. Additionally, the judgment in the case of Pioneer Urban Land and Infrastructure Limited recognized the rights of the homebuyers as financial creditors, while recognizing the rights of the allottees to seek relief through other remedies such as (i) the Real Estate (Regulation and Development) Act, 2016 and (ii) consumer protection laws.
In the judgement of Manish Kumar (supra), the Hon’ble Supreme Court performed a balancing act by recognizing the rights of homebuyers as financial creditors of the real estate corporations while upholding the minimum threshold required for the homebuyers to file an insolvency petition in order to shield the corporate debtor from frivolous claims. The Apex Court delivered a well-reasoned judgement wherein it observed that allowing allottees from all projects to sue a real estate developer would complicate the applicants’ duty throughout the bankruptcy resolution process. This would influence the overall timing of the insolvency resolution process. Allowing a large degree of subjectivity in decision-making for an individual allottee would also undercut the objective of balancing the interests of all parties participating in the bankruptcy resolution process. The Supreme Court found that the need of a minimum number of allottees and that these allottees be drawn from the same project is well-reasoned and is constitutionally sound. While considering the question of the Amendment’s intelligible differentia, the Supreme Court held that the allottees were distinguishable from other financial creditors by their enormous numbers, variety, and individuality in decision-making. A real estate project may have hundreds or even thousands of allottees.
The Need for PPIRP in the Real Estate Sector
The Code has proved to be a reformative step in the Indian economic system, successfully combating the growing threat of non-performing assets and improving credit discipline within corporations. However, the COVID-19 has suddenly stalled the engines of the global economy. India has been no exception to the brunt of the pandemic. The GDP in the first quarter (Q1) of 2021, post lockdown in 2020, contracted an unprecedented23.9%. Post the advent of the global pandemic COVID-19, the already distressed real estate sector has been under great duress. Having a cursory look at the statistics, it is clear that the figures, specifically in respect of the real estate sector, do not attest to the success of Code.
|Cases under CIRP as on 30 September 2021||All Sectors||Real Estate Sector|
|Total admitted into CIRP||4708||223|
|Closed on appeal/review/settled||701||51|
|Closed on withdrawal under Section 12A||527||20|
|Ongoing CIRP cases||1640||119|
|Closed by way of resolution||421||9|
|Admitted to liquidation||1419||24|
While major real estate players have been dragged into insolvency proceedings,the latest one being the Supertech Group, the route under the Code has not proven to be the most effective in this space. While there is a large potential for insolvency resolution, the non-adherence to the timeline prescribed under the law has dragged more companies to liquidation and ultimate corporate death, in comparison to the ones where the CIRP process has successfully been completed.
The case ofJaypee had reached the Supreme Court following a series of court battles between several entities involved in the bankruptcy resolution process involving Jaypee Infratech Ltd. In that case, the resolution plan proposed by the committee of creditors was approved by the NCLT with some adjustments and recommendations. While the Apex Court held that the NCLT has no power to interfere with the commercial wisdom of the committee of creditors, it was decided to extend the timeline for the completion of CIRP while allowing resolution applicants to submit updated resolution plans that complied with the instant ruling, the Code’s criteria, and associated rules.
The Code is envisaged as beneficial legislation focused on putting the ailing corporates back on their feet, however, the same cannot be achieved if the timelines envisaged under the CIRP are not strictly complied with. The timeframes for the resolution procedure must be closely adhered to prevent additional dilution of the corporate debtor’s assets.There are a series of judicial precedents that emphasize the critical role of timeliness in the insolvency resolution procedure.
Another major reason for the non-completion of CIRP in the real estate sector may be traced back to the fact that the committee of creditors which also includes the allottees who are distinguishable from other financial creditors by their enormous numbers, variety, and individuality in decision-making, has the ultimate control over the affairs of the company. The supremacy of the committee of creditors also extends to a limit wherein, thecommittee can proceed with the liquidation of the corporate debtor by not approving any resolution plan.
Being a positive enactment, the Code must aim to look and address such concerns by providing the major stakeholders a middle ground to reach a resolution. The PPIRP model can act as the same. There are three major financial stakeholders in the insolvency proceedings of a real estate company, i.e., the corporate debtor, the homebuyers, and the financial creditors. The PPIRP model, which is ultimately based on the same principles that the Code initially envisaged, can act as a medium for balancing the interests of all major stakeholders in the sector. The real estate sector has 3 major participants, that are, the corporate debtor itself, the homebuyers, and lastly other financial creditors.
At this stage, it is important to acknowledge that the traditional CIRP approach has not been as successful in terms of the real estate space, as it is expected. However, the implementation of the PPIRP model may benefit all stakeholders in a manner that would otherwise also preserve the value of the ailing entity.
The PPIRP model coupled with the distressed funding of the real-estate projects can help in achieving the optimal resolution. While the management of the company staying in control of the corporate debtor itself would give a better chance of insolvency resolution given the familiarity and comfort of the debtor with his own organization. A resolution model, which may be based on distressed funding, born with both an informal and a formal element, shall also help comfort the traditional financial creditors who are not keen to disburse further. Such resolution plans may aim at the completion of half completed projects in a fixed timeframe, thereby enabling the project to generate cash flows in the system and solve the larger chunk of the problem by providing the homebuyers with what they were promised. This shall ensure the timely completion of projects, credit discipline amongst debtors and value preservation of the assets, and boosting investor confidence in the market. Such resolution plans representing and taking into account the interests of all key players shall also in the long run help strengthen the secondary debt market for the otherwise non-performing assets.
The Hon’ble NCLT, Ahmedabad Bench admittedGCCL Infrastructure and Projects Ltd to PPIRP for a meagre default of INR 54.16 lakhs and also noted that it has filed an affidavit under Section 29A of the Code, regarding its eligibility to submit a resolution plan and thus it has complied with the provisions of Section 54A(2)(d) of the Code. While there is no demurral that a Corporate Debtor is eligible to submit a resolution plan for its under PPIRP, however Section 29A(c) of the Code prohibits promoters and directors of the Corporate Debtor from submitting a resolution plan. However, Section 240A of the Code exempts promoters/directors of MSMEs -both under CIRP and PIRP -from the prohibitions imposed by Section 29A(c). This seems to be largely in line with principles (i) and (ii) of the Sub-Committee Report as mentioned above.
Similarly, the Hon’ble NCLT New Delhi Bench, admittedLoon Land Developers Ltd to the PIRP in November 2021. As provided for in the pre-pack framework, the management of the Corporate Debtor still vests with the Board of Directors. It will be interesting to observe how the strict timeline of 120 days for completion of the PIRP will be adhered to in these cases.
This requirement to complete the PIRP in a time bound manner was pointed out by the Corporate Debtor in the case ofKrrish Realtech Private Limited before the Hon’ble NCLAT. In this case certain Home-Buyers raised objections to the application filed by the Corporate Debtor for initiating its PPRIP, with regard to filing of the application in accordance with the requirements of the Code. The Hon’ble NCLT permitted the said Objectors to formally file their objections, while also granting time to the Corporate Debtor to file adequate replies to the application filed by Corporate Debtor. The said matter was preferred in appeal and, it was argued by the Corporate Debtor that the Hon’ble NCLT had no jurisdiction to grant any time or opportunity to Objectors to file a reply in the said application. It was argued that under the PIRP, there is no provision for providing an opportunity to oppose any person, including the Objectors/Financial Creditors prior to the admission of the Application- as the PPIRP is a time-bound process. While upholding the order of the Hon’ble NCLT, the Appellate Authority recorded that no prejudice will be caused to the Appellant Corporate Debtor in case Objectors were given time to file objections, as the Appellant was also given the opportunity to file its replies to the said objections. The Hon’ble NCLAT observed that as Home-Buyer/Financial Creditors with huge stakes, their anxiety would have to be appeased by ensuring that the PIRP is resorted to in accordance with the procedure prescribed in law. Whether or not such objections carried merit, was of course to be decided by the Hon’ble NCLT.
This observation by the Hon’ble NCLAT seems to be in line with principle (iii) laid down by the Sub-Committee, to make certain that the PPIRP does not compromise on the rights of any persons, “by ensuring that there are adequate checks and balances to prevent the unbridled use of pre-packs by debtor companies, as a means of circumventing the CIRP.”
Thus, it would be right to say that the move to introduce the PPIRP model in the Indian insolvency law landscape has definitely been brought in with the right intentions. At this nascent stage, it can be seen as yet another economic experiment awaiting the test of time. While it is expected that the nature of PPIRP being informal, yet time-bound would ultimately benefit the economic landscape, expanding the scope of the same at this stage itself would just help strengthen the law further. Therefore, it would be important to witness how the legal framework of PPIRP would develop further through the legislative amendments and judicial pronouncements in India.
About the Authors
Mr. Savar Mahajan is a Senior Associate at Chandhiok & Mahajan, Advocates and Solicitors, New Delhi.
Mr. Kshitij Pandey is a 4th Year Law Student from Ram Manohar Lohiya National Law University (RMLNLU), Lucknow. He is also an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Muskaan Singh
Senior Editor: Aribba Siddique
Associate Editor: Kshitij Pandey
Junior Editor: Tisa Padhy
Preferred Method of Citation
Savar Mahajan and Kshitij Pandey, “The PPIRP Model in the Real Estate Sector” (IJPIEL, 29 June 2022)