STATUTORY UPDATES

Discussion paper on real estate related proposals – CIRP & liquidation

  • The Insolvency and Bankruptcy Board of India (IBBI) vide discussion paper dated November 06, 2023 sought comments on the prospective amendments to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Process) Regulations, 2016 (CIRP Regulations) and Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations).
  • The paper aims to deal with the following issues faced during the insolvency resolution processes of real estate projects:
    • Mandatory registration and extension of projects under Real Estate Regulatory Authority (RERA)
    • Operating a separate bank account for each real estate project
    • Execution of registration/sublease deeds with approval of Committee of the Creditors (CoC) during Corporate Insolvency Resolution Process (CIRP)
    • CoC to examine and invite separate plans for each project
    • Exclusion of property in possession of homebuyers from the liquidation estate
  • Basis the recommendations given by the Committee formed under the chairmanship of Sh. Amitabh Kant (ex- CEO, Niti Aayog) and the colloquium on functioning and strengthening of the IBC, the IBBI has proposed for the following amendments in CIRP Regulations and Liquidation Regulations to address the above issues:
    • Mandatory registration and extension of projects under RERA: In order to ensure a transparent, accountable, and efficient process, Section 3 of the Real Estate (Regulation and Development) Act, 2016 (RERA Act) mandates registration of real estate projects under specified circumstances, including the projects where the completion certificate or occupancy certificate has not been issued. Essentially, under Section 17(2)(e) of the Insolvency and Bankruptcy Code, 2016 (IBC), it is the responsibility of the Interim Resolution Professional (IRP) and the Resolution Professional (RP) to comply with the requirements under any law on behalf of the Corporate Debtor (CD) which includes compliance under Section 3 of RERA. Therefore, IBBI has proposed to insert Regulation 4D in the CIRP Regulations to expressly state and mandate that the IRP/RP must register/extend the registration of all the real estate projects under RERA, wherein the registration is expired or is about to expire.
    • Operating a separate bank account for each real estate project: Under RERA, each project is registered separately and is given a unique identification number. The approvals, filings, etc. are done on a project-to-project basis which facilitates systematic record-keeping. RERA also mandates separate project-wise accounts which aid in tracking the progress of the project, identifying potential issues, and facilitates informed decision-making. Following similar approach under the IBC shall facilitate information about a particular project which may be useful for project wise insolvency or for inviting separate resolution plans for a particular real estate project. Accordingly, in line with the provisions of RERA, IBBI has proposed to insert Regulation 4E in CIRP Regulations for operation of a separate bank account for each project undergoing CIRP.
    • Execution of registration/sublease deeds with approval of CoC during CIRP: In real estate projects undergoing CIRP, it has been observed that while the creditors have fulfilled their part of obligation in the contract and the CD has also constructed the units, the formal handover of the unit still remains pending. The National Company Law Appellate Tribunal, New Delhi (NCLAT) in Alok Sharma & Ors v. IP Constructions Pvt Ltd1 observed that the '... the rights of home buyers cannot be affected adversely in the 'corporate insolvency resolution process' and their interest is to be appropriately preserved and protected within the parameters of the I & B Code, 2016.' and accordingly directed the RP to execute the sale deed after collecting 'Dues and Costs', if any, remaining unpaid, including the 'Costs of Registration', 'Penalty' and 'other incidental Costs', till date, etc. Considering the plight of the homebuyers and the larger public good, the IBBI has proposed to insert Regulation 4F in the CIRP Regulations for transfer of immovable property (where the allottees have either paid the full amount and occupied the units or are in possession of the unit), with the approval of the CoC. The IBBI, by way of Regulation 4F, has also proposed for handing over of the unit on 'as is where is basis' on payment of the balance amount, if any, with the approval of the CoC, to expedite the resolution process and avoid delays. Pertinently, such units shall be kept out of the resolution process of the CD.
    • CoC to examine and invite separate plans for each project: A CD engaged in the real estate business generally has multiple projects, which are at different stages of construction. Each of these projects requires different treatment in terms of resolution. In fact, while a resolution applicant may be interested in the resolution of a specific project, he may not be interested in the resolution of the entire CD. Notably, investing in all projects by one resolution applicant requires huge capital, and thus limits the number of potential resolution applicants. Accordingly, in order to yield better value for the CD and facilitate the resolution process, IBBI has proposed to clarify under Regulation 36A(4) of the CIRP Regulations that the CoC on examination may, direct the RP to invite separate plans for each project.
    • Exclusion of property in possession of homebuyers from the liquidation estate: As stated above, during the insolvency resolution process pertaining to real estate industry, it has been observed that despite fulfilment of obligation on the part of the allottees, formal handover of the possession (including execution/registration of sale deeds, etc.) is pending. Over the years, the NCLAT has observed that there is no bar on the execution of sale deeds in favor of the allottees under Section 14 of the IBC. However, when faced with the question of inclusion of such property in the liquidation estate of the CD, the NCLAT while highlighting that no security interest was created in favor of the applicants and that without a registered sale deed, they had no ownership rights, has rejected the exclusion of such property from the Liquidation Estate under Section 36 of the IBC. The above judgements have led to a conflicting and often confusing jurisprudence and therefore, in order to address the issue, IBBI has proposed to insert Regulation 46A in the Liquidation Regulations to state that the units which are in possession of the allottee shall not form a part of the liquidation estate of the CD under Section 36(4)(e) of the IBC.

RECENT JUDGMENTS

Hari Babu Thota

Supreme Court of India | Judgment dated November 29, 2023 | Civil Appeal No. 4422 of 2023

Background facts

  • Vide order dated June 02, 2023, the NCLAT, Chennai Bench upheld the order dated February 28, 2023 passed by the NCLT, Bengaluru and relied on the order passed in Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors2 to observe that an application for Micro Small and Medium Enterprise (MSME) certificate made after the commencement of CIRP is unauthorized and cannot tide over the ineligibility under Section 29A of the IBC.
  • Aggrieved by the order dated June 02, 2023 passed by the NCLAT, the Resolution Professional (RP) of the Corporate Debtor (CD) filed this appeal under Section 62 of the IBC.
  • Since there was no representation on the opposite side, the Supreme Court (SC) appointed an amicus curiae to assist the Court. The Amicus Curiae took the same stand as the Appellant and submitted that if the MSME Certificate is obtained prior to presentation of the plan such disqualification would not be attracted and the benefit of Section 240A will be available, even if such registration is after the initiation of insolvency.

Issues at hand?

  • Whether the RP was disqualified under the conditions as specified under Section 29A of the IBC?
  • Whether the CD not having MSME status at the time of commencement of CIRP proceedings would disqualify the Resolution Applicant under Section 29A of the IBC as benefit of Section 240A would not be available?

Decision of the Court

  • By way of this judgement, the SC set aside the orders passed by the NCLT and the NCLAT and observed that the law laid down by Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors (supra) is not the correct position of law.
  • Noting the purpose of enactment of Section 240A of IBC, the SC observed that while interpreting Section 240A, the cut-off date/the crucial date shall be the date of submission of resolution plan and not the CIRP commencement date. Reliance was also placed on Arcelormittal India Pvt Ltd v. Satish Kumar Gupta & Ors3 to observe that the stage of ineligibility is attached when the resolution plan is submitted by a resolution applicant.
  • The SC held that MSME certificate obtained after the commencement of CIRP is not a ground to disqualify the Resolution Applicant and the relevant date to ascertain such disqualification is the date of submission of Resolution Plan and not the date of commencement of CIRP.

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Footnotes

1. Company Appeal (AT)(Insolvency) No 350 of 2020

2. Comp. App. (AT) (Ins.) No.43-43A/2021

3. (2019) 2 SCC 1

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