India’s Insolvency and Bankruptcy Code (IBC), introduced in 2016, has certainly provided a lifeline to struggling companies. However, while its effectiveness is undeniable, one can see that the IBC does not distinguish between businesses, or adapt its remit to the unique needs of certain sectors. Is this equal treatment acceptable, or must the IBC trans-form into a sector-specific law, consider the ground realities and concerns of all stakeholders?

The National Company Law Appellate Tribunal (NCLAT), while hearing Flat Buyers Association Winter Hills – 77, Gurgaon Vs Umang Realtech Pvt. Ltd through IRP & Ors acknowledged that in light of the distinctiveness of the real estate sector, the IBC-recommended Corporate Insolvency Resolution Process (CIRP) was possibly not conducive to the respondents. Taking a rather inventive approach, outside the scope of the CIRP, the tribunal permitted a promoter to disburse funds to Umang, albeit as a lender. The tribunal particularly emphasized the necessity of restricting the invocation of resolution process to only the defaulting project of the real estate company, as opposed to dragging the entire company and all its projects in.

In the case of a real estate company, there is hardly a distinction between the management of an ailing project and that of the healthy ones. Of course, where projects are under separate special purpose vehicles (SPVs), the situation is better. However, if all projects are owned and developed by a holding company, the assets cannot be ring-fenced. Pooling of assets of all projects of a company would pit lenders and homebuyers of one project against those of other projects. A committee of creditors constituted, as a result, may not be aligned enough to choose the best course of action. Moreover, projects are likely to be at different phases of completion thereby adversely affecting the rights of home buyers and lenders as financial creditors. Therefore, segregation of projects of the corporate debtor is a sine qua non for ensuring an effective resolution. Perhaps, it would be helpful to prepare project-wise audited accounts and balance sheets. Analysis of the cost of completion and assessment of the viability of the project would facilitate formulation of a resolution plan agreeable to all stake-holders of the project.

The practicality and creativity demonstrated by the judges in the matter were noteworthy. From identifying problems to recommending solutions, the approach was rather meticulous. The judges assumed the role of honest critics. The seemingly robust measures recommended by the tribunal could be legitimised. Since the IBC essentially caters to resolution of a company and not a specific project, few provisions may require amendments. Further, the IBC was not originally drafted as a home-buyer-focused law. They were brought within the meaning of financial creditors recently. As such, the law would naturally have to evolve to detail their role.

The IBC provisions pertaining to collection of information and management of the corporate debtor under CIRP could be amended and guidelines issued, to the real estate sector, limiting the resolution and collection of information to the concerned project. Aimed at efficient monitoring, Real Estate Regulatory Authority (RERA) could formulate guidelines on a prospective basis ensuring that real estate projects are held under SPV structures. Further, a resolution professional should endeavour to control pilferage, act as a custodian, and eventually scout for a suitable developer. These steps will keep the process project centred and insulate the company from detriment.

The NCLAT’s views in Umang Realtech remind us that the purpose of the law is not to pose as an elegant piece of legislation, stacked up on a cosy bookshelf. This is precisely why the importance of the phrase “practice of law” cannot be denied.

About the Author

Aradhana Ohri is a legal officer at the Reserve Bank of India. She joined the bank in 2013. Ohri earlier worked for a capital markets-focused law firm in Mumbai.

The views expressed by the author are personal and not those of the Reserve Bank of India. Any intervening legal or other changes may impact these views.