The Conundrum of the “Same Real Estate Project”: Insolvency and Bankruptcy Code, 2016

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC)¹ has undergone several amendments since its inception. One significant amendment was made vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020² (Amendment Act). As per this Amendment, in a case of allottee(s), it is necessary that an application under Section 7³ IBC, must be filed or endorsed by either:

1. at least one hundred allottees of the same real estate project; or

2. 10% of the total allottees of the same real estate project, whichever is less.

Notably, the allottees who are filling to initiate insolvency against a real estate project will have to be from the same real estate project. The Amendment Act aims to ensure that enough allottees come together to initiate the insolvency resolution process for a real estate project. It sets a threshold for the number of allottees required to file the application, thereby promoting collective action among the affected parties.

Pertinently, the Amendment Act was challenged before the Supreme Court in Manish Kumar v. Union of India⁴, wherein the Supreme Court while upholding the Amendment Act also held that as determination of a real estate project would depend on the terms and conditions, in which the allottees are a part of. This means that specific details and characteristics of each real estate project will be taken into consideration when assessing a real estate project. In the present article, the author focuses on the concept of deriving a “same real estate project” in the context of the Amendment Act.

Assessing the same real estate project

It is necessary for the National Company Law Tribunal (NCLT) to analyse what constitutes a real estate project. This analysis becomes crucial in determining whether an application filed under Section 7 IBC meets the requirement of having the required number of allottees as specified in the proviso of Section 7 IBC. This article suggests that the NCLT should undertake a detailed analysis of the project to ensure that the application meets the prescribed criteria. This analysis involves assessing the commonality of the project, the identity of the developer, the rights, and obligations of the allottees, and other relevant factors. In case, the corporate debtor raises a question regarding the classification of allottees belonging to different real estate projects in an application filed under Section 7 IBC, the NCLT may consider the following factors while assessing the ambit of a “real estate project”:

The documents available on record of the relevant authorities

The NCLT can assess whether the corporate debtor has obtained the necessary regulatory authorisations for the real estate project as a whole or if they were treated as distinct projects by the relevant authorities. It is important to examine if the projects were treated as a single entity for regulatory purposes, if not then it may support the classification of a single real estate project into several other real estate projects. The NCLT can refer to various documents and sources of information to assess the classification of a real estate project. These documents can provide valuable insights and evidence regarding the nature of the project and the relationships between different projects. Some of the documents that the NCLT may consider include the following: (i) records available on the website of the relevant RERA (real estate regulatory authority); (ii) documents from the environment impact assessment authority; (iii) buyer-builder agreement(s); and (iv) brochures published by the corporate debtor, and so on.

Common developer(s)

The NCLT can examine whether the allottees in question share a common developer or promoter. If the developer or promoter is the same for multiple projects, it may indicate a connection between the projects.

Common amenities and facilities

The NCLT may analyse whether the projects in question share common amenities and facilities. If there are shared amenities, such as a clubhouse, swimming pool, or common parking area, it may suggest a relationship between the projects.

Interconnected infrastructure

The NCLT can consider whether the projects are interconnected or share common infrastructure, such as roads, drainage systems, or utility connections. If there is a physical connection between the projects, it may indicate a larger integrated development.

Integrated marketing and sales

The NCLT may assess whether the marketing and sales efforts for the projects were carried out together or in a coordinated manner. If the projects were marketed and sold as part of a larger scheme or under a common campaign, it may imply a cohesive real estate project.

Common terms and conditions

The NCLT can review the terms and conditions of the allotment agreements or other relevant documents to determine if there are common clauses or provisions across the projects. Similar terms and conditions may suggest a uniform approach to the projects.

Geographical proximity

The NCLT may consider the geographical proximity of the projects. If the projects are located in close proximity or within the same geographical area, it may indicate a connection between them.

The abovementioned factors are indicative and may vary depending on the specific circumstances of each case. The NCLT would have the discretion to evaluate and consider additional factors as deemed necessary to determine the classification of the real estate project in question. This analysis ensures that the intent and purpose of the amendment are upheld, and that the corporate insolvency resolution process (CIRP) under IBC is appropriately applied to distressed real estate projects only. This evaluation is not only necessary for the NCLT to perform but will also assist practitioners before the pre-litigation stage when filing an application under Section 7 IBC.

Importance of assessment of a real estate project

Pertinently, it is crucial to assess whether the mentioned real estate project is the same project or not. This is not only for filing an application under Section 7 but also for initiating insolvency of a developer company. This assessment gains significance as the National Company Law Appellate Tribunal (NCLAT) ruled in Flat Buyers Assn. v. Umang Realtech (P) Ltd.⁵ has held that the insolvency process shall be limited to a single real estate project. Additionally, the Supreme Court in Indiabulls Asset Reconstruction Co. Ltd. v. Ram Kishore Arora⁶, upheld the Umang Realtech⁷ judgment passed by NCLAT. In essence, the judgment clarified that the insolvency process (CIRP) should be confined to a single real estate project and should not extend to other projects of the corporate debtor. Therefore, the aforementioned factors for assessing whether the real estate project is a single project become even more crucial.

Conclusion

The determination of what constitutes a “real estate project” is crucial for the NCLT when assessing applications filed under Section 7 IBC by allottees of a real estate project. The NCLT has the discretion to consider various factors, as mentioned above; however, these factors serve as indicators and may vary depending on the specific circumstances of each case. It may not be necessary for all the factors to be met by each real estate project. Therefore, the NCLT will have to consider additional factors as necessary to determine the classification of a real estate project. This analysis ensures that the intent and purpose of the amendment to the IBC are upheld and that the CIRP is appropriately applied only to distressed real estate projects, while also protecting the interests of all stakeholders.