The Indian real estate sector is in a mess. Homebuyers are forever waiting for builders to deliver their homes, but builders seem to express their helplessness in completing long-pending projects and take the insolvency route. Ever since the Parliament made the insolvency law, beleaguered real estate companies have been dragged into the bankruptcy litigation, and some of them have even used it to find an exit from projects they cannot or do not want to handle anymore.
Resolving the insolvency of a real estate company, while ostensibly safeguarding the interest of homebuyers, has emerged as one of the biggest challenges for courts, governments and policymakers.
This situation has not emerged overnight. It is the culmination of years of corruption, disregard for housing norms by development authorities in collusion with builders and long-winding judicial processes.
Shattering a Dream
A booming real estate sector in 2006–07, particularly in the National Capital Region (NCR) of Delhi, attracted millions of people to invest their hard-earned money into various lucrative housing projects. However, the non-existence of a regulator and corruption in development authorities prompted many builders to divert homebuyers’ money for activities other than construction.
So, when the real estate sector witnessed a slump around 2013–14 and many projects remained incomplete even after several years of their launches, impatient buyers started filing cases in courts for compensation, refund and delivery of their promised apartments.
A turning point of sorts for the sector came in 2016, when, on the one hand, the Centre enacted the Real Estate (Regulation and Development) Act (RERA) that made it mandatory for states to appoint a regulatory body for the realty sector and, on the other, the Insolvency and Bankruptcy Code was enacted, which envisaged efforts to maximise the value of a bankrupt company’s assets and resolve its insolvency.
The introduction of a real estate regulator salvaged the situation to an extent. However, by the time regulatory frameworks were set up in states, the sector was in a deep state of crisis, and courts were flooded with cases of real estate frauds and misappropriation of funds.
One can imagine the extent of irregularities in the sector from an analysis that Outlook carried out in 2019 of all the cases filed in the Economic Offence Wing of the Delhi Police. More than 60% of FIRs registered in that year were found to be related to fraud in the real estate sector.
The Jammed Wheel of Justice
A large number of real estate firms have invoked the insolvency law over the years. However, its success rate is not encouraging, especially when it involves big real estate companies.
Take the case of prominent real estate company Jaypee Infratech Limited in Noida. Like many other companies in the sector, it is facing corporate insolvency resolution process (CIRP) in the National Company Law Tribunal (NCLT). It has been more than five years since the NCLT, Allahabad, ordered the appointment of an internal resolution professional (IRP) in Anuj Jain to replace the directors of the company on August 9, 2017. However, the resolution process is still going on. As per the law, it should have been over in 330 days, but at its current legal status, it will not finish for another few years.
After Jain invited interested parties with a resolution plan, a volley of cases was filed in the Supreme Court on several contentious issues. Observers say that due to these litigations, the CIRP process could not be completed within the specified period of 330 days.
Ashish Gupta, one of the homebuyers in the project and petitioner in the Supreme Court, says, “There are about 33,000 flats [in the Jaypee Infratech project], out of which over 3,000 flats were already constructed and delivered to homebuyers before the beginning of the CIRP. In the last five years since the appointment of the IRP, 8,000 more flats have been constructed.”
There was a ray of hope for homebuyers when, on November 6, 2019, the apex court settled most of the litigations around the project and asked the IRP to complete the CIRP in 90 days. However, since then, there has been a legal ping-pong involving the Supreme Court, the NCLT, NBCC and Suraksha. The last entity’s plan was eventually submitted to the NCLT, where it is pending approval.
Around 22,000 homebuyers are still waiting for their flats for more than a decade in this project. If the legal process around the resolution plans stays at this pace, these homebuyers will continue to face unending trauma. The ongoing legal process at the NCLT involves the Yamuna Expressway Industrial Development Authority (YEIDA), ICICI Bank, Bank of Baroda and Jaiprakash Associates Ltd, out of which only YEIDA has completed its arguments in court.
The CIRP appears to be a long process to many, but some observers feel that this is the correct way to resolve stuck projects. Alok Kumar, an advocate and veteran of insolvency matters, says, “If the [insolvency] law is followed strictly without giving any leeway to anyone, I do not think the CIRP will fail.”
However, homebuyers feel that the final approval of the resolution plan will take place in the Supreme Court only, and it will take a lot of time for that process to reach there and get completed.
Insolvency Innovation for the Builder
The resolution of real estate projects under the insolvency law has given rise to a debate about its ability to maintain strict timelines. Many legal experts feel that the CIRP is successful in cases where the project size is small. But, in big projects, due to the involvement of a large number of homebuyers and other stakeholders, pressing competing interests in courts delay the whole process inordinately.
While the Jaypee Infratech case is chugging along in courts, of late, the National Company Law Appellate Tribunal (NCLAT), the appellate body for NCLT judgements, passed an order in the Supertech insolvency case which is being seen outside the purview of the insolvency law. The NCLAT ordered to initiate the CIRP on the whole company, but it asked the IRP to form a committee of creditors (CoC) for only one project, Ecovillage II in Greater Noida. The builder has over 20 such projects at various locations in the NCR.
This constitution of CoC for one project instead of all is against the regular practice of the CIRP. In the last two years, the NCLAT has passed similar orders in other cases as well. This is being termed “reverse CIRP” in legal circles.
Legal and corporate experts say that the NCLAT might have experimented a little with an intent to safeguard the interest of all stakeholders. However, no such provision exists in the Insolvency and Bankruptcy Code of 2016. “The so-called reverse CIRP has been a debatable thing, as the existing insolvency law does not spell out anything on this. It is borne out of judicial wisdom,” advocate Venket Rao from Intygrat law firm says.
Legal experts agree that the NCLAT has exceeded the law. However, they say that it presents a better solution than what is provided in the existing law. “I think that the NCLAT has done it in the interest of homebuyers,” says advocate M.L. Lahoty. He feels that the tribunal is of the view that if other projects are running well, there is no need to disturb them. “So, it has ordered to constitute CoC only for one project,” he adds.
Other experts, however, say that the NCLAT innovation is a vague, but loaded, idea. They cite Section 14 of the insolvency law, according to which once the CIRP is initiated against a company, all legal cases, such as the institution of suits, the continuation of pending cases, recovery, etc., are prohibited. “When the insolvency resolution proceedings are only in the case of one project of the company, why should the whole company get the benefit of Section 14? It benefits the builder, but buyers who are into litigation against the company in other projects suffer,” another advocate says, requesting anonymity.
He feels that the reverse CIRP doctrine benefits real estate promoters in ways more than one and puts homebuyers and financial creditors at a disadvantage. “Just imagine what happens in case a sick project goes into liquidation. The project’s financial creditors, such as banks, will lose their money. On the other hand, the value of other projects will be maximised for the benefit of the company. This is a winning situation for the real estate company, but not for all stakeholders,” he adds.
This class of experts feels that the purpose of the CIRP is the maximisation of assets of the whole company, thereby finding a balanced resolution for the entire company and its creditors, and not just a selected few, something that the reverse CIRP doctrine negates.
While the Jaypee Infratech case is being dealt with under the insolvency law, the irregularities of the Amrapali real estate firm took a divergent course despite the initiation of the CIRP on the petition of Bank of Baroda.
Amrapali homebuyers filed a petition in the Supreme Court because the initiation of the CIRP enforced a moratorium on further litigation, due to which no court case against the builder could gone on.
On July 23, 2019, the Supreme Court passed a well-reasoned order under which it replaced the promoters of the company with a senior advocate R. Venkataramani as the court receiver. Around 42,000 homebuyers heaved a sigh of relief.
The apex court also appointed the government-owned construction company NBCC to complete the company’s pending projects. Today, when more than three years have gone by, the buyers feel that the court receiver has not only failed to live up to their expectations but added new problems.
For instance, one of the allegations against Amrapali was that it offered huge discounts to influential people and sold flats at throwaway prices to oblige them, causing financial losses to the company. In the process of making recoveries for that undervaluation, the court receiver is making even those homebuyers liable to pay who had got a genuine discount of Rs 100 to Rs 200 per square foot from the builder.
Chakresh Jain, a civil engineer, who offers consultancy in real estate matters, is one among the Amrapali homebuyers. He says that the apex court has entrusted the court receiver with several responsibilities, such as arranging funds from the bank, selling off Amrapali’s assets to create a fund and monitoring the construction work of NBCC, among others. “I think the court receiver has failed on all counts. He could arrange only Rs 1,600 crores, which is not enough to complete the projects,” Chakresh alleges.
Another buyer, Juginder Singh, agrees with Chakresh and says that the court receiver does not have the kind of team and human resource one needs to deal with a huge company like the Amrapali Group. “The court receiver has a small team of lawyers, and his insufficient staff is incapable to deal with the complaints of 42,000 homebuyers. At times, buyers feel frustrated due to delay and pathetic grievance redressal mechanism from the office of the court receiver,” Singh says.
When contacted, Venkataramani said that a lot of work has happened since he took over and he wanted to concentrate on his work rather than responding to queries.
It is not that all homebuyers are unhappy with Venkataramani’s efforts. Gaurav Asati, president of the management committee of Amrapali Zodiac project, says that the court receiver has streamlined the registration process of flats, which was stuck for years. “This has improved the overall sentiment, leading to an increase in the valuation of apartment prices,” he says.
The Unitech Exception
All crucial decisions about bankrupt real estate companies eventually end up in the Supreme Court. Over the years, as benches change, no one dominant judicial precedent is visible in managing insolvency cases of large firms. Take, for example, the case of Unitech, which is one of the first such firms to dash the hopes of homebuyers. The Supreme Court has remarkably been involved in this case to the extent of changing the company’s governance structure and monitoring it minutely, but homebuyers are not convinced.
Once a promising real estate firm, today, Unitech is a story of broken dreams. Around 2014–15, impatient homebuyers had started approaching consumer forums and concerned authorities as the apartments that were promised to them within three years were not delivered for over five years.
In a complaint filed in the Economic Offence Wing of the Delhi Police in 2017, alleging fraud and misappropriation of funds, the company’s promoters Sanjay Chandra and his brother Ajay Chandra were arrested, who approached the Supreme Court to get bail after the Delhi high court rejected their petition. The apex court also refused them relief and, realising a plethora of ongoing litigation at multiple judicial forums against company, appointed lawyer Pawanshree Agrawal as amicus curiae to look into the buyers’ grievances and assist the court.
Homebuyers feel that focus on the cases against the Chandras has harmed their interests. “The Supreme Court has spent a lot of time on ancillary cases, such as the Enforcement Directorate case, to look into siphoning of money or allegations of the Chandras influencing jail authorities, among others. These cases overshadowed the issue of homebuyers’ interest,” says a homebuyer.
The Supreme Court replaced the Chandras with the government-appointed nominees in the board of directors that included top names such as NBCC ex-chairman A.K. Mittal, HDFC managing director Renu Sud Karnad, former managing director of the State Bank of India B. Sriram and Niranjan Hiranandani of the Hiranandani Group.
The apex court also appointed former Supreme Court judge Justice A.M. Sapre to assist and approve the plans and decisions of the board. Besides, it involved another agency, Engineers India Limited, to examine the parameters and costs of the construction plan that the board approves, which is slated to resume in February 2023 with a deadline of completion of all projects within eight to 48 months.
Given the legal proceedings against the Chandras, the board wants to tread with caution and safeguard its interests. “The board pleads for immunity against any misdoing in every hearing. It does not have any teeth or hunger [to hurry the process]. Since they have been appointed by the court, they look at the court for every single decision,” says Amit Gupta, a petitioner who represents the buyers of Unitech’s Exquisite project in Gurgaon. Moreover, 50% of the directors have excused themselves from completing the thankless job. “Their resignations have caused huge uncertainty among buyers,” a homebuyer says.
Homebuyers allege that since the tender process has not started yet, everything looks tentative. They say that the biggest challenge might be the cash flow in case the available funds fall short of the bids that will be received to complete the project. Moreover, it has been more than three years since the Supreme Court took up the issue, but, to date, only tentative plans have been put in place, and no construction activity has resumed on the stalled projects.
There are observers who disagree with the whole resolution approach taken by the Supreme Court in this case. “I think that it would have been better had the CIRP been initiated in the Unitech case. At least, the construction process would have begun, even if at a slow pace,” a senior financial consultant says, requesting anonymity. Gupta notes that even the apex court knows that it made an exception. “The court itself has said in one of the orders that the process that it has followed in the Unitech case will not be adopted in the case of any other company,” he says.
The Quasi-Judicial Model
The real estate community acknowledges that the success rate of the CIRP is low, an impression verified in a report published by Grant Thornton in February 2022. It says, “[T]he number of cases being resolved for real estate under the IBC currently stands at just about 4% of those admitted.” The corresponding success rate in all cases being resolved under the insolvency law is 9%.
Experts say that the solution to stalled real estate projects should be explored outside the insolvency law. Senior advocate Vikas Singh say, “I strongly disapprove of the way the Amrapali, Unitech or Jaypee [cases] are being handled. There exists a complete composite scheme under RERA. There is a method of looking at these stalled projects. In Uttar Pradesh, stalled projects have been completed under the available provisions of RERA. I think that that is the only way a default of the builder should be handled.”
The senior lawyer is referring to the Uttar Pradesh Real Estate Regulatory Authority invoking Section 8 of RERA, which is rarely used in dealing with financial delinquency in the real estate sector. Under this section, if a developer fails to deliver the project on time and registration of the project expires, the regulator can get the remaining construction work done with the help of the concerned homebuyers’ association.
When Jaiprakash Associates failed to complete the construction of four out of a total of fifteen towers of a project and left the homebuyers in the lurch for over a decade, the Uttar Pradesh regulator adopted a mediation and conciliation mechanism to bring the buyers and the builder to the negotiation table. Subsequently, the builder created a fund of Rs 45 crore to complete the construction and buyers agreed to pay their remaining instalments. Within two years, the towers got ready and buyers started getting possession. After the success of this experiment, the Uttar Pradesh regulator has taken over more than a dozen projects facing delays and financial crunch for similar resolution.
Real estate stakeholders feel that the lesson learned from the existing resolution models is to involve builders in the completion of the project rather than throwing them out and getting a new entity. They say that both Section 8 of RERA and the reserve CIRP value the builders’ role in the completion of the project.
Manoj Gaur, president of the NCR chapter of the Confederation of Real Estate Developers’ Associations of India and CMD of Gaurs Group, says that the best option is that the project is given to the same developer under the supervision of an IRP for faster completion and delivery of homes, as was recently done in the case of RG Luxury Homes in Noida.
“Jaypee, Amrapali and Unitech were exceptionally big and complicated projects, but in other cases, innovative approaches can be worked out as the delivery of homes to respective buyers is of utmost priority and must be done on time. No one understands the project better than the developer who conceived it,” he says.
On the face of it, this approach looks a credible solution, but experts say that its success largely depends on the very positive and cooperative stand of the builder. R.D. Paliwal, a senior officer of the Uttar Pradesh regulator, says that all stakeholders should promote this model. “When a builder’s insolvency lands in the NCLT, all stakeholders suffer a loss, because any other company that offers a resolution plan proposes a heavy haircut on the debts of financial creditors, like banks. Not only that, development authorities, being operational creditors, lose their dues, too,” he says.
The cooperation of the real estate developer is quite another story though. The roots of the NCR’s real estate mess lie in builders’ inability or unwillingness to complete projects on time or ever. The various judicial solutions and the RERA route involve raising extra funds to complete projects. The bankruptcy proceedings essentially emerge from the lack of funds. Who provides these extra funds or if it is possible at all is the question that policymakers and courts need to address without equivocation. Though banks may get their money back with small or heavy haircut, inordinate delays and financial losses make homebuyers the ultimate losers. Unfortunately, even courts have failed in their duty to fix legal responsibility on those who have denied homebuyers their rights to enjoy their property. Till a clear framework emerges to resolve these issues, homebuyers are likely to stay where they are.