A spate of defaults at several prominent real estate companies has left creditors and homeowners on shaky ground, with several challenges awaiting them at the insolvency court, writes Vineeta Bansal
When Supertech, one of the New Delhi-NCR region’s largest real estate developers, was declared insolvent on 25 March 2022, it sent shockwaves across the sector. The National Company Law Tribunal (NCLT) issued the order in response to a plea by Union Bank of India and a group of 100 homebuyers.
The mega realty developer had defaulted on a payment of INR4.3 billion (USD56 million) to Union Bank for construction of the company’s Eco Village II project in Greater Noida, in Uttar Pradesh state. The project is being developed at a cost of INR11 billion, and out of 38,041 flats, 27,111 were delivered to homebuyers. The homeowners were in a quandary as they were paying a pre-equated monthly instalment before receipt of the flats and, because they had taken loans, were being forced to pay those or risk huge penalties.
After Supertech, the NCLT initiated insolvency proceedings against Logix Blossom Zest, allowing a plea by operational creditor Colliers International (India) Property Services. Logix’s project in the New Okhla Industrial Development Authority (Noida) was launched in 2011, and consists of 3,400 units spread across 14 towers, of which nine are incomplete. Several homebuyers had been unable to get their units registered because of the developer’s pending dues with the Noida city authorities. There were several irregularities stalling land allotment and development clearances due to a nexus between builders and Noida officials.
The Comptroller and Auditor General’s (CAG) report said: “Nearly 80% of the total allotment of plots in the commercial category between 2005-2018 were secured by three real estate firms named Wave, Three C and Logix Group. Despite repeated violations by these companies in terms of outstanding dues that accumulated to INR149 billion, the authority failed to take any action against them.”
The CAG observed that Noida’s authorities had weakened and changed rules to suit real estate developers and ignored the interests of homebuyers who had invested their savings. Hundreds of homebuyers who had booked properties belonging to the three companies have been unable to find their homes, even after a decade, and the companies were facing many cases in the courts.
Several other big names in the real estate industry such as Amrapali, Jaypee Group and Unitech have also been taken to the bankruptcy court.
Real estate is one of the top sectors where corporate insolvency resolution processes (CIRPs) have been initiated. In December 2020, a total of 1,600 cases were pending, while only 462 resolution plans were closed/approved and 350 CIRPs are still operating under the Insolvency and Bankruptcy Code, 2016 (IBC).
Several real estate projects are failing to pay debts to creditors or, in the case of homebuyers, provide units as per buyers’ agreements. Both are urging the NCLT to initiate the resolution process so creditors can be repaid and incomplete projects completed.
Once a company/real estate developer (referred to as a corporate debtor by the IBC) is admitted to the resolution process, a legal moratorium or stay applies to all suits and proceedings against it, thus denying any potential litigant or claimant recourse outside the CIRP. The only remedy left is for creditors to file claims with the interim resolution professional within statutory prescribed timelines under the IBC.
In addition to cases before the Real Estate Regulatory Authority, a legal moratorium or stay applies on all cases, such as civil suits, and cases pending under the Consumer Protection Act, 1986 and its successor legislation, the Consumer Protection Act, 2019 (under which litigants can seek remedies including compensation against developers).
The government enacted the IBC in 2016, which redefined the existing insolvency and bankruptcy regime. It has since regularly updated the IBC by bringing in new amendments, including adding homebuyers to the category of creditors so they can be treated on par with financial creditors.