2026 (3) TMI 1647 - AT - IBC

Project-specific real estate debt can support CIRP, but insolvency administration must stay confined to the secured project.

A project-specific debenture financing in a real estate company was treated as creating a financial debt secured only against the concerned project, not ... Debt and default under debenture trust deed - acceleration of debenture liability - project-wise insolvency in real estate - project-specific security interestDebt and default under debenture trust deed - acceleration of debenture liability - cure of default during pendency - The financial creditor had established default only to the extent of the unpaid quarterly interest demanded in the cure notice, and not the entire debenture amount including principal. - HELD THAT: - The Tribunal held that, under the debenture trust deed as extended, the principal amount had become payable only on 30.06.2024. The notice relied upon for filing the Section 7 application demanded payment of the overdue quarterly interest and gave a cure period of 15 days. Although the deed contemplated further remedies after expiry of the cure period, no subsequent step was taken requiring redemption of all outstanding debentures before filing the application. Consequently, inclusion of the principal amount in the default figure stated in Part IV of the application was contrary to the contractual scheme. Even so, non-payment of the interest amount demanded in the notice stood clearly proved, and that default was above the statutory threshold. The subsequent payments made during pendency of the Section 7 proceedings did not wipe out the subsisting default as on the date of filing and could not cure the default for purposes of admission. [Paras 18, 19, 20, 21]Default stood proved in respect of the overdue interest demanded in the notice, but the claim treating the entire debenture liability including principal as due on the filing date was held to be incorrect.Project-wise insolvency in real estate - project-wise resolution - The view that insolvency of a real estate company can never be confined project-wise and that only resolution can proceed project-wise was held to be erroneous in law. - HELD THAT: - The Tribunal held that the adjudicating authority failed to follow binding precedent governing insolvency in the real estate sector. Referring to the law earlier laid down by the Supreme Court and this Appellate Tribunal, it concluded that where insolvency proceedings are initiated in relation to one real estate project, the process should, as a rule, proceed on a project-specific basis and should not automatically envelop other distinct projects of the same corporate debtor unless circumstances justify otherwise. The adjudicating authority's contrary approach, despite noticing those authorities, was therefore disapproved. [Paras 34, 35, 36]The finding that project-wise insolvency is impermissible was set aside as contrary to the law laid down for real estate insolvency.Project-specific security interest - real estate project financing - The debenture funding and security structure under the debenture trust deed related to a specified project and property, and the CIRP in the facts of the case had to be confined to that project alone. - HELD THAT: - On construction of the debenture trust deed, the Tribunal found that the transaction was anchored to development of a defined project on identified land. The deed linked the business plan, receivables, escrow mechanism, mortgage, hypothecation, monitoring rights, internal audit rights and requirement of no-objection for sale of units to that project property. The material on record also showed that the respondent itself issued no-objection letters for sale of units in Project Aspirations, thereby treating that project as the charged project. The general clause concerning business activities and corporate purposes did not override the specific security and control provisions tied to the identified land and project. The Tribunal therefore concluded that the financing was project-specific and that the CIRP could not extend to the corporate debtor's other projects in Haryana or elsewhere. [Paras 56, 57, 63, 64, 65]While admission of the Section 7 application was upheld, the CIRP was directed to remain confined to Project Aspirations on the identified land and not to the corporate debtor's other projects.Final Conclusion: The appeal was partly allowed in the sense that admission of the Section 7 application was sustained on proof of debt and default, but the impugned order was modified to confine the CIRP only to Project Aspirations situated on the identified project land. The IRP was directed to continue the process accordingly, with liberty to creditors of other projects to pursue remedies available in law. Issues: (i) Whether the amount of default and debt proved by the financial creditor included the principal debenture amount or was confined to the overdue interest claimed in the notice dated 29.12.2023, and whether payment made during pendency cured the default; (ii) Whether the insolvency proceedings in respect of a real estate company could be confined to the specific project for which the debentures were issued or had to proceed against the corporate debtor as a whole; (iii) Whether the debenture trust deed and surrounding documents showed that the financing and security were project-specific and therefore the CIRP had to be limited to the concerned project.Issue (i): Whether the amount of default and debt proved by the financial creditor included the principal debenture amount or was confined to the overdue interest claimed in the notice dated 29.12.2023, and whether payment made during pendency cured the default?Analysis: The redemption date of the principal amount had been extended to 30.06.2024, so the principal was not due when the Section 7 application was filed. The notice dated 29.12.2023 demanded only overdue quarterly interest of Rs. 29,72,29,959/-, and the default was established only to that extent. The amount of Rs. 274 crore claimed in the application wrongly included the principal amount. The later payment of Rs. 37.2 crore did not extinguish the already existing default on the filing date.Conclusion: The default stood proved only for the overdue interest amount, the principal amount could not be included, and the later payment did not cure the default.Issue (ii): Whether the insolvency proceedings in respect of a real estate company could be confined to the specific project for which the debentures were issued or had to proceed against the corporate debtor as a whole?Analysis: The binding legal position recognises insolvency of the corporate debtor, but in the case of real estate assets, resolution may proceed on a project-specific basis where the circumstances justify it. The statutory framework and regulations permit project-wise resolution after commencement of CIRP, and the earlier authorities on real estate insolvency required protection of solvent projects and homebuyers from collateral prejudice. The adjudicating authority's view that project-wise insolvency was impermissible was inconsistent with that position.Conclusion: The CIRP could not be allowed to operate against all projects of the company and had to be confined to the concerned project.Issue (iii): Whether the debenture trust deed and surrounding documents showed that the financing and security were project-specific and therefore the CIRP had to be limited to the concerned project?Analysis: The trust deed described the project, the identified land, the mortgage over the project land, the charge over receivables, the escrow mechanism, the control over sales through no-objection requirements, and the appointment rights over project-related professionals. The later regulatory and registration documents, including the project registration and the trustee's own no-objection letters, showed that the financing and securities were tied to the same project. This established that the debt transaction was project-linked rather than a general corporate facility.Conclusion: The debentures and securities were project-specific, and the CIRP was required to be confined to that project alone.Final Conclusion: The admission of CIRP was sustained, but its operation was restricted to the real estate project identified in the financing documents, with the remaining projects of the corporate debtor kept outside the present insolvency process.Ratio Decidendi: Where a financial debt is demonstrably created and secured for a specific real estate project, CIRP may be maintained against the corporate debtor but its administration must be confined to that project so that other independent projects are not brought within the insolvency fold.