Real estate developers face a dilemma—whether to launch new projects under a SPV (Special Purpose Vehicle) or under the flagship entity. This decision is often influenced by various factors like stamp duty, GST, availability of resources and the Insolvency and Bankruptcy Code.
While organisational structure and tax framework would favour launching a project in the flagship entity, RERA and IBC tilt the scales in favour of the SPV route. This is because the need to ringfence the flagship entity from risks far outweighs operational inefficiencies of having project development and operations at the various SPV levels.
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The NCLT recently has admitted CIRP proceedings against a real estate developer by lifting the corporate veil and contending that the marketing agency and Som Resorts were under common management. While doing so, the NCLT has rejected the established doctrine of “separate legal entity”.
Som Resorts submitted that it had given marketing rights to CSL for a year only. Further, the marketing agreement did not permit CSL to receive payment in its name. It was also argued that several material acts were also not performed by petitioners such as providing proof of allotment.
The government/creditor etc. have increasingly been using forensic audits to help uncover frauds. Further, Section 43/44 of the IBC seeks to invalidate any preferential (or deemed preferential) transaction entered with related parties within two years prior to the commencement of insolvency.
While forensic audit is event-based, evaluation of a preferential transaction happens only once the CIRP has commenced and only transactions entered within the preceding two years can be invalidated.
The NCLT ruling now gives right to a home buyer where a home buyer can seek to initiate CIRP proceedings directly against the flagship entity, where the stakes are much higher for the developer. This judgement is pathbreaking as it opens the gates for bringing in the ‘real’ real estate developer into insolvency proceedings, even if defaults occur in a SPV—reducing the advantage of using SPVs.
