By Wasana Nadeeshani Sellahewa
(Commonwealth)_ Real estate companies undergoing what’s known as “reverse insolvency” are encountering challenges securing bridge funding due to a lack of clarity regarding the applicability of regulations. In typical insolvency scenarios, creditors offering bridge funding receive priority in terms of dues. However, in reverse insolvency cases, the treatment of such funding remains ambiguous, causing potential creditors to hesitate in providing bridge capital, according to legal experts. Generally, bridge capital is deemed senior to other existing debts in insolvency proceedings. The issue of bridge funding and its treatment in insolvency cases has gained significant attention, particularly within the real estate sector, amidst ongoing insolvency proceedings involving major players like Supertech and Umang Realtech. Insolvency experts stress the importance of clarity on how bridge funding is handled, as it is expected to have far-reaching implications for both current and future real estate insolvency cases.
Under normal circumstances, when a company defaults on its debt obligations, it is typically subjected to the procedures outlined in the Insolvency and Bankruptcy Code (IBC). However, in the complex landscape of the real estate sector, unique scenarios often arise. For instance, a large real estate firm may find itself facing defaults specifically related to one of its many projects, rather than across the entire company. In such cases, instead of initiating insolvency proceedings for the entire company, tribunals have the discretion to focus on the particular project in default. This approach allows for a more targeted and tailored resolution process, addressing the specific challenges and issues associated with the defaulted project. It also provides flexibility for creditors and stakeholders, potentially mitigating the broader impact on the company’s other operations and assets.
However, the treatment of bridge funding in these specialized insolvency proceedings remains a critical concern. Bridge funding, which is often essential for sustaining operations and facilitating the restructuring process, may not be clearly defined or prioritized within the existing legal framework. As a result, there is uncertainty surrounding how such funding will be treated and whether creditors providing bridge capital will receive the priority they expect. This lack of clarity adds complexity to an already intricate process and can deter potential creditors from offering bridge funding, thereby impeding the progress of insolvency proceedings. It underscores the need for clear guidelines and precedents to ensure consistency and fairness in the treatment of bridge funding across real estate insolvency cases.
“Under the IBC, interim finance/bridge funding falls within the definition of ‘insolvency resolution process cost,’ thereby granting it super priority over other debts during the resolution process. However, the treatment of such funding in reverse insolvency cases remains uncertain due to a lack of legislative and judicial precedents,” highlighted Siddharth Srivastava, a partner at Khaitan & Co.
“Given the legislative uncertainty surrounding the treatment of interim finance in reverse insolvency cases, investors seek to secure such status contractually through definitive agreements with the resolution professional (RP) or promoters,” Srivastava further noted. The absence of clarity regarding bridge funding complicates the ability of projects undergoing insolvency to raise essential capital for sustenance. This further exacerbates the challenges associated with implementing reverse insolvency proceedings, as noted by legal experts.
In essence, reverse insolvency poses unique challenges within the real estate sector, particularly regarding the treatment of bridge funding. The lack of established legal frameworks and precedents necessitates careful consideration and contractual arrangements to safeguard the interests of all parties involved. Clarity and guidance from legislative and judicial authorities are crucial for navigating these complexities effectively and ensuring the successful resolution of real estate insolvency cases.
