Introduction:
A few years back, under the Insolvency & Bankruptcy Statute, 2016, homebuyers don’t have enough security. As a result, if they were placed by the homebuyers, then in the stumble as they did not maintain their assertions under the Code against real estate firms. The legislation passed the Insolvency and Bankruptcy (Amendment) Act 2018 to address the fears of homebuyers, under which homebuyers were classified under the Code beyond the framework of ‘private creditors. In Gurgaon v. Umang Realtech Pvt[1], the current decision of the National Company Law Appellate Tribunal (NCLAT) IRP & Ors on the Reverse-Corporate Insolvency Resolution Process put forward a crucial concern during the resolution process, whether the judgment is unfavourable to the Code/scheme system or not.
Background
The fundamental problem implicated in the matter was that the first applicants, that is; two of the allottees of the project are being built by the Corporate Debtor, that expected the CIRP along with the Flat Buyers Association of the said project. Still, they don’t need the consent of any third-party applicant’s resolution strategy. Although acknowledging the unique position under the Code of allottees as creditors, the NCLAT observed that allottees do not have the competence to determine the effectiveness and efficacy of the outcome strategy or the corporate debtors’ business element. They will also be reluctant to support a settlement agreement that maximizes the Corporate Debtor’s assets and meets the stakeholders.
The NCLAT then permitted the proponent of the Corporate Debtor to remain behind the CIRP procedure and act as a lender, to finish the CIRP procedure and the Scheme, supposedly to encourage the flat buyers to take ownership of their apartments, on the assumption that most allottees are enthusiastic in bringing control of their respective apartments.
The NCLAT observed that if the CIRP is launched in reverse to a real estate corporation by the Financial Creditors or Operating Creditors of a particular Corporate Debtor Project, the CIRP must be restricted to the same Corporate Debtor Project and not to other Corporate Debtor Projects including separate proposals, property, assignments, financial institutions. Consequently, in the interests of the allottees and the sustainability of real estate firms, the NCLAT pursued the Reverse CIRP process.
Legislative Interpretation of Section 29A
Mainly, the decision of the NCLAT was to inquire of one of the Corporate Debtor’s promoters to financially assist the Interim Resolution Specialist for homebuyers/allottees to take ownership of their flats during the CIRP era. It is contradictory to the Code scheme. The Definition of Objects and Reasons of Insolvency and Bankruptcy (Amendment) Act, 2018, as it incorporated Section 29-A into the Legislation, states that “Interests have been put forward to the persons who have led to business defaults or contrarily unacceptable by their wrongdoing may insult this circumstance due to absence of ban or prohibitions on engaging in the settlement or liquidation process.” As the evil citizen will be seen to be compensated at the detriment of borrowers, this will weaken the mechanisms set down in the Code. It should be remembered that Section 29-A is meant to ensure that the perpetrators responsible for the corporate debtor’s insolvency are not involved in the settlement process.
Besides, Section 29-A was implemented in the greater public interest and to encourage good corporate governance as a significant setback in the Code that permitted former promoters to join the legislature remedied the CIRP.
Reverse CIRP: Going Beyond the Scheme of IBC
The NCLAT ‘s contention that, in the case of real property infrastructure firms, the standard process set out in the CIRP can not be pursued in an endeavour to override the settled rules of law developed by the SC. In Chitra Sharma v. Union of India, an insolvency action raised against Jaypee Infratech Ltd., an SPV formed by the clenching company Jaiprakash Associates Ltd., homebuyers/allottees moved the SC to protect their economic interests. The SC agreed that the liquidation of the corporate debtor would not sub-serve the part of homebuyers, but also expanded that the courts could not substitute a mechanism under judicial guidance for the procedures laid down in the IBC.
Interestingly, in the Winter Hills decision, the NCLAT observed that in the case of real estate infrastructure firms, the “Reverse Corporate Insolvency Resolution Procedure” should be pursued in the attention of allottees and the sustainability of real estate corporations and to assure the fulfilment of programs that provide a significant number of unorganized employees with jobs. However, the NCLAT can’t override the process formulated by the legislature, encompassing the precedents suggested by the SC, under the premise of defending the interests of the allottees.
As mooted in the Winter Hills decision, the principle of Reverse CIRP is established on specific hypotheses that may be valid in the case. Still, it might not be adopted as a standard for additional real estate firms. A few of the odd details in this situation are as below:—
a. The flats were dramatically developed and were on the edge of existing turned over for possession;
b. Many of the allottees required apartments for possession;
c. Allottees didn’t have the experience and information to test the feasibility of settlement plans
Thus, even though the allottees would not consent to third-party settlement strategies in such situations, they will not, in all probability, consent to stay for flat ownership and demand a refund of interest money through liquidating the firm.
Besides, the legislature and the SC have consistently recognized allottees as a particular group of financial creditors. They have also been identified in the Insolvency and Bankruptcy Code (Amendment ) Act 2020, specifying those of few 100 allottees or 10% of the entire number of project allottees are expected to re-launch CIRP at the same time, though, it is exceedingly ill-placed to devise the Reverse CIRP purely on the grounds of the presumption that allottees don’t have the aptitude to determine the financial feasibility of the proposals. Therefore, any CIRP undertaken by the allottees shall be handled like that conducted by any other financial creditor in compliance with Section 7 of the Code. The Code doesn’t allow for any distinction or any benchmark that concerns the qualifications of the economic creditors in fact, as the SC noted in Pioneer Urban Land and Infrastructure Ltd. v. UOI[2].
Conclusion
The decision is an action by the NCLAT to conserve the developers of real estate rather than it tries to protect the interests of the allottees. The information that the decision came roughly simultaneously as the latest adjustment influencing the threshold of a minimum of 100 or 10% of the allotted parties to the CIRP project against corporate debtors indicates a joint commitment under the Code to protect CIRP builders. Furthermore, the judgement was based on the fact that at the time of implementation of the CIRP, the balance of Rs.2 lakh deposited by the initial claimants was not adequate to cover the expenses for keeping the corporate debtor as an ongoing concern and, thus, the investor was ordered to shell out funds for the completion of the scheme. In my opinion, the decision is a step by the NCLAT, instead of seeking to safeguard the rights of the allottees, to defend the real estate developers. Such actions of the developers and the inability of the promoter to comply with the conditions of the Reverse CIRP shall only contribute to the wasting of the time of the Tribunal and the loss of the redress for innocent project allottees. Thus the Winter Hills Decision aims to set a harmful precedent for both Reverse CIRP and Project CIRP, which are not only contradictory to the requirements of the Code and the precedents but can also grant real estate developers the opportunity to circumvent their responsibilities.
References:
- https://indialawjournal.org/reverse-cirp-on-real-estate-companies.php
- https://realty.economictimes.indiatimes.com/news/regulatory/cirp-cannot-be-initiated-once-debt-is-converted-into-capital-nclat/77903281
- https://indianexpress.com/article/business/reverse-cirp-realty-cos-insolvency-to-be-project-wise-not-across-group-rules-nclat-6261514/
[1] Company Appeal (AT) (Insolvency) No. 926 of 2019
[2] Writ Petition (Civil) No. 43 Of 2019
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