Reverse Insolvency: Pragmatic Approaches to Resolution of Real-Estate Projects

The NCLAT in order to surgically address the concerns of the creditors and appellants, categorically clarified that CIRP "against a real estate company (Corporate Debtor) is limited to a project as per approved plan by the Competent Authority and not other projects which are separate at other places for which separate plans are approved".....

The Hon'ble National Company Law Appellate Tribunal (NCLAT) in Company Appeal No. 926 of 2019 titled Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd. & Ors., filed by a multitude of affected flat buyers of the Winter Hills project through Hammurabi & Solomon Partners, recently conceptualized a mechanism to redress grievances of flat buyers in the form of Reverse Corporate Insolvency Resolution Process. The NCLAT vide the order dated 04.02.2020 in Flat Buyers Association directed one of the Promoters of the Corporate Debtor – namely, Uppal Housing Pvt. Ltd. – to co-operate with the Interim Resolution Professional of the Corporate Debtor and disburse amount from outside the CIRP process as a lender (in the capacity of a financial creditor) to ensure that the project is completed within the time frame as specified by the NCLAT. Importantly, if the said Promoter fails to comply with the undertakings, the CIRP against the Corporate Debtor will be completed.

The NCLAT in order to surgically address the concerns of the creditors and appellants i.e. the Flat Buyers Association of homebuyers, categorically clarified that CIRP "against a real estate company (Corporate Debtor) is limited to a project as per approved plan by the Competent Authority and not other projects which are separate at other places for which separate plans approved."

This finding of the NCLAT is much in consonance with the practicalities of real estate projects which are also reverberated in the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2019, which by adding certain provisos to the Section 7 of the Insolvency & Bankruptcy Code, 2016 (Code) specifies that "for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less[…]"; thereby implying that even the framers of the said ordinance recognize that it is the specific real estate projects and not the entire corporate entity of the corporate debtor that should be subjected to CIRP; and in the event the goals set by the NCLAT are met, the CIRP will be closed after intimating the same to the concerned NCLT.

The pragmatic approach so employed by the Hon'ble NCLAT goes to the meticulous extents of even identifying the date by when all internal fit outs for electricity, water connection should also be completed, and further even specifies that allottees in whose favor possession has been offered and clearance has been given by the competent authority are bound to pay the cost for registration and directed to deposit registration cost to get the flats/apartments registered after paying all the balance amount in terms of the agreement.

A key and paramount feature of the Reverse CIRP is that the protections under the moratorium so garnered to the Corporate Debtor for its revival by virtue of Section 14 of the Code will continue and it is the Interim Resolution Professional who will oversee that all the funds brought in by the said Promoter and those demanded and received from the homebuyers are used specifically for the completion of the project. The Reverse CIRP propounds to achieve this by mandating that the amounts can be utilized only by issuance of cheques signed by the authorized person of the Corporate Debtor with the counter signature by the Interim Resolution Professional.

The order of the NCLAT should be appreciated even by all classes of Financial Creditors, both non-homebuyer Financial Creditors and even the allottees as the Reverse CIRP is based on the NCLAT identifying the difficult position the Financial Creditors are collectively dragged into during the CIRP of a real estate project, as the Secured Creditors, such as financial institutions/banks, cannot be provided the asset (being the unit, flat or apartment in question) by preference over the allottees, despite the latter being unsecured financial creditors as it is for the said allottees that whom the project has been approved. It is the claims of these allottees that are satisfied by providing the unit.

The employment of the novel approach under Reverse CIRP comes in the form of a much needed sigh of relief for the real estate developers and stakeholders including Banks and operational creditors for the same finally shows the light at the end of the tunnel to complete the project under the supervision of the court appointed Interim Resolution Professional, and very well balances the rights of all the stakeholders concerned with the project. With this judgment, the long-drawn juxtaposition of the recognition of allottees of real-estate projects as Financial Creditors under the Insolvency & Bankruptcy Code, 2016 against their often touted inability to effectively exercise "commercial wisdom" to resolve an insolvent corporate debtor has finally been addressed within the realms of the practical realities of real estate projects and the economic conditions of the real estate sector.