20 April 2020

IBC UPDATE | REVERSE CORPORATE INSOLVENCY PROCESS TO BE FOLLOWED FOR REAL ESTATE COMPANIES

National Company Law Appellate Tribunal (NCLAT) recently passed a first of its kind Order, in Umang Realtech Case, wherein it held that Corporate Insolvency Resolution Process (CIRP) initiated against a real estate company is to be confined to a particular project and the same cannot affect other projects of the real estate company.

Background:

Two allottees (Applicants), under a project being developed by Umang Realtech Private Limited (Corporate Debtor) moved an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating CIRP of the Corporate Debtor. National Company Law Tribunal, Principal Bench, New Delhi (NCLT) admitted the application.

As per the IBC, after initiation of the CIRP, it is the duty of the Interim Resolution Professional (IRP)/ Resolution Profession (RP) to keep the company a going concern. For keeping a real estate infrastructure company a going concern, the pending flats/ apartments need to be completed and sold. In the event CIRP is initiated against a corporate debtor who is in the business of real estate development, the flat/apartment purchasers, of not only that project, but of all the projects of that corporate debtor would get hampered.

The order of the NCLT, admitting the application was challenged before the NCLAT by the other flat buyers through the flat buyers association of the said project, as there was already an extra ordinary delay in the completion of the project.

NCLAT observed that::

• The Applicants and the flat buyers association i.e. the appellant, wanted the Corporate Debtor to go through CIRP, but at the same time, did not approve of any resolution plan.
  
  
• Real Estate allottees, unlike other financial creditors, like banks, Non-Banking Financial Companies (NBFC) and other financial institutions, do not have commercial wisdom and thus cannot assess the viability/ feasibility of the resolution plan or commercial aspect of the corporate debtor.
  
  
• Thus, in case of CIRP instituted by financial or operational creditors against a real estate company/ corporate debtor, the same would be limited to that particular project in respect of which the financial or operational debt has been incurred. It cannot affect any other project(s) of the same corporate debtor in other places where separate plan(s) are approved by different authorities, land and its owner may be different and mainly the allottees (financial creditors), financial institutions (financial creditors, operational creditors) are different for such separate project.
  
  
• A secured creditor such as a financial institution/ bank, cannot be provided with the asset (flat/apartment) by preference over the allottees (unsecured financial creditors) for whom the project has been approved. Their claims are to be satisfied by providing the flat/ apartment. While satisfying the allottees, one or more allottees may agree to opt for another flat/ apartment in the same tower or other towers if not allotted to any other allottee. In such a case their agreements can be modified by the IRP/ RP with the counter signature of the promoter and the allottees, so that the allottees (financial creditors), who are paying rent or paying interest to banks may get possession on an earlier date.
  
  
• Thus, in light of the peculiar situation of real estate companies, the NCLAT held that `Reverse CIRP` must be followed in such cases. The NCLAT directed one of the promoters of the Corporate Debtor to act as a financial creditor and disburse amounts for keeping the Corporate Debtor a going concern. Further, the NCLAT observed that the IRP may sell the unsold flats to the intending purchasers and the amount so received should be used for completion of the project and paying the financial creditors. As per the NCLAT, the allottees can also approach the IRP for finding a third party, who is interested in purchasing their flat/ apartment.
  
  
• It would also be open to an allottee to reach an agreement with the promoter (not Corporate Debtor) for refund of amount.
  
  
• The NCLAT directed that only after getting the certificate of completion from IRP and approval of the NCLT, unsold flats/ apartments etc. can be handed over to the promoter.
  
  

MHCO Comment: This is an interesting development under the IBC. NCLAT has recognised the fact that the primary concern of the allottees/ home buyers is getting possession of their homes. The NCLAT order also secured the interest of the allotees/ home buyers of other projects of the Corporate Debtor, who are not facing any issues or problems with their own respective projects. NCLAT has thus formulated a new concept of Reverse CIRP in order to expedite the completion of the real estate project. 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.