IBC: Reverse insolvency to the rescue in housing projects

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Authored by Hammurabi & Solomon Partners

The National Company Law Appellate Tribunal (NCLAT) in Flat Buyers Association Winter Hills – 77, Gurgaon v Umang Realtech Pvt Ltd & Ors, brought by disaffected flat buyers of the Winter Hills project represented by Hammurabi & SolomonPartners, recently formulated a mechanism in the form of a reverse corporate insolvency resolution process to redress the grievances of flat buyers being denied possession because of insolvency proceedings.

The NCLAT directed a promoter of the corporate debtor to cooperate with the interim resolution professional of the corporate debtor and to provide funds from outside the corporate insolvency resolution process (CIRP) as a lender, and in the capacity of a financial creditor, to ensure that the project is completed within the time frame specified by the NCLAT. If the promoter fails to comply with its undertakings the CIRP against the corporate debtor will continue.

In order to address the concerns of both the creditors and the Flat Buyers Association, the NCLAT held that a 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 were approved.”

This finding accords with the practicalities of real estate projects and also with the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, which amended section 7 of the Insolvency and Bankruptcy Code, 2016 (code), to provide that “for financial creditors who are allottees under a real estate project, an application for initiating a corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less”; thereby implying that even the drafter recognized that it is the specific real estate projects and not the entire corporate entity of the corporate debtor that should be subjected to the CIRP. Provided that the goals set by the NCLAT are met, the CIRP will be closed after intimating the same to the NCLT.

This pragmatic approach of the NCLAT even goes so far as to identify the dates by when all internal fit outs for electricity and water connection are to be completed. The order further directed that the allottees in whose favour possession was offered and for which clearance had been given by the competent authority were required to pay the costs of registration and were ordered to deposit the amounts needed to get the flats and apartments registered, that is the balance amount set out in the various agreements.

The vital feature of the reverse CIRP is that the protections given by virtue of section 14 of the code to enable its revival under the moratorium continue, and it is the interim resolution professional who will oversee the process by which all the funds brought in by the promoter and the payments demanded and received from the homebuyers are used specifically and exclusively for the completion of the project. The reverse CIRP will achieve this by mandating that the monies can be accessed only by the issuance of cheques signed by the authorized person of the corporate debtor and countersigned by the interim resolution professional.

The order of the NCLAT should be welcomed by all classes of financial creditors, including non-homebuyer financial creditors and the allottees. The logic of the reverse CIRP is based on the acknowledgement by the NCLAT of the difficult position in which financial creditors find themselves when they are collectively dragged into the CIRP of a real estate project. The asset, being the unit, flat or apartment in question, cannot be given to secured creditors, such as financial institutions and banks in preference to the allottees, despite the latter being unsecured financial creditors. The project will have been approved specifically for the allottees and it is the claims of these allottees that are to be satisfied by the provision of the completed units.

The novel approach of the reverse CIRP process provides much needed relief to real estate developers as well as their stakeholders including banks and operational creditors. The process not only enables completion of the project under the supervision of the court-appointed interim resolution professional but also balances the rights of all stakeholders involved in the specific project without adversely affecting other similar projects. This judgment will greatly ease concerns that the viability of healthy real estate projects is being affected by risks that have arisen in other projects experiencing financial difficulties.

This article was originally published in Indian Business Law Journal

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