Is the Reverse CIRP a Tailor-Made Remedy for Homebuyers?

by Palak Kumar

The Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) was brought in, interalia, to provide for the resolution of the stressed corporate debtor, for maximization of value of the assets and for protection of interests of all the stakeholders. The IBC, 2016 in its sections 7, 9 and 10 provides how a Financial Creditor, an Operational Creditor and the Corporate Debtor himself can file for Corporate Insolvency Resolution Process (“CIRP”) in case of any default of one lakh and above.

Until June 2018, the term ‘Financial Creditor’ as defined under Section 5(8) of IBC, 2016 did not include homebuyers and so they could not initiate the CIRP in case the real estate developer failed to finish the projects within the stipulated period. This problem was finally resolved by coming into force of the amendment dated 6 June 2018 (“2018 Amendment”), which gave a status of financial creditors to homebuyers.  This essentially meant that the homebuyers could now approach the National Company Law Tribunal (“NCLT”) on occurrence of any delay in possession or completion of project by the real estate developer.

The amendment received many catcalls from the real estate developers and myriad of petitions were filed before various courts to challenge the validity of the amendment.  The Supreme Court in the case of Pioneer Urban Land and Infrastructure Limited v. Union of India upheld the validity of the 2018 Amendment. The court held that the amount given by a homebuyer under an agreement for sale of property to the real estate developer does have a commercial effect of borrowing and thus the homebuyers would qualify as financial creditors under Section 5(8) of the IBC, 2016.

However, a recent ruling by the National Company Law Appellate Tribunal (“NCLAT”) in the case of Flat Buyers Association v. Umang Realtech Pvt.Ltd. has turned out to be a tipping point for the homebuyers and their right to initiate the CIRP against the real estate developers.

The author through this blog attempts to analyze the reasoning adopted by the NCLAT in innovating the CIRP process under the IBC, 2016 and coming up with the concept of Reverse Corporate Insolvency Resolution Process (“Reverse CIRP”).

FACTS AND ANALYSIS

An application under Section 7 of the IBC, 2016 was filed by two real estate allottees because of delay in completion of the project named Winter Hills, 77 Gurgaon, Haryana. As per the Buyer’s Agreement, the project had exceeded the stipulated time within which it was to be completed and the possession handed over to the real estate allottees. Aggrieved by the delay in the project, the two allottees made an application to the NCLT for initiating CIRP. The NCLT via order dated August 28, 2019 admitted the application and directed the allottees to deposit an amount of two lakh for meeting the expenses of the CIRP.

The order was in appeal before the NCLAT by the Flat Buyers Association who claimed that admitting an application by two real estate allottees hampers the interest of other allottees. The Flat Buyers Association argued that the construction of the flats is on the verge of completion and that the corporate debtor must be given some more time to finish the project instead of filing for CIRP. Moreover, the CIRP expenses, which in infrastructure projects would mainly involve the cost of the project, will not be complete with an amount of two lakh. The Flat Buyers Association also claimed that the claim of the allottees must confine to the real estate project in question. A single resolution plan cannot maximize all the infrastructure projects of a real estate developer.

In case of a regular CIRP, a moratorium under Section 14 of the IBC, 2016 will operate, the construction would stall and it would involve the claim of other stakeholders such as secured creditors like banks and financial institutions. Moreover, the real estate allottees that would form the Committee of Creditors may lack commercial wisdom to decide upon a viable plan for resolution of the Corporate Debtor and satisfaction of claims of all the stakeholders involved. If the Corporate Debtor goes into liquidation, the secured creditors have better right in the waterfall mechanism under section 53 of the IBC, 2016 as compared to the unsecured homebuyers. Moreover, the asset, which is the flat itself, needs to be sold off to pay the debts of all the stakeholders.

The NCLAT recognized that the corporate debtor is on the verge of completion of the project and the fact that the homebuyer’s ultimate aim behind invoking CIRP is to obtain the possession of the flat. Taking note of the above fact the NCLAT held that no Committee of Creditors will be formed and instead of inviting a third party to submit a resolution plan, the  promoter of the real estate company who is willing to offer funds for finishing the real estate project would act as resolution applicant. The court also held that maximization of asset would be with respect to the project in default and not with respect to other projects of the corporate debtor. This process of accepting a resolution plan form the promoter instead of a third part resolution plan and limiting the claim of the creditors to only the project in default is what a reverse CIRP is.

CONCLUSION

The author stands oppose to the idea of reverse CIRP because it appears to be a mechanism to circumvent Section 29A of the IBC, 2016. The section explicitly bars an interested party such as a promoter, director of the Corporate Debtor from participating in the CIRP in any manner. Moreover, reverse CIRP cannot be a rule and cannot apply as a straightjacket formula in case of insolvency of all real estate projects.  Even though reverse CIRP worked out in the Umang Realtech, it does not mean, that it would be a panacea for all the real estate allottees suffering from the default of the real estate developers. Allowing the courts to come up with their own new methods to deal with economic problems like these would only lead to judicial adventurism which even though be well suited for few cases, will only lead to circumventing the already existing law in the long run. The author is of the view that reverse CIRP as a measure to deal with the default of the corporate debtor in real estate infrastructure projects was only a tailor made remedy suited to the facts and circumstances of the Umang Realtech case. We cannot adopt it as thumb rule to apply on all cases involving insolvency of a real estate developer.

The idea undoubtedly is a novel way to deal with defaults in case of real estate developers and is a relief to both the homebuyer as well as the developer. However, existing IBC, 2016 does not provide for such methodology and so a new amendment must introduce it before such an approach is applied. The courts have to apply the legislation already in place and not come up with new ways to sideline the existing law. The court must be wary of the fact that promoters cannot be a part of the CIRP process under the IBC, 2016.

The Author of this article is Palak Kumar. She is a third-year law student at National Law Institute University, Bhopal.