Project insolvency only; Reverse Insolvency to help Developers and Allottees: NCLAT

Stating that it is difficult to follow the "normal course" in cases of real-estate companies, the National Company Law Appellate Tribunal has stated that a ‘Reverse Corporate Insolvency Resolution Process’ can be followed in such cases in the interest of the allottees and survival of the company..The NCLAT has also held that when creditors of a real-estate project initiate proceedings under Insolvency and Bankruptcy Code, 2016 against a real estate company, the corporate insolvency resolution project is to be confined to that particular project only..Allottees or financial institutions/ banks or operational creditors of other projects cannot file a claim before the Resolution Professional, NCLAT has clarified..The judgement was passed by a two-member Bench of Chairperson Justice SJ Mukhopadhyay and Member (Judicial) Justice Bansi Lal Bhat..Two homebuyers (Applicants) had moved application under Section 7 IBC for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s Umang Realtech Pvt. Ltd. .The application was admitted by NCLT and CIRP was set in motion..Meanwhile, one of the Promoters of the Corporate Debtor, Uppal Housing Private Limited, agreed to remain outside the CIRP but offered to play the role of a ‘lender’ to ensure that the CIRP reached success and the allottees were given possession of their flats/apartments without any third party intervention..Another financial institution, ‘JM Financial Credit Solutions Ltd’, also agreed to cooperate in terms of agreement with the condition that they will get 30% of the amount paid by the allottees at the time of the registration of the flat/apartment..The Flat Buyers Association of the concerned project as well as the Applicants accepted the proposal. .Subsequently, construction was expedited and large number of allottees including the applicants took possession of their respective flats and sale deeds were registered..The NCLAT thus noted that the case at hand was a “peculiar case” in which the Flat Buyers Association, as well as the original Applicants, wanted the CIRP to continue for resolution but did not approve any plan by a third party i.e the Resolution Applicant..The NCLAT perused the law with respect to the status of allottees/homebuyers as Financial Creditors under IBC and observed,.“They (the allottees) do not have any expertise to assess ‘viability’ or ‘feasibility’ of a ‘Corporate Debtor’. They don’t have commercial wisdom like Financial Institutions/ Banks/ NBFCs. However, these allottees have been provided with voting rights for approval of the plan. Many of such cases came to our notice where the allottees are the sole Financial Creditors. However, it is not made clear as to how they can assess the viability and feasibility of the ‘Resolution Plan’ or commercial aspect/ functioning of the ‘Corporate Debtor’..”NCLAT.It was added that in most cases, the Committee of Creditors takes a ‘haircut’. However, in the case of allottees, the same cannot happen..The NCLAT thus relied on the Supreme Court’s decision in the Essar Insolvency case on the point of need to experiment, and decided to “experiment as to whether during the Corporate Insolvency Resolution Process the resolution can reach finality without approval of the third-party resolution plan”..Calling it ‘Reverse Corporate Insolvency Resolution Process’, the NCLAT stated that the same can be followed in the cases of real estate infrastructure companies in the interest of the allottees, for the survival of the real estate company and to ensure completion of projects which provides employment to large number of unorganized workmen..The NCLAT stated that object was that the maximization of the asset of that particular project of the Corporate Debtor in order to balance interests of all the creditors of that particular project. .It thus held that the CIRP for a real-estate company should be on project basis.."..we hold that Corporate Insolvency Resolution Process 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."NCLAT.Stating that the Allottees' claims are to be satisfied by providing the flat/apartment, the NCLAT further noted that a ‘Secured Creditor’ such as ‘financial institutions/ banks’ could not be provided with the asset of the corporate Debtor i.e. flat/apartment in preference over the allottees. .The NCLAT noted that one or other allottee may agree to opt for another flat/apartment or one tower or other tower if not allotted to any other, but the prayer for refund cannot be allowed by the NCLT or the NCLAT. .However, it is open to an allottee to request the Interim Resolution Professional or the Promoter to find out a buyer in cases of refund or reach agreement with the Promoter, it is further clarified. .In view of the above, the NCLAT directed the Promoter, Uppal Housing Pvt. Ltd to cooperate with the Interim Resolution Professional to ensure that the project is completed with the time frame given by it..It has stated that if the project is completed within the deadline, the CIRP will be closed after intimating it to the Adjudicating Authority..If the Promoter failed to comply with the undertaking, the NCLT will continue with the CIRP, NCLAT said. .Flat Buyers Association was represented by Advocates Manoj Kumar, Shweta Bharti, Shantanu Mallik, Nanki Arora, Katyani Mahendru..Promoter was represented by Advocates Manoj Kr Singh, Vijay K Singh, Daizy Chawla, Kanishka Prasad..Read the Judgement: