Question-1: Whether the Insolvency and Bankruptcy Code, 2016 contains any provision regarding ‘Reverse CIRP’.
Answer: No: There is no such provision exists in the Insolvency and Bankruptcy Code of 2016 (‘IBC/Code’).
Question-2: In which case the concept of ‘Reverse CIRP’ was introduced?
Answer: In 2020, Umang Realtech Pvt. Ltd. was the first company in which the National Company Law Appellate Tribunal (‘NCLAT’) (by its order dated 04.02.2020) experimented with the Reverse CIRP doctrine. In view of the observation of the Hon’ble Supreme Court in “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (2019 SCC On Line SC 1478)”, the NCLAT experimented as to whether during the Corporate Insolvency Resolution Process the resolution can reach finality without approval of the third party resolution plan.
The NCLAT in the matter of Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd. (through IRP & Ors.) (2020) [referred to as ‘Winter Hills’] took a practical approach bordered on survival of the business and satisfying the interests of the stakeholders involved and introduced the concept of Reverse CIRP.
Mrs. Rachna Singh and Mr. Ajay Singh (Allottees) had moved an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of CIRP of M/s. Umang Realtech Pvt. Ltd., a real estate company involved in constructing flats/ apartments and the said application was admitted by National Company Law Tribunal (‘NCLT’), Principal Bench, New Delhi.
Question-3: Whether Reverse CIRP concept introduced in Umang Realtech Pvt. Ltd. is a Precedent?
Answer: This case, Winter Hills was challenged in the Supreme Court but the Apex court refused to set aside the impugned order of the NCLAT. Legal experts say that the Hon’ble Supreme Court’s ruling cannot become a Reverse CIRP precedent because the Hon’ble Supreme Court merely refused to interfere with the NCLAT order in the Umang Realtech Pvt. Ltd. case. In one of its judgments, the Hon’ble Supreme Court has clarified that only a well-reasoned order will have a binding effect. Since the Court did not pass such an order in the Umang Realtech Pvt. Ltd. case, it will not become a precedent.
Legal and corporate experts also say that the NCLAT might have experimented with an intent to safeguard the interest of all the stakeholders. The mechanism adopted by NCLAT in the Reverse CIRP is too peculiar to the fact and circumstances of the aforesaid judgment and it is unlikely that the same can be used as a precedent to be followed in other matters involving real estate developers. The concept of Reverse CIRP as introduced in aforesaid judgment is based on several surmises, which may have been applicable in the said case but cannot be followed as a practice for other real estate companies.
In the case of M/s. Sheltrex Developers Pvt. Ltd. Vs. M/s. Tata Capital Housing Finance Ltd. (2022), an application was filed under Section 60(5) of IBC, 2016 by the Resolution Professional for M/s Sheltrex Developers Pvt. Ltd (Corporate Debtor) seeking the following reliefs:
a) Permit the Applicant herein to constitute Project-based Committee of Creditors, for the purpose of conducting reverse corporate insolvency resolution process, as mandated by the Hon’ble NCLAT in Flat Buyers Association Winter Hills – 77 Gurgaon Vs. Umang Realtech Pvt. Ltd through IRP & Ors. ;
b) Permit the Applicant hereinto issue separate Expression of Interest for each project under control of the Corporate Debtor and to consequently invite and place before the respective Committee of Creditors, Resolution Plans for each project under control of the Corporate Debtor.
The NCLT, Chennai Bench, in the said matter, held that on a thorough reading of the IBC, 2016 read along with the regulations made there under envisages the insolvency of the Corporate Debtor and it can be seen that there is no concept of limited CIRP or CIRP for specific projects anywhere. It can be further seen in the Hon’ble Supreme Court judgment in Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India , that the IBC, 2016 is a beneficial legislation which can be triggered to put the Corporate Debtor back on its feet in the interest of unsecured creditors like allottees, so that a replaced management may carry out the real estate project as originally envisaged and deliver the flat/apartment as soon as possible or pay late fees for late delivery. As far as the case laws relied on by the Applicant is concerned i.e. Flat Buyers Association Winter Hills – 77 Gurgaon Vs. Umang Realtech Pvt. Ltd through IRP & Ors. , Rajesh Goyal Vs. Babita Gupta & Ors. and Shri Bijay Pratap Singh Vs. Unimax International , NCLT, Chennai Bench is of the view that, the mechanism adopted by the Hon’ble NCLAT is too peculiar to the facts and circumstances of the Winter Hills judgment and cannot be used as a precedent in the present scenario. Moreover, in the present case, as no promoters have put forward any funds to avoid CIRP, the process of project-wise CIRP cannot be followed here as how it was followed in the Winter Hills judgment and the decision in Rajesh Goyal.
Question-4: What are the difficulties in process of CIRP of real estate infrastructure companies, observed by the NCLAT in Winter Hills judgment?
1. The ‘allottees’ (Homebuyers) come within the meaning of ‘Financial Creditors’. They 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’ in terms of the decision of the Hon’ble Supreme Court in “Innoventive Industries Limited v. ICICI Bank and Anr.3” followed by “Swiss Ribbons Pvt. Ltd. & Anr. V. Union of India & Ors.4” and “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.”.
2. In terms of the ‘I&B Code’ and the decisions of the Hon’ble Supreme Court, the ‘Resolution Plan’ must maximize the assets of the Corporate Debtor and balance the stakeholders (secured and unsecured creditors- Financial Creditors/Operational Creditors). The Infrastructure which is constructed for the allottees by Corporate Debtor (Infrastructure Company) is an asset of the Corporate Debtor. The assets of the Corporate Debtor as per the Code cannot be distributed, which are secured for ‘Secured Creditors’. On the contrary, allottees (Homebuyers) who are ‘Unsecured Creditors’, the assets of the Corporate Debtor which is the Infrastructure, is to be transferred in their favour (‘Unsecured Creditors’) and not to the ‘Secured Creditors’ such as Financial Institutions/ Banks/ NBFCs. Normally, the Banks/ Financial Institutions/ NBFCs also would not like to take the flats/ apartments in lieu of the money disbursed by them. On the other hand, the ‘unsecured creditors’ have a right over the assets of the Corporate Debtor i.e. flats/ apartment, assets of the Company.
3. In most cases, the Committee of Creditors take ‘haircut’. The Resolution Applicants satisfy them most of the time with lesser amount than the amount as determined. In the case of allottees (Financial Creditors), there cannot be a haircut of assets/ flats/ apartment.
Therefore, the law is to be explained now again in a reverse way.
Question-5: What practical approach bordered on survival of the business and satisfying the interests of the stakeholders involved have been taken by the NCLAT in aforesaid case and introduced the concept of Reverse CIRP?
1. In Corporate Insolvency Resolution Process against a real estate, if allottees (Financial Creditors) or Financial Institutions/Banks (Other Financial Creditors) or Operational Creditors of one project initiated Corporate Insolvency Resolution Process against the Corporate Debtor (real estate company), it is confined to the particular project, it cannot affect any other project(s) of the same real estate company (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. Therefore, all the asset of the company (Corporate Debtor) are not to be maximized. The asset of the company (Corporate Debtor – real estate) of that particular project is to be maximized for balancing the creditors such as allottees, financial institutions and operational creditors of that particular project. Corporate Insolvency Resolution Process should be project basis, as per approved plan by the Competent Authority. Any other allottees (financial creditors) or financial institutions/ banks (other financial creditors) or operational creditors of other project cannot file a claim before the Interim Resolution Professional of other project and such claim cannot be entertained. So, 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 approved. For example – in this case the Winter Hill – 77 Gurgaon Project of the ‘Corporate Debtor’ has been place of Corporate Insolvency Resolution Process. If the same real estate company (Corporate Debtor herein) has any other project in another town such as Delhi or Kerala or Mumbai, they cannot be clubbed together nor the asset of the Corporate Debtor (Company) for such other projects can be maximised.
2. Further, a ‘Secured Creditor’ such as ‘financial institutions/ banks’, 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 other allottee may agree to opt for another flat/apartment or one tower or other tower if not allotted to any other. In such case their agreements can be modified by the Interim Resolution Professional/Resolution Professional with the counter signature of the Promoter and the allottees, so that the allottees (financial creditors), who are on rent or paying interest to banks may like to get earlier possession and are relieved from paying rent or interest to banks.
3. There may be some allottees who may ask for refund. But that prayer cannot be allowed by the Adjudicating Authority (National Company Law Tribunal) or by this Appellate Tribunal in view of the decision of the Hon’ble Supreme court in “Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors.− (2019) SCC OnLine SC 1005”, wherein the Hon’ble Supreme Court observed as follows:-
“57. It can thus be seen that just as information utilities provide the kind of information as to default that banks and financial institutions are provided under Sections 214 to 216 of the Code read with Regulations 25 and 27 of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017, allottees of real estate projects can come armed with the same kind of information, this time provided by the promoter or real estate developer itself, on the basis of which, prima facie at least, a “default” relating to amounts due and payable to the allottee is made out in an application under Section 7 of the Code. We may mention here that once this prima facie case is made out, the burden shifts on the promoter/real estate developer to point out in their reply and in the hearing before the NCLT, that the allottee is himself a defaulter and would, therefore, on a reading of the agreement and the applicable RERA Rules and Regulations, not be entitled to any relief including payment of compensation and/or refund, entailing a dismissal of the said application. At this stage also, it is important to point out, in answer to the arguments made by the Petitioners, that under Section 65 of the Code, the real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of insolvency. This the real estate developer may do by pointing out, for example, that the allottee who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment. They can also point out that in a real estate market which is falling, the allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it. Given the above, it is clear that it is very difficult to accede to the Petitioners’ contention that a wholly one-sided and futile hearing will take place before the NCLT by trigger-happy allottees who would be able to ignite the process of removal of the management of the real estate project and/or lead the corporate debtor to its death.”
4. However, after offering allotment it is open to an allottee to request the Interim Resolution Professional/Promoter, whoever is in-charge, to find out a third party to purchase said flat/apartment and get the money back. After completion of the flats/project or during the completion of the project. It is also open to an allottee to reach agreement with the Promoter (not Corporate Debtor) for refund of amount.
As part of its order, the NCLAT directed and set out a time bound schedule, mode and manner in which the infusion of funds will be made by Uppal Housing Pvt. Ltd. and the balance payments by the allottees and also a schedule within which the project shall be completed and possession be handed over to the Allottees
Question-6: What was root on which NCLAT experimented as to whether during the Corporate Insolvency Resolution Process the resolution can reach finality without approval of the third party resolution plan?
Answer: The NCLAT had referred to the judgment passed by the Apex Court in the landmark Swiss Ribbons case, wherein it held that the IBC is an economic legislation which deals with economic matters and in the larger sense deals with the economy of the country as a whole and that any denial of the right to experiment is fraught with serious consequences to the nation. In light of the aforesaid observation of the Hon’ble Supreme Court, the NCLAT has experimented as to whether during CIRP the resolution can reach finality without approval of any third-party resolution plan.
Question-7: Whether a CIRP could be without a resolution applicant’s plan, which is a sine qua non under the Code?
Answer: Legal and corporate experts also say that the NCLAT’s decision in aforesaid case to ask one of the promoters of the Corporate Debtor to help the IRP financially so that the homebuyers/allottees can take possession of their flats during the CIRP period is contrary to the scheme of the Code. Parliament has introduced Section 29A into the IBC with a specific purpose. The provisions of section 29A are intended to ensure that among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process. The Statement of Objects and Reasons appended to the Insolvency and Bankruptcy (Amendment) Bill 2017, which was ultimately enacted as Act 8 of 2018 which brought section 29A into the code states that
“2. The Provisions for insolvency resolution and liquidation of a corporate person in the Code did not restrict or bar any person from submitting a resolution plan or participating in the acquisition process of the assets of a company at the time of liquidation. Concerns have been raised that persons who with their misconduct contributed to defaults of companies or are otherwise undesirable, may misuse this situation due to lack of prohibition or restrictions to participate in the resolution or liquidation process and gain or regain control of the Corporate Debtor. This may undermine the processes laid down in the Code as the unscrupulous person would be seen to be rewarded at the expense of creditors. In addition, in order to check that the undesirable persons who may have submitted their resolution plans in the absence of such provisions, responsibility is also being entrusted on the committee of creditors to give a reasonable period to repay overdue amounts and become eligible”.
Furthermore, Parliament was of the view that to allow such persons to participate in the resolution process would undermine the salutary object and purpose of the Act. It must bear in the mind that Section 29A has been enacted in the larger public interest and to facilitate effective corporate governance and Parliament rectified a loophole in the Code which allowed a backdoor entry to erstwhile promoters in the CIRP. In light of the legislative intent behind inclusion of Section 29A, the experts says that NCLAT’s directive to the promoter to act as a ‘lender’ and stay outside the CIRP is in violation of the Code. The NCLAT’s order to act in the capacity of a lender does not oust the fact that the intervenor is a ‘promoter’ and the Code excludes such ‘promoter’ to take part in the resolution process in order to gain an entry into the Corporate Debtor.
Question-8: Whether Reverse CIRP is beyond the scheme of IBC?
Answer: Legal and corporate experts also say that the NCLAT cannot avoid the mechanism laid down by the legislature including precedents propounded by the Apex Court. In Chitra Sharma vs. Union of India (judgment dated 9th August, 2018), the Apex Court acknowledged that liquidation of the Corporate Debtor will not sub-serve the interest of homebuyers but also added that the Court should follow the discipline of the IBC which has been enacted by Parliament specifically to streamline the resolution of corporate insolvencies. Matter involving corporate insolvencies require expert determination. The legislature has made specific provisions which are conceived in public interest and to facilitate good corporate governance. The court should not take itself the burden of supervising the intricacies of the resolution process.
Apparently, the NCLAT, while restricting the CIRP in cases of real estate companies to a Project has gone beyond the scope of the Code as the entire Code only contemplates the insolvency of the Corporate Debtor and there is no concept of limited CIRP under the Code
Question-9: Whether any order in concern to project wise resolution in the matter of Supertech Limited has been passed?
Answer: Yes: The Hon’ble National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi in Company Appeal No. 406/2022, Ram Kishor Arora Suspended Director of M/s. Supertech Ltd. vs Union Bank of India & Anr., decided project wise resolution of Real Estate Company M/s. Supertech Ltd. (Corporate Debtor) as part of interim relief vide order dated 10th June, 2022.
This Appeal was filed by Suspended Director of Corporate Debtor against the order dated 25th March, 2022 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi, Court –VI) admitting the Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by Union Bank of India praying for initiation of CIRP against Corporate Debtor.
Question-10: Whether any order in concern to project wise resolution in the matter of Ansal Properties & Infrastructure Limited has been passed?
Answer: Yes: The Hon’ble National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi in Company Appeal No. 41/2023, Ajay Kumar Gupta & Anr vs Bibhuti Bhushan Biswas & Ors., decided project wise resolution of Real Estate Company M/s. Ansal Properties & Infrastructure Limited (Corporate Debtor) as part of interim relief vide order dated 13th January, 2023.
This Appeal was filed by Ajay Kumar Gupta & Anr. against the order dated 16th November, 2022 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi, Court –II) admitting the Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by Bibhuti Bhushan Biswas & 125 Ors., Home Buyers of ‘Fernhill Project’ situated at Gurgaon praying for initiation of CIRP against Corporate Debtor.
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