Explore the efficacy of Reverse CIRP in addressing issues faced by allottees/buyers of properties. Analyze the impact of legal decisions on this insolvency resolution process.
The Hon’ble National Company Law Appellate Tribunal (NCLAT, Delhi) has originated the concept of Reverse Corporate Insolvency Resolution Process (hereinafter CIRP) in the matter of Flat Buyers Association Winter Hills – 77, Gurgaon vs M/s Umang Realtech Pvt. Ltd.(Winter Hills Case) in the interest of allottees in Company Appeal (AT) (Insolvency) No. 926 of 2019. Thereafter, the National Company Law Tribunal (NCLT) is flooded with disputes between builders and allottees of Flat/Apartment/Shop. This concept was brought in action by the order dated 04.02.2020 in Winter Hills Case before Hon’ble NCLAT. The same order was then challenged before the Hon’ble Supreme Court in the matter of Narendra Singh vs M/s Umang Realtech Pvt. Ltd. [Diary No. 13889 of 2020] (the order) but the Apex Court chose not to interfere with the order of the NCLAT introducing the concept of Reverse CIRP by going beyond the boundaries of Insolvency & Bankruptcy Code, 2016 (the Code). Therefore, the Apex Court left the issue open to the Hon’ble NCLAT to take decision for the benefit of the allottees.
In this article, the author will analyze the current scenario with the Reverse CIRP and the impact of the order of the Apex Court on builder buyer dispute for initiation of CIRP against Corporate Debtors when there is a project on verge of getting completed.
BACKGROUND
The Reverse Corporate Insolvency Resolution Process is a process introduced by the Hon’ble NCLAT in which the promoters of the company are allowed to infuse funds in a project as a lender while staying outside the process. This process primarily allows resolution of Corporate Debtors without the interference of any third party. In other words, the promoters of the Corporate Debtors and the creditors enter into an arrangement and revive the Corporate Debtor under the umbrella of Reverse CIRP. However, the Apex Court has refused to pass any order neither in favour nor against the Reverse CIRP. Instead, the Court passed an order saying “we find no ground to interfere with the orders passed by the National Company Law Appellate Tribunal” which has created trouble for the allottees or buyers while approaching the NCLT.
The bench comprising Justices Arun Mishra, B.R Gavai and Krishna Murari after hearing the counsel for the Creditors prima facie took this view of not interfering with the order of NCLAT. This has put the allottees/buyers on the back foot while approaching the NCLT, as without any settled precedent on Reverse CIRP the NCLT on various occasions rejected the applications filed by the Creditors to initiate CIRP against the Corporate Debtor. The Resolution Professional (RP) on behalf of Corporate Debtor filed an application under Section 60 (5) of the Code before NCLT, Chennai in the matter of M/s Sheltrex Developers Pvt. Ltd. vs. M/s Tata Capital Housing Finance Ltd. In his application, the RP was relying upon the Winter Hills Case seeking project wise resolution of M/s Sheltrex Developers Pvt. Ltd. The NCLT after perusing the application held that the Code does not recognize any concept of reverse CIRP or project wise constitution of committee of creditors for project wise resolution. Furthermore, the RP has relied upon the Winter Hills case, Shri Bijay Pratap Singh vs Unimax International (2020), etc, while answering this point the NCLT said that the facts in the present case are peculiar to the judgments in Winter Hills Case and Unimax International therefore the judgments cannot be used as precedent in the present case. Hence, the NCLT denied the request of the RP to initiate Project wise resolution of Corporate Debtor.
REVERSE CIRP- BOON OR BANE
The Project wise resolution or reverse CIRP is introduced with an intention to benefit the allottees/buyers of flat/shop/apartment but in turn the NCLT across the country has displayed different views on reverse CIRP. There is no dispute to the fact that the concept lacks any statutory backing. Even the NCLAT when introduced this concept relied on the judgment of the Apex Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. (2019 SCC OnLine SC 1478) which facilitates the main rationale of the Parliament to introduce this code is to protect the interest of the allottees/buyers (in this case). Therefore, reverse CIRP was introduced with clear and clean intention to protect the interest of the flat/shop/apartment buyers.
The NCLAT formulated three issues in the Winter Hills case to adjudicate the whole matter. These followings are the three issues:
1. Whether CIRP against a real estate company should be limited only to the concerned project or should other projects of the said real estate company be brought under the scope of such CIRP?
2. Whether secured financial creditors should be given preference over unsecured financial creditors under a CIRP?
3. Whether a claim for refund by allottees can be allowed by the adjudicating authority?
While answering the first issue the NCLAT developed the concept of reverse CIRP and observed that the Corporate Debtor will go into reverse CIRP and the allottees will get the possession of the flat on the specified. For the second issue the NCLAT inclined in the favor of unsecured financial creditors and observed that in most cases the Committee of Creditors take haircuts but in case of allottees haircut of flat/shop/apartment is unnecessary or bootless. Lastly, for the third issue the NCLAT answered in negative and relied upon the judgment of the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd vs. Union of India and observed that allottees is a speculative investor and not a person who is genuinely interested in purchasing the flat/apartment.
Therefore, it can be concluded that the NCLAT’s decision in Winter Hills is a great boon for allottees and buyers.
ROLE OF THE SUPREME COURT AND THE PARLIAMENT
Any concept or practice is not considered as precedent unless the particular concept or practice is recognized by the Supreme Court or the Parliament has made it in the form of an Act. In the present scenario also the reverse CIRP is accepted and recognized by the NCLAT but the Supreme Court has refused to comment on the same. The Insolvency Law Committee has published its report after the NCLAT passed an order in Winter Hills case but the Committee made no reference about the reverse CIRP or Project wise resolution. In such cases, the role of the Apex Court becomes cardinal to pass any order either affirming the reverse CIRP or declaring it as against the ethos of Insolvency Code. Similarly, the parliament during the Covid pandemic made certain amendments in the Insolvency and Bankruptcy Code, 2016 to protect the MSMEs going into insolvency. But more than three years have passed to the order of the NCLAT in the Winter Hills case and Parliament has not taken any decision on reverse CIRP.
The Supreme Court and the Parliament have the main role to play when it comes to enactment of any new provision. Hence, both the Supreme Court and the Parliament have shown lack of agility when it comes to implementation of reverse CIRP in law.
CONCLUSION
While there are still some interpretational concerns, given the facts and circumstances, the NCLAT has played a balancing act in this case – on one hand to protect the interests of allottees of several ongoing projects which were near completion and, on the other hand to protect the interests of financial creditors that had lent to a specific project and suffered defaults.
Given the number of such instances, especially in the real estate sector, it is imperative that the Government and IBBI seriously deliberate on the concept of project-wise CIRPs and amend the law to put in place rules on how such project wise CIRPs or reverse CIRPs can function.
References:
1. https://ibclaw.in/mr-n-kumar-rp-of-m-s-sheltrex-developers-pvt-ltd-vs-m-s-tata-capital-housing-finance-ltd-nclt-chennai-bench/
2. https://ibclaw.in/case-name/shri-bijay-pratap-singh-vs-unimax-international/
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