In the case of Flat Buyers Association Winter Hills - 77, Gurgaon v. Umang Realtech Private Limited through IRP and Others, the National Company Law Appellate Tribunal, New Delhi ("NCLAT"), by order dated February 4, 2020 ("Order"), held that a Corporate Insolvency Resolution Process ("CIRP") against a real estate company would have to be limited to only the concerned project and will not affect other projects undertaken by it.
In the instant case titled Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Private Limited through IRP and Others the issue raised for clarification before the NCLAT was:
Whether CIRP against a real estate firm should be confined to the project in question or if other projects of the aforementioned real estate company should also be included in the CIRP?
With regard to this issue, The NCLAT noted that if allottees, financial institutions/banks, or operational creditors of one project initiate CIRP against a real estate company (corporate debtor), it should be limited to only that particular project and should not affect any other projects of the same real estate company in other locations with different land owners, allottees, financial institutions, and operational creditors. So, according to the plan approved by the relevant government, CIRP should be on a project-by-project basis rather than maximising all of the real estate company's assets. The interim resolution professional of another project by the same real estate firm should not accept a claim from allottees, financial institutions/banks, or operational creditors of a real estate project as a result.
The NCLAT further noted that allottees (unsecured financial creditors) for whom the project has been approved, as opposed to secured creditors such as financial institutions/banks, cannot be given preference in receiving the asset (a flat or apartment). The provision of the allottees' flat or apartment is required to satiate their entitlements. The NCLAT remarked that typically, banks, financial institutions, and NBFCs would not want to accept the flats or apartments in exchange for the cash they have disbursed. The assets of the corporate debtor, however, are subject to the claims of the unsecured creditors. The NCLAT was of the opinion that real estate infrastructure companies could follow a project-specific CIRP process in the interest of allottees, the survival of such companies, and to ensure the completion of projects that provide employment to a significant number of unorganised workmen where it is very difficult to follow the normal course of CIRP.
The NCLAT ruled that CIRP should only be applied to one project by a real estate business, in accordance with the plan authorised by the appropriate authority, and not to any of its other projects for which independent plans have been authorised. As a result, the CIRP with respect to the Project cannot be combined with other Respondent projects, nor can the assets of those other projects be realised. With the aforementioned observations and instructions, the appeal was rejected.
The NCLAT categorically stated that,
“a defaulting allottee who has knocked on the door of the court is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment and hence when the real estate market is falling, the allottee does not want to go ahead with his obligation to take possession of the flat/apartment but wants to jump ship and get a refund of the monies paid by him by adopting coercive measures.”