The National Company Law Appellate Tribunal (‘NCLAT’) took a practical approach bordered on survival of the business and satisfying the interests of the stakeholders involved and introduced the concept of the reverse corporate insolvency resolution process (‘CIRP’).
In the instant case titled Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd three issues were raised before the NCLAT for clarification:
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.
Whether a financial institution/bank (secured financial creditor) should be given preference over an allottee of flat/apartment (unsecured financial creditor) under a CIRP.
Whether a claim for refund by allottees can be allowed by the adjudicating authority.
With regard to the first issue, NCLAT held that, if allottees (financial creditors), financial institutions/banks (other financial creditors), or operational creditors of one project file a CIRP against a real estate company (corporate debtor), it should be limited to that project and not affect any other projects of the same real estate company in other locations with different landowners, allottees, financial institutions, or operational creditors. As a result, all of the real estate company's assets should not be maximised, and CIRP should be done on a project-by-project basis, in accordance with the plan approved by the competent authorities. As a result, allottees, financial institutions/banks, or operational creditors of a real estate project are unable to bring a claim against the interim resolution professional of another project by the same real estate business.
As on the second issue, The NCLAT remarked that banks, financial institutions, and non-bank financial companies (NBFCs) generally do not want to receive flats/apartments in exchange for the money they have issued. Unsecured creditors, on the other hand, have a claim on the corporate debtor's assets.
Secured creditors, such as financial institutions/banks, were found to be unable to receive the asset (flat/apartment) before allottees (unsecured financial creditors) for whom the project was approved. Allottees' claims would have to be met by providing their flat/apartment.
Lastly, for the third issue, The NCLAT also looked into allottees' demands for refunds, concluding that such claims cannot be considered in the light of the judgement given by the Supreme Court in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [2019 SCC online SC 1005], where it was held that, “a defaulting allottee who has knocked 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”. The NCLAT also stated that after an allocation is made, an allottee has the option of requesting that the interim resolution professional/promoter, whoever is in charge, find a third party to purchase the concerned flat/apartment and refund her/his money. It is also possible for an allottee to negotiate a refund with the promoter (rather than the corporate debtor).
The Court categorically held that:
“Reverse Corporate Insolvency Resolution Process can be followed in the cases of real estate infrastructure companies in the interest of the allottees and survival of the real estate companies and to ensure completion of projects which provides employment to a large number of unorganized workmen”.
The NCLAT ruled that CIRP should be confined to a single project undertaken by a real estate business under a plan approved by the competent authority, rather than the company's other projects for which different plans have been approved. As a result, the CIRP for the Project cannot be combined with the Respondent's other projects, and the assets of those other projects cannot be realised. With the aforementioned observations and directives, the appeal was dismissed.