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NCLAT sets out ‘reverse corporate insolvency process’ for real estate companies
February 4, 2020Flat Buyers Association Winter Hills vs. Umang Realtech Pvt Ltd through IRP & Ors.[1]
The NCLAT has laid down a Reverse Corporate Insolvency Process’ for real estate companies, which is in the interest of both the allottees, the companies/Corporate Debtors (CDs) and ensures the completion of real estate projects. It stated that for real estate companies it was not possible to maximise the assets of the CD and to balance the interests of secured and unsecured creditors – financial/operational creditors, for the reason that the infrastructure (flat/apartment) that is constructed for the allottees by the CD is its asset. This asset cannot be distributed as it may be secured in favour of financial institutions, banks, NBFCs. On the other hand, the same asset is to be transferred to the allottees who are unsecured creditors. Banks usually do not accept flats in lieu of monies disbursed by them. While in a normal CIRP the CoC takes a haircut, in the case of allottees (financial creditors) there cannot be a haircut of flats/apartments. In this situation, a ‘Reverse Corporate Insolvency Resolution Process’ would be appropriate wherein the resolution can reach finality without approval of a third party resolution plan.
In the instant case, one of the Promoters of the CD – Uppal Housing Pvt Ltd/ Intervenor agreed to remain outside the CIRP but would play the role of a lender (financial creditor) to ensure the CIRP is successful and the allottees take possession of their flats during the CIRP without any third-party intervention. One of the financial institutions agreed to cooperate on condition that that it would get 30% of the amount paid by allottees at the time of registration of the flat/apartment. Thus, it would be possible to complete the project and hand-over the flats/apartments to the allottees within a time period laid down by the NCLAT.
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In such a situation the Appellate Tribunal clarified that:
- If a CIRP is initiated against a real estate company by allottees (Financial creditors) or Financial institutions (Other financial creditors) or operational creditors of one project, that CIRP is confined to the particular project. It cannot affect any other project of the same real estate company in another place where separate plans are approved by different authorities and where the land, allottees and other financial creditors are different for that other project. Therefore, all the assets of the corporate debtor/real estate company are not be maximised. The CIRP should be on a project basis as per the approved plan of the competent authority. Allottees, financial creditors or operational creditors of another project cannot file a claim before the IRP of any other project.
- A secured creditor such as a financial institution or bank cannot be given preference with respect to the flat/apartment over the allottees (unsecured creditors) for whom the project has been approved. Their claims have to be satisfied by providing the flat/apartment.
- While satisfying their claims, some allottees may agree to opt for another flat/apartment or another tower if not allotted to anyone as yet. In such cases their agreement can be modified by the IRP, with the counter signature of the promoter and the allottees. This will enable some allottees to get earlier possession and be relieved from paying interest to banks or rentals.
- However, no refund can be allowed to allottees by the AA or the NCLAT, in view of Pioneer Urban Land & Infrastructure Ltd & Anr vs UoI, wherein the SC held that allottees who do not wish to go ahead with their obligation to take possession due to a falling market and want get back their monies by using the CIRP process, would not be entertained/granted relief.
- After having been offered allotment, it was open to an allottee to request the IRP/Promoter, whoever is in charge, to find a third party buyer who would buy the flat/apartment and get the money back. The allottee may also, after the completion of the flat or during the completion of the project, enter into an agreement with the promoter (not the corporate debtor) for refund of the amount.
In this ‘Reverse Corporate Insolvency Resolution Process’ the interest of the allottees is protected and the survival of real estate companies and completion of projects is ensured.
Footnote
[1] Company Appeal (AT) (Insolvency) No. 926 of 2019, decided on 4 February 2020, coram : S.J. Mukhopadhaya J. and Bansi Lal Bhat J.
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