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Reverse CIRP - Reflections on NCLAT Legal Experimentation

Ruling of the National Company Law Appellate Tribunal (NCLAT) in Flat Buyers Association v. Umang Realtech Pvt. Ltd. is of significance. It not only affects the existing corporate insolvency resolution process (CIRP) with respect to real estate developers, but it also grants the promoter of the group an opportunity to participate in the process as a lender. The NCLAT held that in case of an insolvency proceedings against a real estate developer, it would be limited to that particular project & would not go on to include the other projects of the company. Background: In this case, an application was filed by the home allottees (being financial creditors) for initiating CIRP against the real estate developer, Umang Realtech. However, they resisted the idea of approval of resolution plan of a third party by the committee of creditors (CoC). After having dealt with the parties extensively, the NCLAT finally came to the finding that in such a case, where Corporate Insolvency Resolution Process (CIRP)  proceedings has been initiated against a real estate company by a homebuyer, its scope would be restricted to that specific project of the company & would not impact the other projects. In case of real estate companies, it is not a prerequisite to maximize all the assets (i.e. buildings), but only a particular asset. The CIRP would be limited to that project of the company, & no other allottees or creditors of other projects would have the right to put forward their claims before the resolution professional. In such cases, where the tribunal wishes to not only maximize the asset of the corporate debtor (i.e. real estate developer) but also balance the interest of the homebuyers, it is not easy to follow the normal CIRP. Therefore, it referred to the concept of Reverse CIRP. It allowed the promoters of the real estate group to act as lenders & cooperate with the resolution professional to ensure that the project is completed on time. In the normal course of proceedings, under the insolvency law, the CIRP would involve the imposition of moratorium period, suspension or termination of supply of essential goods & services, verification of claims of creditors & approval or rejection of the proposed resolution plan by the creditors. If the resolution plan is approved by the CoC, it becomes binding upon all the stakeholders of the company, but if it is rejected, the company goes into liquidation. The reverse CIRP proposed by the NCLAT for real estate projects would imply that the project of the corporate debtor does not stop, but continues so that the allottees can bear the fruits of their investments & the resolution professional  can carry on the operations of the company as a going concern, In this way, the projects can be completed within a given time frame, thus protecting employment of unorganized workers. Analysis: The Insolvency & Bankruptcy Code does not contain any provision for Reverse CIRP. Considering the given situation at hand, liquidation was not in the interest of the homebuyers. In that situation, the only way out would have been to avoid the effect of liquidation by making out a plan outside the provisions of the IBC. The Supreme Court has held that the courts may resolve difficulties by application of common law or equitable principles where a legislation is silent or ambiguous. It has also observed that such cases will be exceptional. It is the duty of the courts to give effect to the intention of legislature as impugned legislation is to be considered as a whole. Allowing reverse CIRP might be a new step to protect and balance the interest of all the stakeholders. This will be beneficial for both homebuyers and project developers. Considering that homebuyers are key stakeholders and the concept of CIRP is to protect the rights and interests of homebuyers, such a step might be considered necessary. The liquidation of project developers might not secure the interests of the homebuyers. homebuyers have made valuable investments by contributing their hard-earned money in the hope of obtaining a home, such order is deemed to be in the interest of all.

 

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