Reverse CIRP: Reflections on NCLAT’s Legal Experimentation

[Ankit Tripathi is a practicing advocate before the Supreme Court and Delhi High Court and Ravleen Chhabra is a final year student at Institute of Law, Nirma University]

A recent ruling of the National Company Law Appellate Tribunal (“NCLAT”) in Flat Buyers Association v. Umang Realtech Pvt. Ltd. comes as a game-changer. 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, the same would be limited to that particular project and would not go on to include the other projects of the company. While this judgment has brought relief to real estate companies, it has raised numerous concerns amongst the legal fraternity who fear that the tribunal has surpassed the boundaries of the Insolvency and Bankruptcy Code, 2016 (“IBC”), given that there is no provision for a “reverse CIRP”.

Through this post, the authors seek to identify the potential reasoning behind the decision of the NCLAT and its consequential impact on both the homebuyers and project developers.

Background

This case involved an application filed by the home allottees (being financial creditors) for initiating CIRP against the project 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 CIRP has been initiated against a real estate company by a homebuyer, its scope would be restricted to that specific project of the company and would not impact its others projects. This would mean that, in case of real estate companies, it is not a prerequisite to maximise all their assets (i.e. buildings), but only a particular asset. The CIRP would be limited to that very project of the company, and 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 maximise the asset of the corporate debtor (i.e. real estate developer) but also balance the interests of the homebuyers, it found it problematic to follow the normal CIRP. Therefore, it referred to what it called a reverse CIRP. Moreover, it allowed the promoters of the group to act as lenders and cooperate with the resolution professional to ensure that the project is completed in a timely manner.

In the normal course of proceedings under insolvency law, the CIRP would involve the imposition of moratorium, the suspension or termination of supply of essential goods and services, the verification of claims of creditors and the approval or rejection of the proposed resolution plan by the creditors. If this resolution place is approved by the CoC, it becomes binding upon all the stakeholders of the company. If rejected, the company enters liquidation. However, the reverse CIRP proposed by the NCLAT for real estate developers 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 and the resolution professional can maintain the company as a going concern. In this manner, the projects can be completed within a given timeframe, thereby protecting employment of a multitude of unorganised workers.

Analysis

The reverse CIRP is a probable step following the “equality for all” approach, wherein the rights and interests of maximum stakeholders in the project are protected as part of an insolvency resolution. In the normal course of a CIRP, the supply of essential goods and services is suspended or terminated during the period of moratorium. However, this process puts both the homebuyers and project developers under distress because the rights of both parties are compromised. The home buyers have invested their money categorised as “financial debt” in the said ongoing project of the project developer (or corporate debtor) and they expect nothing other than the apartments that they were promised. The project developers, on the other hand, have taken huge loans from banks and other financial institutions to complete their ongoing projects. The initiation of the CIRP against the project developer by any financial creditor during an ongoing project puts both the parties are at loss as those ongoing projects would be stalled midway, which would affect the interests of not only the buyers who await possession but also the project developers.

If we analyse the recent trends of cases under IBC, in most of the cases, the homebuyers have approached the tribunal seeking refund of their money, which is clearly not the objective of the IBC. The tribunal also recorded the observations that some of the allottees are adopting meandering ploys against the developers seeking refund of their money, as they are not willing to take possession of their apartments. The NCLAT in this case took note of this fact and decided to experiment with the existing methods of the CIRP so that right of the project developers are not compromised. This reverse CIRP is aimed at the twin benefits of avoiding insolvency of the project developer and awarding possession of flats to the homebuyers in lieu of their invested money.

The NCLAT has taken this step to ensure that the stakeholders mutually come up with a resolution plan without intervention of any third party wherein the intended action should be that allottees take possession of their apartments during the CIRP and the project developers are able to complete the ongoing project. This is because liquidation would leave the homebuyers with an uncertain future. The tribunal cannot ignore the interests of homebuyers, who are vital stakeholders in building projects and they have advanced their wealth in pursuit of their desire to own a home.

If a regular CIRP were to be followed and the resolution plan accepted, the real estate company would have survived and continued as a going concern. However, if the plan were to be rejected, the company would be left with no alternative but to go in liquidation. To avoid the latter, the NCLAT experimented with a reverse CIRP because the liquidation would have left the homebuyers in limbo. In addition, it would have been not easy for the tribunal to deal with the liquidation of project developers considering that they would have to take constructive view to protect the rights of homebuyers who have already suffered delayed delivery. In such a scenario, this was probably the most optimal solution.

The catch in the judgment, as mentioned above, is that this particular experimented step would be limited to the specific project involved in the case and it will not affect any proceedings in other projects against the same developers. This has arguably been done keeping in mind that the ongoing project in this case was on the verge of completion.

Now, the main question that arises is whether this ruling is within the scheme of IBC or whether the NCLAT has travelled far beyond the boundaries of the IBC. Also, could the NCLAT have exercised its inherent jurisdiction to ensure inclusive justice to the homebuyers instead of leaving them to the clemency of a liquidation process? Further, the current scheme of the IBC does not allow promoters of the company to be a part of the resolution process, which is reflective from section 29A.By this, the promoters are disqualified from submitting a resolution plan and therefore are ineligible. Any deviation would cause serious prejudice to the regulation of the IBC and would set at naught the salutary provisions of the IBC.

The IBC contains no provision that provides for reverse CIRP. Moreover, it is clear that considering the given situation at hand, liquidation was not in the interest of the homebuyers. In that event, the only way out would have been to avert the effect of liquidation by carving out a plan outside the provisions of the IBC and not under it. 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.[1]Nevertheless, 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 evinced by the impugned legislation considered as a whole. The fact that promoters are disqualified from submitting a resolution plan might need greater evaluation by the court.

Conclusion

The aforementioned experiment of allowing reverse CIRP might be a novel step in order to protect and balance the interest of the all the stakeholders. This is a win-win situation for both the homebuyers and project developers. Considering that homebuyers are vital stakeholders and the CIRP directly impinges upon their rights and interests, such a step might be considered necessary. The liquidation of project developers might not secure the interests of the homebuyers in the impugned case. In cognizance of the fact that homebuyers have made valuable investments by contributing hard earned monies in the hope of obtaining a home, such order is deemed to be in the interest of all.

However, since the existing law does not cover the situation, such experimentation might be an impermissible exercise of the judicial function that goes beyond the statutory scheme. By applying such principles, there might be a mere anticipation of achieving a fairer solution to the ambiguity.

– Ankit Tripathi & Ravleen Chhabra

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[1]The Board of Trustees of the Port of Bombay v. Sriyanesh Knitters, (1998) 1 SCC 142.