The National Company Law Appellate Tribunal (NCLAT) has held that any insolvency process initiated by a flat buyer or financial institution would be confined to the project concerned only and cause zero impacts on other projects of the developers.
“In CIRP against a real estate, if allottees or financial institutions, banks or operational creditors of one project initiated CIRP against the corporate debtor, it is confined to the particular project, it cannot affect any other projects of the same real estate company in other places where separate plans are approved by different authorities”, said a two-member NCLAT bench headed by Chairman Justice SJ Mukhopadhaya. CIRP stands for Corporate Insolvency Resolution Process.
The order came over a petition filed by a group of allottees – Flat Buyers Association Winter Hills-77, GurgaonThe appellate tribunal also suggested that once CIRP is initiated against a real estate company, no home buyer can approach the National Company Law Tribunal (NCLT) or the NCLAT to seek refunds for the project. They termed this process as “reverse corporate insolvency resolution process”.
In case the flat owners of such projects wish to seek a refund for the particular project of the real estate company which is undergoing insolvency, they are open to sign an agreement, either with the interim resolution professional, or the promoter to find a new buyer and get the money back if and when that flat is sold, the NCLAT said. However, both RERA Act & IBC have been understood by many real estate experts to be in direct conflict with each other because of conflicting resolution proposals.
“As we find it is very difficult to follow the process as in normal course is followed in a Corporate Insolvency Resolution Process, we are of the view, that a ‘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 large number of unorganized workmen”, said the NCLAT.
Earlier, the Delhi-based Principal bench of the National Company Law Tribunal (NCLT) had on August 20, 2019 directed to initiate Corporate Insolvency Resolution Process against Umang Realtech. This was challenged before the NCLAT by a group of allottees – Flat Buyers Association Winter Hills-77, Gurgaon – contending that the project in question, would be completed by the end of Diwali (October, 2019). According to them, just because of the plea of two allottees, insolvency was triggered.
While this may help real estate builders finish stuck projects, this order, say some legal experts, is contrary to the fundamental tenets of insolvency and secured transaction law. This may shortchange many creditors and lead to chaos, they believe. Other experts are of the opinion that this would lead to faster completion of projects.
In a way NCLAT has adopted a practical and solution-oriented approach. However, it needs to deal with these cases very carefully.