In a ruling that is likely to change the Corporate Insolvency Resolution Process (CIRP) followed for real estate and infrastructure companies, the National Company Law Appellate Tribunal (NCLAT) has held that insolvency initiated by a homebuyer or bank or any other financial institution against a real estate company will be limited to a particular project, and not extend to other projects of the group.
“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,” the NCLAT said in its order.
A two-member NCLAT bench headed by Chairperson Justice SJ Mukhopadhaya, which termed the process as “reverse corporate insolvency resolution process”, also said that once CIRP is initiated against a real estate company, no homebuyer can approach the National Company Law Tribunal (NCLT) or the NCLAT to seek refunds for the project.
”As we find it is very difficult to follow the process as in normal course is followed in a CIRP, 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,” the bench said in its order.
In case the homeowners of such projects wish to seek a refund for the particular project of the real estate company which is undergoing CIRP, 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, it added.
In case of most real estate companies, which work on multiple projects at the same time, there could a slight increase in compliance burden, Ashutosh Limaye, director and head of Consulting Services at ANAROCK Property Consultants, said.
“For most real estate companies, making a special purpose vehicle (SPV) for each project that they start is very normal. That is done to ensure that the liabilities, if any, are limited to that project. However, earlier, while there was compliance at the group level, now the real estate companies will also have to ensure it at SPV level,” he added.
The case relates to Gurgaon-based real estate developer Umang Realtech, which was taken to the NCLT by two flat owners, who though wanted to initiate CIRP against the company, did not seek the approval of resolution plan of any other developer.
A promoter of the group, Uppal Housing, offered to “play the role of a lender” to ensure that the pending projects of Umang Realtech were completed on time, which was agreed to upon by all stakeholders.
”It appears none of the stakeholders sought or supported continuation of the CIRP in view of the commitments made by the promoter and the promoter agreed to support the corporate debtor by lending the requisite funds. Faced with such facts, the NCLAT has tried to evolve a solution which appears to put the CIRP into some kind of suspended animation,” Manmeet Singh, partner at law firm L&L Partners said.
Other experts said that while the idea behind the ‘innovation’ of the appellate tribunal may be good, it stretches the “boundaries of IBC and runs the risk of being set aside in appeal if challenged by any stakeholder”.
“The evident predicament faced in the matter only shows that the central government had correctly sought to treat real estate companies as a separate class of corporate debtors which should require a threshold of homebuyers for initiation of insolvency,” Singh said.
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