Vipul Ganda Advocate | IBC: Reverse Corporate Insolvency Resolution Process? | Corporate Lawyer

1. IBC: Reverse Corporate Insolvency Resolution Process? The Insolvency and Bankruptcy Code, 2016 (the“Code”) has been a matter of constant deliberation and change, both, at the hands of the judiciary as well as the legislature, especially, in the context of corporate debtor (“CD”) engaged in the business of construction and development of real estate projects. Largely, the intention has been to balance the equities between real estate CDs and the ‘allottees’ in various of their projects. Recently, the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) has in the matter of ‘Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Private Limited, Company Appeal (AT) (Ins.) No. 926 of 2019, held that the normal course of corporate insolvency resolution process (“CIRP”), as encapsulated in the Code, would not be applicable to a real estate company. The Hon’ble NCLATcoined the term ‘Reverse Corporate Insolvency Resolution Process’ and held that CIRP in relation to a CD engaged in the construction and development of real estate projects would be project specific and not in respect of the CD as a whole. This piece is an attempt to analyse the concept of Reverse Corporate Insolvency Resolution Process as has been promulgated by the NCLAT and identify the issues that are likely to surface while implementing it. Context

2. An appeal was preferred before the Hon’ble NCLAT assailing an order of initiation of CIRP by the Hon’ble NCLT, Principal Bench (NCLT) against Umang Realtech Private Limited (“Umang”). The impugned order was passed pursuant to an application under section 7 of the Code, filed by two allottees of Umang in its project, namely, ‘Winter Hills-77’. The appeal was preferred by flat buyers’ association of Winter Hills-77, on the ground that the project was almost complete, and due to order of the Hon’ble NCLT admitting Umang into CIRP, rights of the other allottees were affected. Upon initiation of CIRP, the Appellant (flat buyers’ association of Winter Hills-77) had accepted the proposal of the erstwhile promoter of Umang, whereby, the erstwhile promoter would invest certain amount in the project, as an outsider financial creditor, to ensure that the project is completed within a certain time period. Also, another financial creditor of the Corporate Debtor, namely JM Financial Credit Solutions Limited, had agreed to this arrangement on the condition that it would get 30 percent of the amount paid by the allottees at the time of registration of the flats. Reverse Corporate Insolvency Resolution Process The Hon’ble NCLAT, observed that, whilst, ‘allottees’ were covered within the meaning of ‘Financial Creditor’ as provided in section 5(8)(f) of the Code, the allottees did not have the commercial wisdom like financial institutions / banks / non-banking financial institutions. Moreover, it is not clear as to how the allottees can assess the viability and feasibility of a resolution plan or commercial aspect / functioning of Umang in terms of the decisions of the Hon’ble Supreme Court. The Hon’ble NCLAT also observed that resolution plans under the Code, must maximise the assets of the corporate debtor. Taking in consideration the aforesaid factors, the Hon’ble NCLAT held that, normal course of CIRP, as provided in the Code, could not be followed in case of a real estate company, and there was a need to under the law in a ‘reverse way’ and introduced ‘Reverse Corporate Insolvency Resolution Process’ which would be applicable to real estate companies. It would be relevant to consider that, neither has ‘Reverse Corporate Insolvency Resolution Process’ been provided in the Code and nor does the Code empower the Hon’ble NCLAT to go beyond the confines of the Code. In the instant judgement, the Hon’ble NCLAT drew its strength from the judgement of the Hon’ble Supreme Court, wherein it was observed that staying experimentation in economic matters would have a serious consequence on the nation, and accordingly promulgated ‘Reverse Corporate Insolvency Resolution Process’. The application under the Code, either by a financial creditor or an operational creditor, is required to be in respect of a certain project of a CD, thereby, not affecting other projects of the CD. Therefore, CIRP in respect of a company engaged in the business of construction and development of real estate projects, is required to be project specific and the Interim Resolution Professional (IRP) or the Resolution Professional (RP), as the case may be, ought not entertain any claim in respect of other projects of the CD. Additionally, the NCLAT permitted the erstwhile promoter of Umang to invest amounts in the project, not as a promoter but as an outside lender, to ensure that the project is completed within

3. the specified time frame of August 30, 2020. In the event that the project is completed by the said time frame, the CIRP process would determine. Analysis The Hon’ble NCLAT, vide the said judgment, has made a novel attempt to provide respite to companies engaged in the business of construction and development of real estate projects by significantly immunising such companies from CIRP, dressed up as Reverse Corporate Insolvency Resolution Process. The said judgement, having been consented by all the parties, has not been challenged before the Hon’ble Supreme Court and therefore has attained finality and would be binding. The judgment has effectively created two separate classes of CDs, one, companies engaged in business of construction and development of real estate projects, and the other, which are not. Whilst, the latter would be subjected to CIRP as provided in the Code, should the situation arise, the former would be subjected to Reverse Corporate Insolvency Resolution Process. Moreover, the judgment also creates an ‘out’ for the erstwhile promoters who would get a second opportunity to complete the project within the revised time frame and thereby free the project from the clutches of the Code and the CIRP. Albeit, it is not yet clear whether such a classification would stand the test of our Constitution, and intervention of the Hon’ble Supreme Court, equally, until then this judgement has, perhaps, has left several practical difficulties for the adjudicating authority (NCLT) in implementation of the Reverse Corporate Insolvency Resolution Process. The judgment has attempted to answer some of the typical issues peculiar to real estate sector, like the owners of land, developers, flat buyers, multiple stake holders, multiple locations, with different stages of completion, but at the same time has overlooked certain relevant factors such as the corporate debtor being a juristic person, RP replacing the Board or Directors, Moratorium on all assets of corporate debtor, common corporate assets and liabilities of the corporate debtor etc In terms of the the Companies Act, 2013, a company is a juristic person and is capable of availing loans and services from third party which may not be project specific. Under such circumstances, it is incomprehensible as to the manner in which such creditors would raise their respective claims, in relation to loans disbursed, which are not project specific. Furthermore, employees, resources and assets of the company may not also be deployed to a specific project and would be for the utilisation of the company as a whole, under such circumstances also, the IRP/ RP would be at a fix as to which employees, resources and assets is the IRP/ RP to take control of. The judgement of the Hon’ble NCLAT seems to have paved a path for the real estate companies, whose position under the Code has been subject to constant change on account of the various amendments brought in by the legislature and the stance taken by the judiciary. However,

4. keeping in mind the various shortcomings in the judgment, it seems the path paved is rather a shaky one and unlikely to survive the scrutiny of the Hon’ble Supreme Court. Vipul Ganda is an Independent Litigation Counsel practising in the Delhi High Court. He was assisted by his chamber colleague, Advocate Ayandeb Mitra in writing this article.