Reverse CIRP: It is too early for realtors facing insolvency to cheer

The reverse corporate insolvency resolution process (CIRP), the latest concept being experimented with upon a suggestion of the National Company Law Appellate Tribunal (NCLAT), has put the promoter back in charge of a project undergoing insolvency resolution. Currently, this is being tested in the case of a Gurugram-based real estate project.

While real estate companies are cheering the NCLAT decision as it puts them back in the driver’s seat, legal experts and insolvency professionals are concerned that the judgment might have a far-reaching impact on the sanctity of the CIRP.

Real estate players say the NCLAT decision will protect the rights of millions of homebuyers and developers whose projects are financially strong. “Homebuyers will feel safer with such steps,” says Nayan Raheja, executive director at Raheja Developers. 

The NCLAT in the matter of Flat buyers Association of Winter Hills-77, Gurugram, a project of Umang Realtech, noted that a "reverse CIRP" can be followed in the cases of real estate infrastructure companies in the interest of allottees and survival of real estate companies, and to ensure completion of projects.

Legal experts, however, feel it is still early days for realtors to rejoice. “The ruling appears to be in contravention of the Code,” says Poornima Advani, partner, The Law Point. While it is intended to help allottees, homebuyers and financial creditors, the judgment is appealable and liable to be set aside in the absence of provisions to support it, she adds.

The NCLAT judgment gives the promoter another chance to complete the pending project, and hand over the delivery of flats to homebuyers through a tribunal-monitored process. However, most legal experts feel the NCLAT order prima facie seems to contravene Section 29A of the Code, wherein the promoter and other related parties cannot be resolution applicants in a resolution process.

The NCLAT’s judgment draws its logic from the provision in the Code that after initiation of the resolution process, it is the duty of the resolution professional to keep the company a going-concern. “In the case of a real estate infrastructure company, to keep the company going concern, the flat apartments are to be completed,” the order read. 

The order also stressed that homebuyers cannot seek a refund as the Code is not supposed to be used as a recovery tool. Lawyers, however, point out that this puts an onerous burden on allottees wanting to exit a project after years of delay.

Legal experts say the methodology formulated in this judgement is most applicable to projects that are on the verge of completion and, therefore, is very case specific. “It remains to be seen whether this formula can be applied to projects where there is no scope for actually finishing the project,” Advani says. 

A major relief for the real estate sector in the judgment is that the insolvency initiated against a project of a developer would not extend to the entire company or any other projects of that company. IBC experts have given thumbs up to this aspect of the order. A resolution limited to the defaulting enterprise would serve a better purpose than dragging the rest of the healthy company into the resolution process, they argue.

However, even for a single project, experts say implementation could become an issue as it is not provided in the law. “As there is no law, it is open to different interpretations. Even in the case of real estate companies, there are loans and liabilities, which are not allocated to specific projects. So what will be the status of those lenders or creditors?” asks Manoj Kumar, partner, Corporate Professionals. 

Some are also questioning the authority of the appellate tribunal to order such a mechanism. “This concept has been devised outside the scheme of the IBC, and without testing mechanisms, such as withdrawal, which could have been employed instead,” says Shreya Prakash, senior resident fellow and coordinator at Vidhi Bankruptcy Research Programme. 

Insolvency law experts point out the need for a judgment like this emerges from the peculiarities of the insolvency resolution process which have to meet the requirements of Section 29A and a statutory timeline. 

“In other jurisdictions, such as the UK, post commencement of insolvency, the office holder can resort to a range of options to resolve insolvency without the need for a specific plan to be approved by all creditors -- except secured creditors to the extent that their secured assets are affected,” says Prakash. 

Clearing the air

What is the reverse corporate insolvency resolution process?

It gives an opportunity to the promoter to resolve an insolvency situation without the involvement of any third party, such as the committee of creditors and outside bidders. 

Why is there a need for new process?

This ensures survival of real estate companies and completion of projects. The reverse CIRP is limited to a specific project against which insolvency has been invoked and not to the whole company.

Who is in charge of the process?

Promoters work in coordination with the interim resolution professional and complete the project within the deadline set by the tribunal 

Will it work for all IBC-stuck realty projects?

No, it will work mostly for projects on the verge of completion, and where promoters agree to provide allotment to all homebuyers 

Is it legally tenable?

It contradicts Section 29 A of the Insolvency and Bankruptcy Code, and is outside the scheme of the Code. Hence, it could be legally challenged.