Status as on- 24/12/2022
Home buyers are now included in the list of financial creditors under the recently modified Code. In the matter in question before the NCLAT, a few allocators who were also financial creditors requested the CIRP of the defaulting real estate corporation, which was acknowledged.
The NCLAT was presented with an odd legal matter, namely, whether a corporate debtor can be put through the rigors of CIRP without a resolution applicant, referring to the appeal as “peculiar.” Despite the fact that such relief should not have existed, the NCLAT instead attempted an “experiment” to adopt the strange idea of Reverse CIRP, which has no precedent in the Code.
As a result, the NCLAT ruled that the CIRP of a real estate developer must be interpreted in reverse, as infrastructure is the “asset” of the real estate corporate debtor company, which under the Code would only be used to satisfy the debt of a secured creditor, as opposed to homebuyers, who would be considered unsecured creditors and could, at best, ask for the allocation of flats. Additionally, it was noted that while purchasers cannot take a haircut on flats or apartments, financial institutions typically do so in an ideal situation to resolve arrears.
It is commonly said that the NCLAT erred in assuming that real estate allottees under the Code are treated as financial creditors who can only seek debt resolution. Any additional relief, like allocations, would be handled through other forums like RERA or consumer forums. This is established law according to the ruling of the Apex Court, which ruled that allottees, who are considered financial creditors under the Code, have additional legal rights under RERA.
The NCLAT produced new innovations under the Code, such as an “Intended Lender” and an “Outsider Financial Creditor,” as part of the experiment to attain Reverse CIRP. However, these innovations have likely produced the ideal workaround for Section 29A of the Code’s prohibition on people who are resolution applicants, especially a promoter of the debtor firm.
The NCLAT decided, without much debate, that the bankruptcy resolution procedure of a real estate firm should be restricted to the particular project in issue and shall not affect any other real estate projects of the company when it arrived at the magical elixir known as “Reverse CIRP.”
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