Status as on- 07/05/2020
The NCLAT has held that insolvency proceedings initiated by Financial Institutions and Homebuyers shall be limited to projects concerned and shall not infringe and impact any separate projects of the Real Estate Developers that may be operational in different cities and towns.
In the order passed, the NCLAT bench negatively noted the peculiar situation wherein the original Applicants and a group of allottees forming a home buyers association wanted the CIRP process to continue for resolution but did not approve the resolution plan put forth by the third party;
“The ‘allottees’ (Homebuyers) come within the meaning of ‘Financial Creditors’. They do not have any expertise to assess ‘viability’ or ‘feasibility’ of a ‘Corporate Debtor’. They don’t have commercial wisdom like Financial Institutions/ Banks/ NBFCs. However, these allottees have been provided with voting rights for approval of the plan. Many of such cases came to our notice where the allottees are the sole Financial Creditors. However, it is not made clear as to how they can assess the viability and feasibility of the ‘Resolution Plan’ or commercial aspect/ functioning of the ‘Corporate Debtor’”
The present matter related to a petition filed before the NCLT by 2 homebuyers against a Gurgaon based Realty Company. The NCLT thereafter directed Corporate Insolvency Resolution Process against the Real-estate Company in August 2019.
This was challenged by a Flat Buyers Association contending that their project in question would complete by the end of October 2019. Thus the NCLAT held that CIRP against Real Estate Company shall be limited to Project concerned and will not affect 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,”
Reverse Corporate Insolvency Process
With a view to best serve the interests of all stakeholders the NCLAT also recommended a reverse corporate insolvency process which ensured that resolution is reached without approval of third party resolution plan through the following directions;
- If insolvency is initiated by the homebuyers/financial institutions/banks of one project of the real estate company than the homebuyers/financial institutions/banks of an on another project cannot file their claim before the Resolution Professional and the CIRP is confined to only one project;
- Secured Creditors like banks and financial institutions cannot be provided with preference over assets like flat/apartment over allottees of the projects;
- To achieve the maximization of assets an allottee can agree to opt for another flat/ apartment;
- Prayer for refund cannot be allowed by the Adjudicating Authority i.e NCLT or NCLAT;
“after offering allotment it is open to an allottee to request the Interim Resolution Professional/Promoter, whoever is in-charge, to find out the third party to purchase said flat/apartment and get the money back. After completion of the flats/project or during the completion of the project. It is also open to an allottee to reach an agreement with the Promoter (not Corporate Debtor) for a refund of the amount”
The present judgment of the NCLAT is hopeful to ensure faster completion of projects as it aims to curb the misuse of the Insolvency Code as a forum for recovery and further ensures other projects of the developer which may be near completion are not negatively impacted.
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