Facts leading to the application before the NCLT
An application under Section 7 of the Insolvency and Bankruptcy Code (IBC) was filed by two allottees (Mrs. Rachna Singh and Mr. Ajay Singh), to initiate Corporate Insolvency Resolution Process (CIRP) against M/s Umang Realtech Pvt. Ltd. (Corporate Debtor). The National Company Law Tribunal (NCLT), Delhi accepted the application by the Financial creditors (FC) and passed an order to initiate the CIRP against the corporate debtor (CD). It subsequently passed an order directing the Financial Creditors (Homebuyers) to deposit a sum of Rs 2 lakhs with the Interim resolution professional to meet the daily expenses of the CD, and to keep it a going concern.
Facts following the initiation of CIRP
After the initiation of the CIRP, and the appointment of an Interim Resolution Professional (IRP), the CD already offered possession of flats to all 624 (Out of 702 flats in total) allottees (including the two applicants of the case), while asking them to pay their outstanding dues to the CD, towards purchasing those flats. Subsequently, the outside financial creditor (Uppal Housing Pvt. Ltd), who had invested a certain amount for the completion of the project in the CD during the CIRP, was promised by the CD to be paid from the remaining amount received from the home buyers.
Issues raised before the Appellate tribunal
In appeal before the NCLAT, the flat buyer’s association claimed that since the CD, had already promised to deliver the possession of flats to all allottees (which include the two applicants), instead of going through the CIRP under the IBC, the CD should be given a chance to finish the project.
In the course of another argument, the IRP claimed before the appellate body that the sum of Rs 2 lakh, declared by the NCLT is negligible to meet expenses of the CD, and it would not help him maintaining the adequate supply of ‘critical goods and services’, and keep the CD a going concern under Section 14(2) of the IBC.
In a subsequent claim the appellants argued that any resolution pertaining to the CD by the NCLAT must be confirmed to the particular project, it should not affect any other project(s) of the same CD in other places where the separate plan(s) are approved by different authorities, where land and its allottees (financial creditors) may be different, and it may have different financial institutions funding them. Thus, all the asset of the CD is not to be maximised by one resolution plan.
The court held that in cases where the CD is a real estate company, in the interest of the allottees, the survival of the real estate companies and to ensure completion of projects which provides employment to a large number of unorganised workmen, a ‘Reverse CIRP’ process, must be applied. According to the court, since the is on the verge of completion of the project, and has already applied for the water connection and are in process of applying for electric connection, any act of pulling out the existing management of controlling the CD would not be in any way beneficial to either of the financial creditors.
Conflicted claims of unsecured financial creditors (home buyer) and secured creditors
The court held that ‘allottees’ (Homebuyers) come within the meaning of ‘Financial Creditors’. Though they do not have any expertise to assess ‘viability’ or ‘feasibility’ of the CD like other financial creditors (banks, financial institutions), they do have been provided with voting rights for approval of the plan. Though the assets of the CD which are secured by the ‘Secured creditors’ cannot be distributed to others, in cases where the CD is an Infrastructure and Real estate developer, the allottees (its unsecured financial creditors) have the primary right over the infrastructure of the CD.
Applicability of a resolution plan to other projects
The court affirmed that the CIRP in cases where the CD is an Infrastructure and Real estate company, should be limited to a project as per approved plan by the competent authority, and not other projects which are separate at other places for which separate plans are approved.
The NCLAT’s move of balancing the interests of all the stakeholders by suggesting a win-win situation between the home buyers and the project developers is a practical step towards resolving such disputes. However, since there is no law backing up such actions, it does raises certain concerns pertaining to the tribunals surpassing the boundary of powers granted to it under the IBC.
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