In the insolvency case against builder Supertech Limited, the National Company Law Appellate Tribunal (NCLAT) issued an order to constitute the Committee of Creditors (CoC) for a single project, Eco Village II. The builder has more than 20 such projects in various locations in Delhi NCR.
This constitution of CoC for one project instead of all goes against the usual practice of Business Insolvency Resolution Procedures (CIRP). Over the past two years, the NCLAT has also passed similar orders in a few other cases. This is called “reverse CIRP” in legal circles.
“To put it simply, legally the whole company is going through insolvency proceedings, but practically the financial solution is only sought for one sick project,” says Nishant Srivastava, Founder and Managing Partner of Legal News.
In 2020, Umang Realtech was the first company in which NCLAT experimented with the reverse CIRP doctrine. This case, Flat Buyers Association Winter Hills-77 v Umang Realtech Pvt Ltd, was challenged in the Supreme Court, but the Supreme Court refused to overturn the challenged NCLAT order.
Innovative use of bankruptcy law
Legal experts say the Supreme Court’s decision cannot become a reverse CIRP precedent because the court simply refused to interfere with the NCLAT order in the Umang Realtech Pvt Ltd case.
“In one of its judgments, the honorable Supreme Court clarified that only a reasoned order will have binding effect. Since the Court did not make such an order in the Umang case, it will not become a precedent,” said lawyer ML Lahoty, who is representing the buyers in the Amrapali real estate case before the Supreme Court.
Legal and corporate experts say the NCLAT may have experimented with the intention of safeguarding the interest of all stakeholders. However, no such provision exists in the Insolvency and Bankruptcy Code (IBC) 2016. doesn’t say anything clearly about it. It comes from judicial wisdom,” said attorney Venket Rao of Intygrat law firm.
The IBC law was enacted in 2016, according to which if a company does not repay the loan from its creditors, the whole company could be subject to resolution proceedings. A referral professional (IRP) replaces the promoters of the company, strives to improve its financial health and avoids liquidation.
Relief for Supertech
In the Supertech case, Union Bank of India filed a case in the National Company Law Tribunal (NCLT) on March 20, 2021 and alleged that it had granted more than Rs 250 crore in loan to the company for the development of the Eco Village. Project II until 2015.
The builder failed to repay the loan and on July 20, 2018 the account was declared a non-performing asset (NPA). The bank’s total claim stands at over Rs 432 crore. The NCLT, by an order dated March 25, 2022, launched the CIRP and appointed Hitesh Goel as IRP.
Supertech challenged the NCLT order in the NCLAT on April 12, 2022 and presented a financially sound plan of the company with a time-limited completion, assigning possession and discharge of financial debts to other creditors.
In its argument, the builder referenced the 2020 case Flat Buyers Association Winter Hills-77 v Umang Realtech Pvt Ltd and pleaded relief on similar grounds. Union Bank objected and argued that the reverse insolvency doctrine was a foreign concept outside the regime and contrary to the provisions/objections of the IBC.
After hearing from all stakeholders, the Main Bench of Judge Ashok Bhushan passed an Interim Order which read, “[The] The IRP may constitute the CoC with respect to the Eco Village II project only. »
He added: “The construction of all other projects will continue with the overall supervision of IRP with the assistance of the ex-management and its employees and workers.”
How safe is the homebuyer?
Legal experts agree that the NCLAT broke the law. However, they say it presents a better solution than what is provided for in the current law. “I think the NCLAT did this for the benefit of homebuyers,” Lahoty said. He believes that the court is of the opinion that if other projects are working well, there is no need to disturb them. “Thus, it was ordered to constitute CoC only in one project”, he adds.
So if reverse CIRP serves a broader purpose, especially for the real estate industry, why shouldn’t it be included in the IBC? “One resolution per project is a long-standing request [of the industry], and I am sure that with such judicial interventions the matter will be clearer. In fact, it can lead to a well-thought-out and debated amendment to the code,” Rao said.
Srivastava seconded this thought. He says: ‘This is a recent development in insolvency law which I believe relates to the whole objective which the IBC wishes to achieve, particularly when it comes to is about builders and infratech companies where thousands of general masses have invested their savings. .”
Ashish Mohan Gupta, purchaser and plaintiff in the Jaypee Infratech Limited case before the Supreme Court, believes that if Reverse CIRP becomes law, it will be universally applicable and all eligible real estate companies will be able to claim its benefits. He says: “Ultimately, the purpose of the law is ‘value maximization’ and to explore all available avenues to save it from liquidation. If reverse CIRP is a better option, it’s worth considering. »
He adds that the JIL Real Estate Allottees Welfare Society has sent suggestions to the Indian Insolvency and Bankruptcy Board asking them to make the reverse CIRP a law under the IBC.
Some experts say, however, that this is a vague concept in its current form. They cite the example of section 14 of the IBC, according to which once a CIRP proceeding is initiated against a company, all legal actions, such as the filing of actions, continuation of pending cases, collection, etc., are prohibited.
“When the insolvency resolution proceedings only concern one business project, why should the whole business benefit from Article 14? It benefits the builder, but the buyers who are in litigation against the company in other projects are suffering,” said another lawyer, speaking on condition of anonymity.
He believes that reverse CIRP benefits developers in more ways than one and disadvantages many homebuyers and financial creditors.
“Just imagine what would happen if the sick project went into liquidation. The financial creditors of the project, such as the banks, will lose their money. On the other hand, the value of other projects will be maximized for the benefit of the company. It’s a win-win situation for the company but not for all stakeholders,” he adds.
This class of experts believes that the purpose of the CIRP process is the maximization of company assets, thereby finding a balanced resolution for the entire company and its creditors, not just a select few.