The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has, by its order dated February 04, 2020 (“Order”), in the case of Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Private Limited through IRP and Others, held that a Corporate Insolvency Resolution Process (“CIRP”) against a real estate company would have to be limited to only the concerned project and will not affect other projects undertaken by it.

Facts

Mrs. Rachna Singh and Mr. Ajay Singh (“Financial Creditors”), allottees of an apartment in Winter Hills – 77 Gurgaon Project (“Project”) had moved an application under Section 7 (initiation of CIRP by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for initiation of CIRP against M/s. Umang Realtech Private Limited, a real estate company (“Respondent”), before the National Company Law Tribunal, New Delhi (“Tribunal”). Under an order dated August 20, 2019, the Tribunal admitted the said application and directed the Financial Creditors to deposit a sum of INR 2,00,000 with the Interim Resolution Professional (“IRP”) to meet the expenses of performing the functions assigned to him, including with respect to keeping the company a going concern. In the interim, the Flat Buyers Association of Winter Hills-77 Gurgaon (“Appellant”) filed the present appeal against the said impugned order dated August 20, 2019, on the ground that initiation of CIRP against the Respondent was causing hindrance to completion of the Project as the same was almost complete, and would be fully completed by October 2019.

Consequently, one of the promoters of the Respondent, Uppal Housing Private Limited (“Uppal”), agreed to remain outside the CIRP and play the role of a lender/ financial creditor to the Respondent to ensure that the allottees took possession of their flats/apartments in the Project during the CIRP without any third party (resolution applicant’s) intervention. The Appellant accepted the aforesaid proposal and agreed to cooperate on the condition that it will receive 30 per cent of the amount paid by the allottees at the time of registration of their flat. In the meantime, the Financial Creditors, joined hands with the Appellant and became its members.

Issues

(i) Whether CIRP against a real estate company should be limited only to the concerned project or should other projects of the said real estate company be brought under the scope of such CIRP.
(ii) Whether a financial institution/bank (secured financial creditor) should be given preference over an allottee of flat/apartment (unsecured financial creditor) under a CIRP.
(iii) Whether a claim for refund by allottees can be allowed by the adjudicating authority.

Arguments

The Appellant, inter alia, contended that the construction of the flats in the Project was almost complete but the rights of other allottees were affected on account of the CIRP initiated by the Financial Creditors. Hence, the CIRP should be discontinued in the interest of all the allottees, towards ensuring survival of the Respondent, and focus should be directed towards completion of construction of the said flats.

The Respondent’s primary contention was that the recovery proceedings against the Respondent should be stayed and the Respondent and/or Uppal should not be burdened with the obligation of paying any additional amounts with respect to satisfying the order(s) passed by any other court/consumer forum/ authority till the construction of the flats in the Project was completed. It was further contended that necessary directions be issued by the NCLAT to ensure that the amount deposited by the allottees, towards payment of their flats, be utilized exclusively for the purpose of providing amenities, facilities and completion of work in the Project. It was also alleged that some of the allottees were adopting arm twisting tactics against Uppal for recovery of the amount already paid by them as they were not willing to take possession of their flats.

Observations of the NCLAT

The NCLAT observed that if allottees (financial creditors), financial institutions/banks (other financial creditors) or operational creditors of one project initiate CIRP against a real estate company (corporate debtor), it should be confined to only that particular project and should not affect any other project(s) of the same real estate company in other places having different land owners, allottees, financial institutions and operational creditors. Therefore, all the assets of the real estate company should not be maximized and CIRP should be on a project basis, as per the plan approved by the competent authority. Accordingly, allottees, financial institutions/banks or operational creditors of a real estate project cannot file a claim before the interim resolution professional of another project by the same real estate company and such claim should not be entertained.

The NCLAT further observed that secured creditors such as financial institutions/banks, cannot be provided with the asset (flat/apartment) in preference over the allottees (unsecured financial creditors) for whom the project has been approved. The claims of allottees would have to be satisfied by providing their flat/apartment. The NCLAT noted that normally, banks/financial institutions/NBFCs also would not like to take the flats/ apartments in lieu of the money disbursed by them. On the other hand, the unsecured creditors have a right over the assets of the corporate debtor.

The NCLAT also explored the issue of claim for refund by allottees and observed that such claims cannot be entertained in light of the judgement given by the Supreme Court in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [2019 SCC online SC 1005], where it was held that, “a defaulting allottee who has knocked the door of the court is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment and hence, when the real estate market is falling, the allottee does not want to go ahead with his obligation to take possession of the flat/apartment but wants to jump ship and get a refund of the monies paid by him by adopting coercive measures” (emphasis supplied). The NCLAT however, noted that after allotment is offered, it is open to an allottee to request the interim resolution professional/ promoter, whoever is in-charge, to find a third party to purchase the concerned flat/apartment and get her/his money back. It is also open to an allottee to reach an agreement with the promoter (not corporate debtor) for refund of her/his amount.

In view of the above observations, the NCLAT was of the opinion that where it is very difficult to follow the normal course of CIRP, a project specific CIRP process can be followed with respect to real estate infrastructure companies in the interest of allottees, survival of such companies, and towards ensuring completion of projects that provide employment to a large number of unorganized workmen.

Decision of the NCLAT

The NCLAT held that CIRP should be limited to a particular project by a real estate company as per the plan approved by the competent authority and not its other projects for which separate plans are approved. Accordingly, the CIRP in relation to the Project cannot not be clubbed with other projects of the Respondent and assets of such other projects cannot be realised. The appeal was disposed of with the aforesaid observations and directions.

Vaish Associates Advocates View

In passing the Order, the NCLAT has outlined an important principle in CIRPs with far reaching consequences, one pursuant to which a CIRP against real estate companies would be confined to only those projects that have not been completed/ delivered and allottees of which are aggrieved (and bring action), and the same would not as a consequence affect other projects being developed by the same real estate company.

Further, towards dissuading homebuyers from misusing the insolvency forum, the NCLAT has under this Order also set out significant guidelines on the manner in which an allottee can claim refund in the event she/ he does not wish to take possession of a flat/ apartment in a Project undergoing CIRP.

Overall, the said Order encourages a more pragmatic and efficient approach to resolution of real estate companies under the IBC.

For more information please write to Mr. Bomi Daruwala at [email protected]

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