“The first requirement of a sound body of law is, that it should correspond with the actual feelings and demands of the community, whether right or wrong.” – Oliver Wendell Holmes Jr.
The concept of ‘Reverse Insolvency’ was alien to the Insolvency and Bankruptcy Code, 2016. It is a well acknowledged fact that the Code has undergone several amendments since its inception. One of the most prominent being, inclusion of homebuyers as financial creditors. But the corporate insolvency resolution process of Real Estate Company was not that uncomplicated. The process posed a major hurdle in terms of the rigorousness that could prejudice the rights of homebuyers.
The reverse corporate insolvency resolution process was brainchild of National Company Law Appellate Tribunal. It may altogether project a totally different idea. However, it is just a supplementary mechanism providing for debt resolution and maximization of asset value.
Reverse Corporate Insolvency Resolution Process
The traditional CIRP came under several criticisms when it came to safeguarding the rights of homebuyers. The need for ensuring the rights of homebuyers forced the courts to venture out new grounds and devise a concept like Reverse CIRP. The reverse corporate insolvency process is specifically intended for utilization in cases of Real Estate Company. The NCLAT while dealing with an appeal in Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd. formulated the idea whereby any promoter of the real estate company who agrees to remain outside the CIRP but intends to play the role of a lender by infusing funds/cash flow can do so. This is done in order to enable the corporate insolvency resolution process reach a successful conclusion and the construction of the stuck real estate projects gets completed. Therefore, it authorizes the allottees to take possession of the project without having any third-party intervention.
The NCLAT in Flat Buyers Case directed ‘Uppal Housing Pvt. Ltd.’, one of the promoters to cooperate with the Interim Resolution Professional and disburse amount from outside as Lender (financial creditor) not as Promoter to ensure that the project is completed with the time frame given by it.
Reverse CIRP to be Project Specific
The Reverse Corporate Insolvency Resolution Process against a real estate company is to be carried out in relation to a specific project. The NCLAT veraciously arrived at the conclusion that CIRP against a real estate company is limited to a specific project as per approved plan by the competent authority.It is noteworthy that project specific nature of the CIRP of real estate companies is reverberated in the newly introduced amendments to Section 7.
The very idea is to ensure that the rights of the homebuyers of project reaching completion are not to be prejudiced and they are not forcefully dragged into insolvency. Therefore, all the assets of the company are not to be maximized. The asset of that project is to be maximized for balancing the creditors such as allottees, financial institutions and operational creditors of that particular project.
The theoretical analysis of the reverse corporate insolvency process certainly seems quite promising. Furthermore, one important highlight of reverse CIRP is the option of claiming refund of the entire amount not made available to the allottees. However, 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 the said flat/apartment and get the money back or the allottee can find a buyer in the market and can ask the resolution professional or the successful resolution applicant to acknowledge the transfer in the records of the Corporate Debtor. Furthermore, it concretizes the claim of the allottee over the claim of other financial creditor as ‘financial institutions/ banks.
These financial creditors will not be provided with the asset (flat/apartment) by preference over the allottees for whom the project has been approved. The claims of the allottees must be satisfied first by handing over the possession to them.