Shriprasad PiseThe real estate sector in India has unique problems. Earlier, home buyers were not recognized as creditors. So, they had no locus-standi as a creditor till the Insolvency and Bankruptcy Code was amended and they are now recognized as financial creditors (refer the article of Jaypee Infra). As financial creditors, they are unsecured financial creditors and if a project goes for liquidation, homeowners will hardly get anything. In almost all real estate projects, secured financial creditors’ liabilities are substantially higher than releasable value partial completed project. So, the only viable and practical solution was to go for a resolution and get equity partner with settlements with creditors and practically no sacrifice by the flat owners. Based on the above principles, we analyze the recent decision of NCLAT.
Flat Buyers Association Winter Hills vs Umang Realtech Private Limited
Brief fact of the case:
Rachana Singh and Ajay Singh (financial creditors) has booked flats in a scheme named Winter Hills, 77, Gurgaon (Haryana). There was a delay in giving possession of the apartment. As per the Buyer’s Agreement, it was the duty of the corporate debtor to complete the construction and obtain completion/occupation certificate as stipulated.
The financial creditors then filed an application under section 7 of Insolvency and Bankruptcy Code, 2016 for initiation of CIRP against Umang Realtech Pvt. Ltd.’ (Corporate Debtor). The Financial Creditors had proposed Manish Kumar Gupta as an Interim Resolution Professional.
By the order dated 20.08.2019, the Hon’ble NCLT has allowed the application with direction to financial creditor to deposit Rs 2,00,000 with IRP to meet out expenses of CIRP and necessary directions were given to IRP.
Flat Buyers Association Winter Hills-77, Gurgaon had appealed to NCLAT against the said order of NCLT dated 20.08.2019 on the ground that because CIRP was initiated by two allottees, the rights of other allottees are getting effected. NCLAT ordered the IRP on 09.09.2019 to not constitute ‘Committee of Creditors’ and enable two allottees i.e. financial creditors to settle the matter and ensure that Corporate Debtor remains as a going concern and construction should not be stopped.
One of the Promoter – Uppal Housing Pvt. Ltd./ Intervenor agreed to remain outside the CIRP but intended to play role of a Lender (Financial Creditor) to ensure that the CIRP reaches success and the allottees take possession of their flats/apartments during the CIRP without any third-party intervention.
By Order dated 04.02.2020 the Hon’ble NCLAT had approved CIRP but not the Resolution Applicant, the clear case of Reverse CIRP. Thus, in this case, one of the equity shareholders participated as financial creditor by bringing required finance to fulfill commitments given to flat owners, and post that recover its further investment back.
Some of problems while following Certain Process in the cases of Infrastructure Companies (For Allottees):
- Weightage to the ‘Secured Creditors’
An amendment to section 30(2) &30(4) of the I&B Code dated August 6, 2019 has given weightage to the Secured Creditors.
As per the amendment to Section 30(2), payment to financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.
Amendment to Section 30(4) states that the committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board.
The extra weightage to Secured Creditors will lead to liquidation of Corporate Debtor as Secured Creditor is most interested in liquidation rather than resolution, as Secured Creditor would have better rights in liquidation than resolution.
- Differences in the distribution of amounts between different classes of creditors
The most important changes introduced by amendment to Regulation 38 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 are:
- Priority in payment to Operational Creditors (OC) under resolution plan over Financial Creditors (FC).
- Removal of requirement of making payment to OCs within 30 days from the date of approval of resolution plan by Adjudicating Authority.
- Removal of the reference to dissenting financial creditors.
Dealing with the interest of the Operational Creditors (OC’s) as per Regulation 38, doesn’t mean OC’s need to be paid the same amount of their debt proportionately. It is at discretion of majority of Committee of Creditors to negotiate and accept the Resolution Plan which may involve different payment to different class of Creditors.
Findings in NCLAT Order:
- The ‘allottees’ (Homebuyers) come within the meaning of ‘Financial Creditors’ (point no. 8 of NCLAT Order)
The Hon’ble NCLAT has referred “Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors.”, wherein Hon’ble Supreme Court upheld that allottees (homebuyers) of Infrastructure Company are Financial Creditor and held that remedies available to the allottees under RERA are not exclusive but additional remedies.
Even after allottees to be considered as Financial Creditors, in absence of commercial wisdom like Financial Institutions, Banks, NBFC, it is not made clear that how these allottees can access viability or feasibility of commercial aspects, functioning of the Corporate Debtor. After all the negotiation and acceptance of Resolution plan is at discretion of majority of Committee of Creditors.
Project Specific CIRP:
The Hon’ble NCLAT held that if allottees (Financial Creditors) or Financial Institutions or Operational Creditors of one project initiated CIRP then such CIRP confined to particular Project of Corporate Debtor and it cannot affect other projects of same real estate company i.e. Corporate Debtor in any other places.
The reason being approval of plan by different authorities, also following parties may be different viz landowners, allottees (financial creditor), financial institutions, operational creditors for different Projects. Therefore, all the assets of the Corporate Debtor are not to be maximized. So, the CIRP should be project basis as per approved plan of competent authority, also any party of other projectss viz financial creditors, financial institutions, or Operational Creditors cannot file claim before IRP of other project and the same cannot be entertained.
Reverse CIRP:
In most of the cases Committee of Creditors took haircut by satisfying themselves with lesser amount than the determined amount, which is not applicable in case of allottees (Financial Creditors), as there cannot be haircut of assets/flats/apartments.
The first time need of CIRP was observed by Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors.
In view of the observations, NCLAT experimented as to whether CIRP can be reached without approval of third-party resolution plan.
As per the terminology, this reverse CIRP can be applied in the cases of real estate Infrastructure companies in the interest of allottees and on the other hand survival of real estate companies to ensure completion of project which provide employment to large number of workmen. Though flat allottees are so to say unsecured creditors, but they get preference over secured creditors.
Difference between CIRP and reverse CIRP
Brief Steps involved in:
| CIRP | Reverse CIRP |
|
Application to NCLT ↓Appointment of Interim insolvency Resolution Professional ↓Moratorium Period ↓Verification and analysis of claims ↓Appointment of RP ↓Acceptance of Resolution Plan / If no resolution plan is accepted, the order of Liquidation of Corporate Debtor ↓End of CIRP |
Application to NCLT ↓Appointment of Interim Insolvency Resolution Professional ↓Completion of Projects ↓End of Reverse CIRP |
Selling of unsold flats during reverse CIRP:
- As per order of NCLAT, the authority is been given to IRP/RP to that he can also sell unsold flats /apartments by way of Tripartite Agreement between the Purchaser, IRP/RP and Promoter.
- The proceeds generated from such selling of flats to be utilized for completion of Project and payment to Financial Institutions and Operational Creditors.
As there is no priority given for utilization of proceeds of the selling of flats/apartments, the same shall be allotted equally among them.
‘Secured Creditor’ such as ‘financial institutions/ banks’, cannot be provided with the asset (flat/apartment) by preference over the allottees (Unsecured Financial Creditors) for whom the project has been approved:
The on-going constructed infrastructures is an asset of the Corporate Debtor, as per the code the asset secured cannot be distributed to any other creditors till rights of Secured Creditors are satisfied. Contrary in case of Infrastructure Companies, assets of the Corporate Debtors will get transferred to the allottees- unsecured creditors and not to secured creditors, as most of the Secured Creditors are not interested to take flat or apartment in lieu of money.
The question arises is that, as Financial creditors will get paid the total amount of money by allotment of flat, what will be remedy available to secured creditors. This seems like clear case of unbalanced stakeholders (secured and unsecured creditors- Financial Creditors/ Operational Creditors).
Refund asked by allottees:
While dealing with such kind of situation the Hon’ble NCLAT has refereed decision of Supreme Court of India in “Pioneer Urban Land and Infrastructure Limited & Anr.vs. Union of India &Ors.
In case of demand for refund by some allottees, the relief under section 65 of the Code is available to Corporate debtor for initiation of CIRP with fraudulent or malicious intent. Corporate Debtor may point out that the allottees who has knocked at the doors of the NCLT is a speculative investor and not a person who is genuinely interested in purchasing a flat/apartment.
However, an option is available to allottees who don’t want to take possession can request IRP/ person in charge to find out the buyer to purchase the said flat and get the money back. In such a case the duration for selling of flat by IRP or person in charge is not mentioned which leads to loss of opportunity due to blocking of funds into the apartments.
Conclusion:
Meanwhile, any CIRP of Real Estate and infrastructure company will be successful only if the promoter cooperates as he only has the expertise to complete the project and he is required to fund CIRP process and support completion of the project out of the funds to be received from allottees. It is also imperative to take secured creditors also on board to maximize assets of the corporate debtor, though no doubt the creditors of Real Estate and infrastructure Company are at disadvantage as compared to secured creditors of any other business.
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