For thousands of homebuyers, whose fates hang in balance as real estate companies fail to handover homes promised to them long time ago, there is some hope after the National Company Law Appellate Tribunal (NCLAT) verdict on the insolvency case against Umang Realtech.
In a far-reaching verdict, the NCLAT has made a couple of very interesting orders. First, it says that the insolvency resolution process should be on project basis, and that homebuyers (financial creditors) or financial institutions/ banks (other financial creditors) or operational creditors of a project cannot file a claim before the interim resolution professional (IRP) of another project, and such claim cannot be entertained.
In the same verdict, the appellate tribunal has observed that in case of real estate infrastructure companies, it is very difficult to follow the insolvency process followed for corporate debtors of other sectors. It says that a reverse corporate insolvency resolution process (CIRP) can be followed in the interest of homebuyers, so that the real estate companies survive and complete the projects undertaken.
Under reverse CIRP, the resolution professional can resolve the insolvency case without approval of a third-party or without the resolution plan of a resolution applicant. The NCLAT asks the promoters of the defaulting real estate company to help the IRP to resolve the case within the same time period as prescribed for the insolvency process under the Insolvency and Bankruptcy Code (IBC).
In the Umang Realtech case, the appellate tribunal has asked the IRP not to form the committee of creditors (CoC). This is very significant because the IBC requires formation of CoC, the body that takes all the decisions on behalf of company under insolvency. The CoC also approves (or rejects) resolution plans by applicants.
These are orders which go against the basic character of the IBC, and can be challenged in the Supreme Court. But if the Supreme Court goes with the NCLAT order, can this be a model to resolve real estate insolvency cases where large number homebuyers are involved? Can it stand the legal test?
Manish Kumar Gupta, resolution professional in the Umang Realtech insolvency case, says, soon there will be more (real estate) cases resolved on the same line. He says the benefit of a reverse CIRP is that while the company will be in the moratorium period (and hence no unnecessary legal burdens), and there won't be a dominant body like CoC on his back, he can focus on resolving the case.
"This ruling will definitely give strength to other real estate cases where due to one project, the other projects of the same Corporate Debtor irrespective of the stage those projects are, are jeopardized as once a Corporate Debtor goes into CIRP even though the Code says that the Corporate Debtor needs to be kept as Going Concern but it is difficult to do so by Interim Resolution Professional or Resolution Professional, as no vendor would like to supply or the banks/financial institution would like to lend to a Company which is already into insolvency," says Manoj K Singh, founding partner of law firm, Singh & Associates, which represented Umang Realtech in NCLAT.
But will it stand the test of legal scrutiny in Supreme Court? After the NCLAT, the verdict can only be challenged in Supreme Court.
Sanjeev Ahuja, Director of Ensemble Resolution Professionals Ltd, who had been proposed to be the authorised representative of homebuyers in the Jaypee Infratech case, says that the NCLAT verdict is quite contradictory to the basic character of the insolvency law.
"CIRP by its very nomenclature is corporate insolvency resolution process, and a corporate is a legal entity. Any policy of a company is at a corporate level. Any project of a company is governed by the same corporate policy. A project can have many stakeholders, and all of them enter into agreement with the company so how can an IRP look at a carve-out. The IRP has to take over the company, not just that of a project," says Sanjeev Ahuja.
He says the verdict that says resolution can be achieved without the CoC or resolution applicant is like redefining the insolvency law itself, and he fears that unless this particular judgement is challenged in Supreme Court, it will become the order of the day.
Umang Realtech was one of the first cases where homebuyers had initiated the insolvency proceedings against the company. Two homebuyers, who had bought flats in Winter Hills project of the company in Sector 77 of Gurugram, had approached the National Company Law Tribunal seeking the start of insolvency proceedings against the company. NCLT admitted the case. However, a homebuyers association moved the NCLAT against the NCLT order.