CORPORATE LAW CORNER

1.       Flat
Buyers’ Association Winter Hills-77 vs. Umang Realtech Pvt. Ltd.

Company Appeal (AT)(Ins.) No. 926 of 2019

Date of order: 4^th February, 2020

Insolvency and Bankruptcy Code, 2016 – Reverse Corporate
Insolvency Resolution Process is to be followed in the case of real estate
companies – The CIRP initiated for one project of a real estate company is
restricted to that project alone – It does not extend to the other assets or
projects of the said company

FACTS

R and A were allottees in the real
estate project of U Co. They moved an application u/s 7 of the Insolvency and
Bankruptcy Code, 2016 (Code) for initiating Corporate Insolvency Resolution
Process (CIRP) against U Co. NCLT passed an order admitting the application and
directed that R and A deposit a sum of Rs. 2 lakhs with the Interim Resolution
Professional (IRP). Under the Code, it is the duty of the IRP to keep the
company a going concern which would be very difficult in the facts of the
present case where Rs. 2 lakhs would be insufficient for the said purpose.

The typical issue for real estate
companies stems from the fact that while homebuyers / allottees are financial
creditors, the homes / projects are often assets of the corporate debtor that
are offered as security against loans taken from banks or Non-Banking Financial
Companies (NBFCs). The assets of the corporate debtor as per the Code cannot be
distributed, they are secured for secured creditors. On the contrary, the
assets of the corporate debtor are to be transferred in favour of the allottees
/ homebuyers and not to the secured creditors such as financial institutions /
banks / NBFCs.

Normally, the 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,
i.e., the flats / apartments which constitute the assets of the company.

The NCLAT was to examine whether
during the CIRP a resolution could be reached without approval of the
third-party resolution plan.

One of the promoters, UH Co, agreed
to remain outside the CIRP but intended to play the 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. The Flat Buyers’ Association of Winter Hills-77, Gurgaon also
accepted the aforesaid proposal. ‘JM Financial Credit Solutions Ltd.’, one of
the financial institutions, has also agreed to co-operate in terms of the
agreement on the condition that they will get 30% of the amount paid by the
allottees at the time of the registration of the flats / apartments.

The CIRP progressed and a number of
allottees took the possession of their flats and had the sale deeds registered
in their favour. UH Co invested a certain amount as an outside financial
creditor and as promoter co-operating with the IRP. The specific details of the
project were laid out before the NCLAT and which were also endorsed by the IRP.
The claim of JM Financials was also satisfied at the time of registration of
flats.

HELD

NCLAT
observed that there were some aspects which were typical to real estate
companies. The decisions of the Supreme Court in the cases of Committee
of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta as
well as Pioneer Urban Land and Infrastructure Limited & Anr. vs.
Union of India were referred to. It was observed that ‘allottees’
(homebuyers) come within the meaning of ‘financial creditors’. They do not have
any expertise to assess the viability or feasibility of a corporate debtor.
They don’t have commercial wisdom like financial institutions / banks / NBFCs.
However, these allottees have been provided with voting rights for approval of
the plan. NCLAT observed that many such cases came to its notice where the
allottees were the sole financial creditors. However, it was not made clear as
to how they can assess the viability and feasibility of the ‘Resolution Plan’
or commercial aspect / functioning of the corporate debtor.

Further, it was observed that in a
CIRP against a real estate company if allottees (financial creditors), or
financial institutions / banks (other financial creditors), or operational
creditors of one project initiated a CIRP against the corporate debtor (the
real estate company), it is confined to the particular project. It cannot
affect any other project(s) of the same real estate company (corporate debtor)
in other places where separate plan(s) are approved by different authorities;
land and its owner(s) may be different and mainly the allottees (financial
creditors), financial institutions (financial creditors), operational creditors
are different for such separate projects. Accordingly, all the assets of the
corporate debtor are not to be maximised. CIRP should be on a project basis as
per plans approved by the Competent Authority. Any other allottees (financial
creditors), or financial institutions / banks (other financial creditors), or
operational creditors of other projects cannot file a claim before the IRP of
the other project of the corporate debtor and such claim cannot be entertained.

It was thus held that CIRP against a
real estate company (corporate debtor) is limited to a project as per the plan
approved by the Competent Authority and does not extend to other projects which
are separate and for which separate plans are approved.

Further,
a secured creditor such as a bank or financial institution, cannot be provided
with the asset (flat / apartment) in preference over the allottees (unsecured
financial creditors) for whom the project has been approved. Their claims are
to be satisfied by providing the flat / apartment. While satisfying the
allottees, one or other allottee may agree to opt for another flat / apartment
or one tower or another tower if not allotted otherwise. In such a case, their
agreements can be modified to that effect.

The prayer of any allottee asking
for a refund cannot be entertained in view of the decision of the Supreme Court
in the case of Pioneer Urban Land and Infrastructure Limited & Anr.
vs. Union of India & Ors. [(2019) SCC OnLine SC 1005]. However,
after offering allotment it is open to an allottee to request the IRP /
promoter, whoever is in charge, to find out a third party to purchase the said
flat / apartment and get the money back. After completion of the flats /
project or during the completion of the project, it is also open to an allottee
to reach an agreement with the promoter (not corporate debtor) for a refund of
the amount.

In a CIRP, NCLAT was of the view
that a ‘Reverse Corporate Insolvency Resolution Process’ could be followed in
cases of real estate infrastructure companies in the interest of the allottees
and survival of the real estate companies, and to ensure completion of projects
which provides employment to large numbers of unorganised workmen.

UH Co, in the facts of the present
case, was directed to co-operate with the IRP and disburse amounts (apart from
the amount already disbursed) from outside as lender (financial creditor) and
not as promoter, to ensure that the project is completed within the time frame
given by it. The flats / apartments should be completed in all aspects by 30^th
June, 2020. All internal fitouts for electricity, water connection should be
completed by 30^th July, 2020. The financial institutions / banks
should be paid simultaneously. Common areas such as swimming pool, clubhouse,
etc. as per the agreement be also completed by 30^th August, 2020.
The allottees are allowed to form a ‘Residents’ Welfare Association’ and get it
registered to empower them to claim the common areas. Only after getting the
certificate of completion from the Interim Resolution Professional / Resolution
Professional and approval of the Adjudicating Authority (National Company Law
Tribunal), unsold flats / apartments, etc. be handed over to the promoter / UH
Co.