Reverse corporate insolvency resolution: A panacea in case of real estate sector

The 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:

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