Reverse CIRP: A Lifeline for Homebuyers in Troubled Real Estate Projects

REVERSE CARP

• Reverse CIRP is a judicial innovation aimed at protecting the interests of homebuyers in the real estate sector.
• This sector shows an evident increase in defaults and delays by real estate companies and builders, prompting homebuyers to seek remedies in RERA, 2016 and CPA, 2019.
• However, in the moratorium period under Section 14 of the IBC, claims of homebuyers under CPA or RERA are stayed if the Corporate Insolvency Resolution Process (CIRP) is initiated by creditors.
• Homebuyers were initially not considered eligible to approach the National Company Law Tribunal (NCLT) under sections 7, 8, and 10 of the IBC and had no significant role in the committee of creditors.

The main objectives of reverse CIRP include:

• Ensuring possession of flats for homebuyers.
• Assisting in debtor management.
• Addressing the commercial wisdom limitations of homebuyers in assessing resolution plans.

Judicial interpretation

Flat Buyers Association Winter Hills vs. Umang Real tech

• The NCLAT Delhi first recognized the concept of Reverse CIRP in this case
• The court permitted Reverse CIRP, where a promoter agrees to act as a financial creditor and infuse funds into the project to ensure its completion within the stipulated time frame set by the NCLAT.
• The court directed that non-compliance or lack of cooperation by the promoter with the IRP/RP would lead to the completion of the CIRP by the NCLT.

Rajesh Goyal vs. Babita Gupta & Ors.

• Promoter Rajesh Goyal was allowed to act as a leader after a voting process among allottees, overseen by the IRP.
• The promoter committed to infusing funds totalling? 69.27 crores to sustain the Corporate Debtor as a going concern.
• A time frame was established for allottees seeking refunds after surrendering their flats.
• The procedure for Reverse CIRP mirrored that of Flat Buyers Association, Winter Hills.
• The IRP had the authority to sell unsold flats/apartments through a tripartite agreement, utilizing the proceeds to repay banks, operational creditors, and interest to allottees awaiting refunds.
• Non-compliance or lack of cooperation by the promoter with the court's directions or the IRP would result in NCLT completing the CIRP.

Rahul Gyanchandani v. Parsvnath Landmark Developers (P) Ltd

• Emphasizing the inclusive nature of the definition of financial debt under the IBC, the NCLAT disagreed with the Adjudicating Authority’s reliance on a precedent (Vishal Chelani case) that distinguished between decree holders and homebuyers without RERA orders.
• The NCLAT viewed such a distinction as artificial and potentially discriminatory under Article 14 of the Constitution of India, which guarantees equality before the law.
• The NCLAT categorically stated that homebuyers, regardless of whether they possessed an order from RERA (Real Estate Regulatory Authority), all belong to the same category of allottees under the IBC. This stance emphasized equal treatment for all homebuyers in insolvency proceedings, irrespective of their specific legal documentation from RERA.
• While affirming that the appellants were financial creditors under the IBC, the NCLAT noted that the Adjudicating Authority had rejected their Section 7 application due to non-compliance with certain provisions of Section 7(1), second proviso. However, the NCLAT did not find this to be a valid reason for dismissal, given their status as financial creditors.
• Ultimately, the NCLAT allowed the appeal, overturning the Adjudicating Authority’s decision. It directed further proceedings by the law, implying that the appellants should be recognized as financial creditors and their application under Section 7 of the IBC should be considered on its merits

Anand Murti vs. Soni Infratech Pvt. Ltd.

• The Supreme Court upheld the principle of Reverse CIRP in this case.
• The NCLAT initially rejected a settlement modification application by the promoter, leading to the continuation of CIRP.
• The Supreme Court, however, allowed Reverse CIRP, emphasizing its benefits to allottees and timely project completion.
• The promoter assured, via affidavit, that flat costs would not increase, commitments made by the previous management would be honoured, and funds were arranged promptly to commence the project without delay.
• The Supreme Court noted that permitting CIRP might result in higher costs for homebuyers compared to the promoter's offer.

Indiabulls Asset Reconstruction Co. Ltd. Vs Ram Kishore Arora & Ors.

• The appeal challenged the adoption of reverse CIRP by NCLAT and the constitution of CoC to only one specific project- the Eco Village Project.
• The Supreme Court emphasized that forming a Committee of Creditors for the entire corporate debtor (company) could significantly impact ongoing projects and cause hardship to home buyers.
• This decision seems to maintain the status quo directed by the NCLAT (National Company Law Appellate Tribunal), indicating a cautious approach to avoid disrupting ongoing projects and affecting stakeholders negatively.
• Union of India v. M/S Raj Grow Impex LLP (2021) and Dorab Cawasji Warden v. Coomi Sorab Warden (1990) to underscore the Court's commitment to applying established legal principles to maintain equity and prevent undue harm or injustice in legal proceedings

JAYPEE KENSINGTON BOULEVARD APARTMENTS WELFARE ASSOCIATION & ORS. VERSUS NBCC (INDIA) LTD. & ORS

• The Supreme Court reaffirmed that the NCLT should not interfere with the commercial decisions made by the Committee of Creditors (CoC) when approving resolution plans. The NCLT's review should be limited to ensuring that statutory criteria under Sections 30(2) and 31 of the IBC are met.
• If a resolution plan does not meet these criteria, the NCLT can only return the plan to the CoC for revision, without altering commercial decisions.
• The Court clarified that dissenting financial creditors should receive compensation only in monetary terms, not through other forms such as equity or land parcels, as proposed by the NBCC.
• The Supreme Court held that the security interests of secured creditors cannot be extinguished without due process, even if the resolution plan proposes such actions.:
• Homebuyers were categorized as a "class of creditors," and the Supreme Court emphasized that the majority decision within this class prevails. Dissenting homebuyers cannot challenge the resolution plan independently if it is accepted by the majority.
• The Court ruled that provisions of the IBC prevail over conflicting provisions of other laws like the Real Estate (Regulation and Development) Act, 2016 (RERA).
• The Supreme Court clarified that there is no provision restricting the CoC from considering multiple resolution plans, thus affirming the jurisdiction of the NCLAT in such matters.