In the past two years, the NCLAT has passed similar orders in a couple of other cases as well. This is being termed “Reverse CIRP” in legal circles
In the insolvency case against builder Supertech Limited, the National Company Law Appellate Tribunal (NCLAT) has passed an order to constitute the committee of creditors (CoC) for only one project, Eco Village II. The builder has over 20 such projects in various locations in Delhi NCR.
This constitution of CoC for one project instead of all is against the regular practice of Company Insolvency Resolution Proceedings (CIRP). In the past two years, the NCLAT has passed similar orders in a couple of other cases as well. This is being termed “Reverse CIRP” in legal circles.
“To simply put, legally the whole company is under insolvency proceedings, but practically the financial solution is being looked for only one sick project,” Nishant Srivastava, founder and managing partner of Actus Legal, says.
In 2020, Umang Realtech was the first company in which the NCLAT experimented with the reverse CIRP doctrine. This case, Flat Buyers Association Winter Hills-77 vs Umang Realtech Pvt Ltd, was challenged in the Supreme Court but the apex court refused to set aside the impugned order of the NCLAT.
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Legal experts say that the Supreme Court’s ruling cannot become a reverse CIRP precedent because the court merely refused to interfere with the NCLAT order in the Umang Realtech Pvt Ltd case.
“In one of its judgements, the Hon’ble Supreme Court has clarified that only a well-reasoned order will have a binding effect. Since the Court did not pass such an order in the Umang case, it will not become a precedent,” advocate M.L. Lahoty, who represents buyers in Amrapali real estate case in the Supreme Court, says.
Legal and corporate experts say that the NCLAT might have experimented with an intent to safeguard the interest of all the stakeholders. However, no such provision exists in the Insolvency and Bankruptcy Code (IBC) of 2016. “The so-called reverse CIRP has been a debatable thing, as the existing IBC law does not spell out anything on this clearly. It is borne out of judicial wisdom,” advocate Venket Rao from Intygrat Law firm says.
The IBC law was made in 2016, according to which if a company defaults in repaying the loan of its creditors, the whole company could undergo resolution proceedings. An interim resolution professional (IRP) replaces the company’s promoters, takes efforts to enhance its financial health and saves it from going into liquidation.
Relief for Supertech
In the Supertech case, the Union Bank of India filed a case in the National Company Law Tribunal (NCLT) on March 20, 2021, and alleged that it had extended over Rs 250 crore in loan to the company for the development of the Eco Village II project till 2015.
The builder failed to repay the loan, and on July 20, 2018, the account was declared as a non-performing asset (NPA). The bank’s total claim runs into over Rs 432 crore. The NCLT, by an order on March 25, 2022, initiated the CIRP and appointed Hitesh Goel as the IRP.
Supertech challenged the NCLT order in the NCLAT on April 12, 2022, and presented a financially sound plan of the company with time-bound completion, handing over possession and discharge of financial liabilities to other creditors.
In its argument, the builder referred to the Flat Buyers Association Winter Hills-77 vs Umang Realtech Pvt Ltd case of 2020 and pleaded relief on similar grounds. The Union Bank opposed it and argued that the reverse insolvency doctrine was an alien concept outside the scheme and against the provisions/objections of the IBC.
After hearing all the stakeholders, the principal bench of Justice Ashok Bhushan passed an interim order that said, “[The] IRP may constitute the CoC with regard to the Project Eco Village II only.”
It added, “The construction of all other projects shall continue with overall supervision of the IRP with the assistance of the ex-management and its employees and workmen.”
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Legal experts agree that the NCLAT has exceeded the law. However, they say that it presents a better solution than what is provided in the existing law. “I think that the NCLAT has done it in the interest of the home buyers,” Lahoty says. He feels that the tribunal is of the view that if other projects are running well, there is no need to disturb them. “So, it has been ordered to constitute CoC only in one project,” he adds.
So, if the reverse CIRP serves a larger purpose, particularly for the real estate sector, why should it not be included in the IBC? “A project-wise resolution has been a long-standing demand [of the industry], and I am sure that with such judicial interventions, there will be more clarity on the issue. In fact, it may lead to a well-thought and debated amendment to the code,” Rao says.
Srivastava seconds this thought. He says, “It is a recent development in the insolvency law which, I feel, is germane to the entire objective which the IBC desires to achieve, particularly when it comes to builders and infratech companies where thousands of general masses have invested their life savings.”
Ashish Mohan Gupta, a buyer and a petitioner in the Jaypee Infratech Limited case in Supreme Court, is of the view that if reverse CIRP becomes a law, it will be universally applicable and all the eligible real estate companies can claim benefit under it. He says, “Ultimately, the purpose of the law is ‘maximisation of value’ and to explore all available possibilities to save it from liquidation. If reverse CIRP comes as a better option then it is worth giving a thought.”
He adds that the JIL Real Estate Allottees Welfare Society has sent suggestions to the Insolvency and Bankruptcy Board of India, asking it to make reverse CIRP a law under the IBC.
Certain experts, however, say it is a vague concept in the present form. They cite the example of Section 14 of the IBC, according to which once CIRP proceedings are initiated against a company, all legal cases, such as the institution of suits, the continuation of pending cases, recovery, etc., are prohibited.
“When the insolvency resolution proceedings are only in case of a project of the company, why should the whole company get the benefit of Section 14? It benefits the builder, but buyers who are into litigation against the company in other projects suffer,” another advocate says, requesting anonymity.
He feels that reverse CIRP benefits the promoters in ways more than one and puts many homebuyers and financial creditors at a disadvantage.
“Just imagine what happens in case the sick project goes into liquidation. The project’s financial creditors, such as banks, will lose their money. On the other hand, the value of other projects will be maximised for the benefit of the company. This is a winning situation for the company but not for all stakeholders,” he adds.
This class of experts feels that the purpose of the CIRP process is the maximisation of assets of the company, thereby finding a balanced resolution for the entire company and its creditors, and not just a selected few.