Decoding Insolvency and Bankruptcy Code, 2016
- Team Lawgram
- Apr 27, 2020
- 6 min read
Updated: Apr 28, 2020
“Reverse Corporate Insolvency Process”
By Akash Swami
The Insolvency and Bankruptcy Code received the assent of the President of India on 28 May 2016 and came into existence with the objective to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto in any manner.
The law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, presently contained in a number of legislations, into a single legislation. Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.
Since inception one set of industry i.e.“ Real Estate Sector” has been struggling to maintain the good relation with the present law. When “The Insolvency And Bankruptcy Code (Second Amendment) Act, 2018 [1]” was passed which provided the “Allottee /Homebuyers at the same pedestal of financial creditor soon after it was challenged by the way of sea of petitions in the apex court of the country. The dust surrounding the second amendment of 2018 was finally settled by the apex court in the landmark judgement of Pioneer Urban Land and Infrastructure Ltd. v. Union of India[2]. The Supreme Court in this landmark judgement clarified that the amendment act of 2018 is not in violation of the provisions of the constitution and does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. The Apex court even clarified that the allottee can avail the relief of both the acts i.e. of Real Estate (Regulation and Development) Act, 2016 RERA and of the Code herein.
With the ruling of the Supreme Court in the Pioneer Urban Land and Infrastructure Ltd. v. Union of India, gave a lot to rejoice for the Homebuyers/allottee as now they can now avail the provisions of the IBC against the builder/real estate entity to resolve the dispute in a timely manner. The real estate sector which was already reeling under immense burden and pressure found itself highly difficult to make their way out and were largely derailed by the homebuyers dragging them in the National Company Law Tribunal thereby instigating liquidation proceedings against the company. So till now the real estate sector was feeling the pain but then came the much needed ray of hope for the sector which was already in turmoil.
Beacon Of Hope For Real Estate Sector:
With the judgement passed by the Hon’ble National Company Law Appellate Tribunal in Flat Buyers Association Winter ... vs Umang Realtech Pvt. Ltd[3] on 4 February, 2020 a new concept of REVERSE CORPORATE INSOLVENCY was coined. As per the I&B Code, after initiation of the Corporate Insolvency Resolution Process it is duty of the Interim Resolution Professional/ Resolution Professional to keep the company a going concern.
In the case of a real estate infrastructure company to keep the company going concern, the flats/ apartments are to be completed. But the question arise from where the funds would be generated and if the funds are generated from outside then the respective fund infuser will hold a “HAIRCUT”. In the present case and in all the real estate cases reaching in the ambit of insolvency stage, the Homebuyers/allottees are the worst suffers and in order to balance the situation for a win win for all, Hon’ble NCLAT coined “REVERSE CORPORATE INSOLVENCY”.
Under the concept of Reverse Corporate Insolvency, in simpler terms the promoter of the company infuses money to ensure that the company remains the going concern but not in the capacity of the promoter but in the capacity of the Lender which in turn means the Financial Creditor. In the terms of the judgement of Flat Buyers Association Winter ... vs Umang Realtech Pvt. Ltd the concept of Reverse Corporate Insolvency can be explained in the manner that One of the Promoter - 'Uppal Housing Pvt. Ltd.'/ Intervenor agreed to remain outside the Corporate Insolvency Resolution Process but intended to play role of a Lender (Financial Creditor) to ensure that the Corporate Insolvency Resolution Process reaches success and the allottees take possession of their flats/apartments during the Corporate Insolvency Resolution Process without any third party intervention. The Flat Buyers Association of Winter Hill - 77 Gurgaon also accepted the aforesaid proposal. It is informed that 'JM Financial Credit Solutions Ltd' one of the financial institution has also agreed to cooperate in terms of agreement with the condition that they will get 30% of the amount paid by the allottees at the time of the registration of the flat/apartment.
Now this concept of Reverse Corporate Insolvency not only ensure that the company remains the going concern with adequate liquidity but also provide the required knowledge for the competition of the project as the builder in the form of financial creditor not only bring the required funds but also the required technical nuances for the completion of the project on time in a way Homebuyers/Allottees will be the ultimate beneficiary.
The second important principle laid down by the Hon’ble NCLAT in the Flat Buyers Association judgement was that only the project specific liquidation will follow and not the Company specific liquidation. It is made clear that mixing of projects of the same real estate company is not permissible and the insolvency proceeding will be limited to the specific project itself. The Hon’ble NCLAT stated “In Corporate Insolvency Resolution Process against a real estate, if allottees (Financial Creditors) or Financial Institutions/Banks (Other Financial Creditors) or Operational Creditors of one project initiated Corporate Insolvency Resolution Process against the Corporate Debtor (real estatecompany), 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 may be different and mainly the allottees (financial creditors), financial institutions (financial creditors, operational creditors are different for such separate project”.
THE INSOLVENCY AND BANKRUPTCY CODE (SECOND AMENDMENT) BILL, 2019
This has brought the much needed legislation in order to distress the reeling real estate sector where at times ill motivated homebuyers with some ulterior motives dragged the real estate company for the insolvency proceedings. This legislation aimed at fixing the minimum threshold for the initiation of the insolvency proceedings against the entity. This in terms means now for the Homebuyers/allottees to file the insolvency proceeding against the real estate entity should qualify the following change i.e. “Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less”
Although the above said amendment is under the challenge where the Apex court has issued notice and ordered to maintain status quo, which eventually means the present amendment holds the field as of now.
Sigh of Relief for the Allottees/Homebuyers:
The judgement has not only tried to keep the builder happy but have taken a good care for the allottees/homebuyers as their rights are duly taken care off. The Hon’ble NCLAT made it amply clear that the a 'Secured Creditor' such as 'financial institutions/ banks', cannot be provided with the asset (flat/apartment) by preference over the allottees (Unsecured Financial Creditors) for whom the project has been approved. This very fine line of difference makes it evident that the intent behind the judgement was to take care of the real beneficiary in the project. The allottees have also been provided with the choice to opt out of a certain tower of the project and take in any other tower of the project, over the Interim Resolution Professional will play an important role in order to resolve all such conflicts. A situation may arise where the actual allottee would want to sell off the flat and this situation has also been duly taken care off by providing a Tri-parte agreement between the actual allottees, the Resolution professional and the intended buyer of the flat. However, all said and done the allottees cannot seek for refund of money from the real estate company which has been settled by the Hon’ble Apex Court.
Balancing Act :
Over the times the appellate body i.e. National Company Law Appellate Tribunal has showed the way forward where the prime contention of the Hon’ble NCLAT is to strike a balance between both the Financial Creditor i.e. Homebuyers/Allottees and Corporate Debtor i.e. real estate entity and this very approach can be witnessed in the plethora of the judgements passed recently. This approach of the NCLAT which aims at ensuring the corporate debtor i.e. real estate entity remains as a going concern as it provides employment to unorganized sector and also ensuring that the financial creditor i.e. Homebuyers/allottees gets their flats/residential units in a stipulated time frame whereby balancing the interest of the financial creditor and the corporate debtor.
Finally in the word of Justice Sudhansu Jyoti Mukhopadhaya the outgoing chairperson of the NCLAT the concept of 'Reverse Corporate Insolvency Resolution Process' can be followed in the 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 number of unorganized workmen.
Author is lawyer practising in Delhi. Views of the author are personal and for information purpose only.
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