This article has been written by Saurabh, pursuing a Certificate Course in Real Estate Laws from LawSikho.

Introduction

Real estate sector of India is a booming sector, and has a very much influence in Indian Economy. The real estate sector of India is regulated by RERA (Real Estate Regulatory Authority) and by the Act known as Real Estate (Regulations and Development) Act, 2016. Before RERA came into picture, there were many irregularities for the home buyers and for the builders and developers but specifically homebuyers were the one who were very much exploited in the real estate sector before this act came into force. Problems faced by homebuyers were like delay in completion of the project, biased contract in favor of builder or developer, no mentioning of the date of completion, no proper disclosure of sanction plan, and many more. 

Also, there was a lack of transparency and accountability in the real estate sector before this act. That’s why to protect homebuyers and to bring transparency in the real estate sector the Government of India introduced the Real Estate (Regulations and Development) Act in 2016. Now, such as – before RERA came into picture, if any home buyer has a difficulty or problem with the builder, he has to go to the consumer court to file a complaint against the fraud or wrongdoing by the builder and has to wait for a long period to get justice, but post RERA the home buyer can approach RERA tribunal or authority and can get justice in short time. Rules and Regulations of RERA are now stricter and harder so that no builder or developer can exploit the home buyer.

Now, talking about IBC (Insolvency and Bankruptcy Code) which was introduced in 2016 is a bankruptcy law of India which integrates or merges the existing framework by creating a single law for insolvency and bankruptcy. The aim of IBC is to save the corporate debtor, debt resolution in fixed time period, revival of companies, and maximization of asset value of the corporate debtor, also give availability of credit.

General Information about IBC 

1. Companies, Individuals, partnership firms come under IBC.
2. Section 12 of IBC defines a time period for the completion of Insolvency and resolution process. It says that from the date of admission of application for initiating the insolvency process, the corporate insolvency process shall be completed within the next 180 days. But the time period can further extend if the Insolvency Professional (defined in Part-I, section 19 of IBC) requests by filing an application to the Adjudicating Authority for an extra time period. If the Adjudicating Authority is satisfied that the corporate insolvency resolution process cannot be completed within 180 days due to some difficulties the Authority shall grant some extra time period beyond 180 days, but the point is that the additional time period given should not be more than 90 days. Provided that, the additional time period for resolution of the Insolvency process shall be provided only once.
3. The Committee of Creditors is formed by Interim Insolvency Professionals(IPR) under section 18 of IBC, which is the supreme decision-making body in the CIRP.
4. The Insolvency and Bankruptcy Board of India is appointed to regulate or to oversee the IBC proceedings. There are 10 members in IBBI, some from the Finance Ministry, some from the legal Ministry and the RBI.
5. There are two Adjudicating Authorities, NCLT (National Company Law Tribunal) and DRT (Debt Recovery Tribunal). NCLT is basically for Corporate Entities, and DRT is for all Non-Corporate Entities.

These are some general information about IBC. Now, before going further about the topic first we should know: 

Who is known as Home buyer?

In normal language, a home buyer is a person who buys a house or flat as a place to live.

Who is known as Developer?

Section 2(zk) of RERA defines developer as a person who constructs a building or apartment or develops an existing building into apartments with the intention of selling it to other person (home buyer) also if a person starts a project on the land with the intention of selling or sells it to other person is known as Developer or Promoter.

Definition of Reverse Insolvency 

The concept of Reverse insolvency was introduced in the matter of- 

Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.

The Hon’ble NCLAT took a practical approach with the intention of saving both, the interest of stakeholders and survival of business. Reverse Insolvency can be termed as a part of Corporate Insolvency Resolution Process (CIRP), Reverse Insolvency process is done in case of a real-estate company, when in a real estate project any promoter or developer wants to remain outside the Corporate Insolvency Resolution Process but intends to act as a backer or lender by suffusing cash flow. This act of the promoter gives two major benefits. First one is that the Corporate Insolvency Resolution Process (CIRP) reaches success and second is that the project is completed without any difficulties and homebuyers would also be satisfied.

Understanding Reverse Insolvency in Case :- ‘Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.’

Summary :- In this case Mr. Ajay Singh and Mrs. Rachna Singh who were allottees or Financial Creditors (according to IBC) moved an application under section 7 of IBC, 2016 to NCLT, Principal Bench, New Delhi to start Corporate Insolvency Resolution Process and without approval of any plan of a third party (Resolution applicant) against ‘M/s Umang Realtech Pvt. Ltd.’, which is a real-estate company (here referred as ‘Corporate Debtor’). The Authority admitted the application and appointed an Interim Resolution Professional (IRP) and directed the financial creditors to deposit Rs. Two lakhs with the IRP to perform further functions assigned to him.

Now, the problem is that in IBC when an IPR is appointed the duty of IPR is to keep the company in running process and in case of real-estate infrastructure company the duty of IRP is to build the remaining infrastructure to keep company in running process. In this case, it is not possible for the IRP to complete the project within Rs. Two lakhs which were ordered by the Authority to Financial Creditors to deposit it with IRP to keep the company in going concern. Now, in this case one of the Promoter name ‘Uppal Housing Pvt. Ltd.’ came out and agreed to remain out of the Corporate Insolvency Resolution Process and intended to play a role of Financial Creditor by infusing case flow. This leads to making sure that the CIRP completes, and the construction of the remaining project is also completed. The completion of the project enables the allottees to take possession of the flats in the project without any third-party intervention. The NCLAT approved this experiment with the ongoing process of CIRP so that rights of promoters are not compromised. The aim of Reverse CIRP is to get twin benefits: the first one is to save promoters from insolvency and the second one is to give possession to the allottees in the project.

Benefits of Reverse CIRP for Home buyers and Developers

Initially, Hon’ble Supreme Court in the case of the ‘Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors. held that home buyers of any real-estate project will be termed as ‘Financial Creditors’ under the Insolvency and Bankruptcy Code, 2016 and should be allowed to be a part of the Committee of Creditors in the CIRP. The Court also observed that RERA Act is also and not in conflict with any provisions of any other law for the time being in force and the remedies provided to allottees under RERA are additional and not exclusive remedies.

Further in case of ‘Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors.’ The Hon’ble Supreme Court with the approach of ‘equality for all’ made distinction between the ‘Unsecured Creditors’ and ‘Secured Creditors’ and observed about the protection of creditors among themselves. The court observed and stated that secured creditors will in many cases, would be benefitted to vote for liquidation and not for resolution as they will have good rights in liquidation of Corporate Debtor. Also, the main objective of IBC is to save and protect Corporate Debtors from Insolvency, and by this the purpose of IBC would be defeated. The Supreme Court, in this case, observed some important provisions for Home buyers (Financial Creditors) such as decision of Committee of Creditors is supreme in any case, the role of IRP is only administrative, and one of the important clarifications was that the amended Regulation 38 of IBBI is not giving equality to all the creditors. 

All these observations were given by the Supreme Court in this case.

Now, talking about the Benefits of Reverse CIRP for homebuyers is that initially when the Corporate Insolvency Resolution Process is initiated for any real-estate company, it would impact all other projects which are running in other places of the same real-estate company. Now, if we study the case ‘Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.We can observe that due to reverse CIRP for any real estate company the other projects placed with different plans in different places would not get affected and the homebuyers of other project would not face any difficulties and this was one of the aim of experimenting the reverse CIRP because due to reverse CIRP the maximization of asset would depend upon project to project and not for all the projects of the Corporate Debtor, and the ultimate objective of home buyer to take possession of flat/apartments without any third-party interference would be achieved and all the rights and interests of stakeholders will be protected.

On the other hand, benefits of reverse CIRP for Developers is that, it will not affect other projects of developers also the CIRP process would get success, and the liquidation of project will not affect the rights and interest of homebuyers which initially get impugned in many cases.

Conclusion 

In conclusion, we can say that Reverse CIRP is a win-win process for homebuyer as well as for project developer, till now we can say that reverse CIRP is good but it is not a secure process and in most of the situations the promoter is failed to give investments as an outside financial Creditor. Also, according to the theoretical analysis, we can say that Reverse CIRP can be a quite promising process but there is still a drawback which is needed to be solved before applying this practically, that is of claiming of refund by home buyers as initially in dimple CIRP process home buyers can claim for refund but in Reverse CIRP the homebuyers cannot claim for refund. So altogether we can say that Reverse CIRP is still in an experimenting process and we should wait for more cases in which Reverse CIRP is applied and then observe its effect.

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