Sponsored briefing: Reverse corporate insolvency resolution process

Manoj K Singh and Vijay K Singh discuss the concept of reverse CIRP in India’s insolvency and bankruptcy matters

In December 2016, the Insolvency and Bankruptcy Code 2016 (I&B Code 2016) was introduced with the objective of rescuing a company in distress by maximising the value of its assets and promoting entrepreneurship, availability of credit and balancing the interest of all the stakeholders, including but not limited to shareholders, creditors, debtors, etc.

The Hon’ble Supreme Court in Swiss Ribbons Private Ltd & Anor v Union of India & Ors (2019 4 SCC 17) held that the I&B Code 2016 is a beneficial legislation which puts the company back on its feet, not being a mere recovery legislation for creditors. It bifurcates the interests of the company from that of its promoters/management with a primary focus to ensure revival and continuation of the company by protecting it from its own management and from death by liquidation.

To achieve the objective for which the I&B Code 2016 was introduced, the I&B Code and regulations made thereunder have been amended from time to time in the last three years. It will not be out of place to mention that to achieve the goal of maximisation of assets all possible amendments have been carried out by the legislature and the judiciary through various judgments have interpreted I&B Code to achieve its objective. While the object of the Code is maximisation of assets, there are many companies which are not able to achieve the desired goal after the corporate insolvency resolution process (CIRP) has been initiated in such companies and it resulted in liquidation. Such companies have either no assets or they are EPC companies or real estate companies (with no extra land parcels) where the prospective resolution applicant finds no merits or chances of any financial returns if it places the resolution plan.

The companies most affected by I&B Code 2016 are real estate companies, especially after the amendment that includes the allottee (flat buyer) in the category of a financial creditor. Though time and again various judicial forums including Hon’ble Supreme Court of India have held that proceedings under I&B Code 2016 are not recovery proceedings. However, after getting the status of financial creditor, in many cases CIRP has been initiated due to application filed by a single home buyer against the company.

The legislature has – in order to stop such instances of filing applications by a single home buyer – amended the requirement w.r.t filing of the application under section 7 of the I&B Code by class of creditors, including homebuyers (allottees). As per the amended provisions, the home buyers (allottees) can file the application for initiation of CIRP against the company if such application is filed jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less.

Apart from this step from legislature, the judiciary also tried to help real estate infrastructure companies by introducing the concept of a reverse CIRP.

Recently the Hon’ble National Company Law Appellate Tribunal (NCLAT) in Flat Buyers Association Winter Hills-77, Gurgaon v Umang Realtech Private Ltd through IRP & Ors [CA(AT)(Insolvency) No. 926 of 2019] have introduced the concept of reverse CIRP which means that during CIRP, the resolution (end result) is reached without approval of the third-party resolution plan.

The concept was introduced by the Hon’ble NCLAT due to the reasons that real estate infrastructure companies face many problems when they go through CIRP. One of them includes the inexperience of the allottees (flat buyers) who generally form a majority in the committee of creditors formed by an interim resolution professional during the CIRP being categorised as financial creditor under section 5(7) of the I&B Code 2016. As these allottees (flat buyers) do not have any expertise to assess ‘viability’ or ‘feasibility’ of corporate debtors they lack the ability to access any resolution plan received. Furthermore, in most cases, the committee of creditors (banks/financial institution) take a ‘haircut’. However, in the case of allottees (financial creditors), there cannot be a haircut of assets/flats/apartments and they generally would like to pass the resolution plan wherein they achieve the desired result in minimum time period and with no or less additional cost if any to be incurred. They fail to appreciate the commercial viability of the resolution plan. Further, barring when CIRP is initiated in any company it is difficult to keep the company as a going concern as it is difficult to arrange funds or manpower and also other resources though the I&B Code 2016 provides that the resolution professional can arrange interim funds but there are hardly any lenders willing to lend to a company that is into insolvency. The stagnant position of working in such companies also affects the livelihood of those who are related to such companies.

Keeping the above in mind, the Hon’ble NCLAT introduced the concept of reverse CIRP wherein the promoter itself is allowed to be the financial lender instead of inviting the resolution plan from a third party to achieve the desired result. This was done with the intention that the interest of all the stakeholders, including allottees, financial institution, etc, are protected and the real estate company keeps functioning as a going concern with the help of a promoter working along with the resolution professional.

The Hon’ble NCLAT also issued various directions w.r.t CIRP against a real estate infrastructure and same are enumerated as follows:

a) In CIRP against a real estate, if allottees (financial creditors) or financial institutions/banks (other financial creditors) or operational creditors of one project initiated CIRP against the company then the allottees or financial institutions/banks or operational creditors of the other project cannot file its claim before the resolution professional. Further, the CIRP will be confined to such project of the company.

b) A secured creditor such as financial institutions/banks cannot be provided with the asset (flat/apartment) by preference over the allottees (unsecured financial creditors) to whom the project has been approved. Their claims are to be satisfied by providing the flat/apartment.

c) As an alternative to achieve the object of maximisation of the asset, an allottee may agree to opt for another flat/apartment or one tower or other tower if not allotted to any other.

d) Prayer for refund cannot be allowed by the adjudicating authority or by the NCLAT.

This order of NCLAT is a bold move and has provided relief to real estate companies, however, it also leaves questions unanswered like whether the home buyers/allottees of other projects cannot approach the NCLAT for commencement of CIRP during pendency of reverse CIRP even if they meet the requirements of 100 allottees or 10% of the total number of the allottees in the same project till such time the reverse CIRP is closed by an order of the adjudicating authority. Further, there is no clarity as to whether the banks and financial institutions, other financial creditors or operational creditors can invoke the jurisdiction under the I&B Code 2016 for the purpose of commencement of CIRP on occurrence of default till the time the reverse CIRP is closed. The financial creditors (banks and other institutions) and operational creditors will be without remedy until the time the reverse CIRP is closed, so far as, availing the remedies under I&B Code 2016 are concerned due to the provisions contained under section 11 of I&B Code 2016.

The issue as to whether a monetary decree or order of a court, tribunal or authority can be executed or enforced against such corporate debtor during the pendency of reverse CIRP is also a question which requires answer by judicial pronouncement or appropriate legislative amendments. The reading of section 14 of the I&B Code 2016 clearly reveals that there will be absolute prohibition, so far as the institution of a suit or legal proceedings or execution/enforcement of court order against a corporate debtor under CIRP is concerned.

Another question will be what will happen to the loans given to the company which is not project specific and how such loans can be recovered during the reverse CIRP.

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