A Brief Note on Reverse Insolvency
Varnit Vashistha
Law Graduate (Batch of 2023)
Introduction
- The concept of corporate insolvency resolution in India has undergone a revolutionary change after the introduction of Insolvency and Bankruptcy Code (IBC) in 2016. In 2019, Courts recognised a concept alien to Indian regime named as “Reverse CIRP”. It is the process which is specifically exercised in real estate projects. In Reverse CIRP, the promoter of the project against which the CIRP has been initiated act as the financial lender (from the outside) of the project and infused funds to complete remaining construction of the project.
- The basic reasoning behind adopting the concept of Reverse CIRP was that the allottees (being the financial creditor) cannot take a haircut which is what happens in the general practice of CIRP. The courts in numerous Judgements/Orders have recognised the route of Reverse CIRP and were always of the view that this is better option in the case of real estate insolvency as it is a time efficient process and suitable for all the parties involved.
- In the coming paragraphs the Author have stated excerpts of judgements in simplified language which can help us in getting a better understanding of Reverse CIRP, further, also pointed out the pre-requisites for Reverse CIRP and differences between CIRP and Reverse CIRP.
Judgments on Reverse CIRP
- The concept of reverse insolvency/CIRP was first recognised by the NCLAT Delhi in Flat Buyers Association Winter Hills vs Umang Realtech [2020] ibclaw.in 166 NCLAT [1]. In this case, the court allowed reverse CIRP and one of the promotors agreed to infuse funds in the project by playing the role of lender (financial creditor) so as to facilitate the completion of project within the time frame as provided by the NCLAT. It was further directed that if the ‘promoter’ fails to comply with the above-mentioned conditions or do not cooperate with the Interim Resolution Professional, then the NCLT will complete the CIRP of the corporate debtor.
- The Hon’ble Supreme Court also upheld the principle of reverse CIRP in the case of Anand Murti vs. Soni Infratech Private Limited (2022) ibclaw.in 27 SC[2]. In this case, NCLAT rejected the application for modification of the settlement by the promoter thereby covering all the home buyers also therein (which were left out earlier in the settlement) and directed the CIRP to be continued but then the Supreme Court allowed the reverse CIRP. It observed that reverse CIRP will be beneficiary to allottees and will result in timely completion of the project. Also, the promoter filed an affidavit in which he promised that the cost of flats will not be escalated, and that the promoter will honour the BBA signed by the previous management, the promoter arranged funds to start the project immediately without any delay and that he had arranged a loan of Rs. 100 crores from SBI Cap Ventures Ltd for the completion of project. It was also observed by the Hon’ble Supreme Court that if the CIRP is permitted then the home-buyers may have to pay a much higher cost as opposed to the offer made by the promoter.
- In the case of Rajesh Goyal vs Babita Gupta & Ors. [2020] ibclaw.in 273 NCLAT [3], promoter (Rajesh Goyal) was allowed to act as lender after the voting process between the allottees. The voting process was conducted by the IRP. Promoter agreed to infuse funds of total Rs. 69.27 crores to keep the company (corporate debtor) as a going concern. A time frame was also decided for those allottees who sought refund after surrendering their flats. The procedure adopted for reverse CIRP was same as in Flat Buyers Association Winter Hill (supra). IRP had the power to sell unsold flats/apartments even during the CIRP by way of tripartite agreement between the Purchaser, IRP and Promoter (Rajesh Goyal). The proceeds from these sales should be used to pay back the banks, operational creditors and interest of those allottees whose principal amount is to be refunded. However, if the promoter fails to comply with the directions of court and do not cooperate with the IRP/RP then NCLT will complete the CIRP.
As observed from the aforesaid judgements, the Promoter while opting the route for reverse CIRP he/she:
- Must have financial backing to infuse funds in the project;
- Must have the support of the home-buyers, majority of whom should be willing for possession of the flats rather than for refunds;
- Should be in position to comply with the time period for completion of the project;
- Should cooperate with the IRP till the completion of project.
Pre – requisites for reverse CIRP:
| S. No. | Name of the Case |
Pre – requisites for Reverse CIRP |
| 1. | Flat Buyers Association vs. Umang Realtech (NCLAT Order dt. 04.02.2020) [2020] ibclaw.in 166 NCLAT |
a. Agreement between promoter and allottees to let the promoter act as a financial lender of the project. (Para no. 13 of the order.) b. Promoter to remain outside CIRP but to ensure that allottees get possession during CIRP without any 3rd party intervention (Para no. 13 of the order) c. Promoter to give time frame for project completion and for providing common area. (Para no. 15) d. Promoter also to provide details of amounts due from allottees and default committed by them. (Para no. 15) e. Amount paid by promoter and the amount generated from dues of allottees during CIRP are to be deposited in the account of CD to keep it going concern (Para 26). f. Above amounts to be utilized only by issuance of cheque signed by authorised person of CD with counter signed by the IRP. (Para no. 26) g. Amount deposited in bank account should be utilised only for specific project. (Para no. 26) h. Banks will allow cheques for encashment only with counter signature of IRP. i. Financial Institutions/banks to be paid simultaneously. (Para no. 27) j. Allottees to pay their dues by given date (Para no. 27) k. Allottees allowed to form RWA to empower them to claim common areas (Para no. 28) l. Resolution cost including the IRP fee to be borne by the promoter. (Para no. 29) m. Unsold flats/apartments to be transferred to promoter only after getting the certificate of completion from IRP and Adjudicating Authority. (Para no. 29). n. Option with IRP to sell unsold inventory even during CIRP, via tripartite agreement between purchaser, IRP/RP and promoter (Para no. 30). |
| 2. | Rajesh Goyal vs. Babita Gupta & Ors. (Order Dated – 05.02.2020) [2020] ibclaw.in 273 NCLAT |
The requirements are the same as in Flat Buyers Association (supra), some of which only are mentioned below: a. Allottees agreed that Promoter to act as outside financial creditor. Promoter to invest the amount, not from the account of ‘corporate debtor’ but from other sources to keep the infrastructure a going concern. (Para no. 20) b. Amount disbursed from outside as lender to be deposited in the account of the Company so as to keep the company a going concern. [Para no. 20(i)] c. Resolution cost including the IRP fee to be borne by the promoter. (Para 20(v). d. IRP can also sell the unsold flats/apartments, by way of a tripartite agreement between the purchaser, IRP and Promoter. The proceeds from the sale will be used for completion of project, pay back the Financial Institutions, Operational Creditors and interest as is payable to the allottees whose principal amount is to be refunded. [Para no. 20(vi)] Note – In this case, the IRP conducted the voting of homebuyers as to whether they agree that the promoter to carry out complete the project. |
| 3. |
Anand Murti Soni vs. Soni Infratech Pvt. Ltd. (Order Dated – 27.04.2022) (2022) ibclaw.in 27 SC |
a. Furnishing of affidavit by promoter explaining the timelines for completion of project, funds to be infused, that the cost of the flats will not be escalated and BBA signed by previous management will be honoured. (Para no. 19) b. IRP shall submit quarterly reports to the NCLAT with respect to the progress of the housing project. [Para no. 24(E)] |
Comparison between CIRP Vs Reverse CIRP
| CIRP | Reverse CIRP |
| Promoters are not allowed to bid (except in case of MSME). Only third-party RAs permitted to bid. | Promoter only submits the proposal. No third party invited to bid. |
| Resolution cost borne by CD/COC. | Resolution Cost including IRP fees is borne by Promoter. |
| Time consuming – involves 3rd party bidding, litigation wr.t. bidding process by the RAs | Less time consuming. |
| Due to time involved in CIRP process and associated litigation, completion of project is delayed. | Completion of project can be achieved on time by the Promoter as per the timelines committed by it before the court. |
| 3rd parties/RAs may not be familiar with real estate and in any case, he/she would have to familiarise with the project, its status, coordination with sub-contractors and authorities. | Promoter has hands on details of the project. Much easier for Promoter to work and coordinate with sub-contractors and authorities. |
| Unsold inventory remains with the CD | Unsold inventory goes to Promoter after receiving completion certificate from IRP and approval of NCLT. |
| Possibility of price escalation of the flats. | Promoter however may undertake that there would be no price escalation. |
Conclusion
The concept of Reverse CIRP is still evolving in India as there is no legislation that has been notified with respect to this mechanism in the Insolvency and Bankruptcy Code, 2016, however it has emerged as a beneficial course for resolution of distressed real estate projects. It allows timely completion of projects without delays and litigation risks associated with regular CIRP. The interests of homebuyers are protected as they get possession of their flats without any haircuts or price escalations. Along with benefits to homebuyers, promoters also have the incentive and are empowered to complete the unfinished projects. Reverse CIRP should not become an easy way for defaulting promoters. Strict compliance with timelines, infusion of funds, and work together with the IRP to fulfil the conditions laid down by the court.
Overall, Reverse CIRP will play an important role in unclogging of the projects which are incomplete and stuck due to extensive litigation, but it should be implemented while keeping in mind the interests of the homebuyers.
References:
[1] Company Appeal (AT) (Insolvency) No. 926 of 2019
[2] Civil Appeal Nos. 7534 of 2021
[3] Company Appeal (AT) (Insolvency) No. 1056 of 2019
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.
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