The Reverse CIRP process will be mandatory for Real Estate Developers and even to Real estate Companies which are in business of Buying/Selling flats, apartments and shops.
It was an innovative experiment by NCLAT delivered on 4th February 2020.
The Judgment was given in case of Flat Buyers Association Winter Hills -77 Gurgaon vs. Umang Realtech Pvt. Ltd.
The objective of Reverse CIRP is to ensure that each allottee of flat/apartment/shop is given possession of flat(s) as agreed at time of signing agreement with Builder.
The Builder is given a chance to complete the project and handover the flats to allottee as a going concern, if he cooperates with the IRP/RP. This enables the CIRP to be carried out on a positive note.
Allottees have an edge over Banks (Secured Creditors) as regards flats/shops. Idea is that Banks are more interested in repayment of their loans while Allottees are interested in possession of their flats.
Reverse CIRP shall apply only to the Project for which Application has been filed by Financial/Operational Creditors and not for other Projects being executed under the Legal Entity.
Legal entity is Umang Realtech Pvt. It had several running projects under it’s belt. Allottees of Project Winter Hills -77 Gurgaon filed for CIRP. CIRP would be applicable only to Winter Hills and other projects would continue to function normally.
Applicants apply for CIRP but do not want to bring a fresh Resolution Applicant.
Under Normal CIRP, typically a Resolution Plan is accepted by COC, the Resolution Applicant will expect hair cut by both Financial Creditors and Operational Creditors. Hair cut for allottees is meaningless as they expect possession of complete flat and not partial delivery. Reverse CIRP aims to provide delivery of flats to allottees.
In Reverse CIRP, allottees are not allowed to seek refund of money paid by them. In fact they have to also pay the balance amount due on account of flats/shops.
Promoter becomes intervenor in CIRP process and helps IRP/RP in completing the Project, repaying banks and protecting employment of construction workers.
Promoter moves out of role of Promoter and infuses funds as lender to project.
Promoter is expected to ensure CIRP achieves goal of completion of Project with his expertise and network. If Promoter does not cooperate, RP has to apply to NCLT for normal CIRP.
An application by Financial Creditor or Operational Creditor will attract CIRP for entire real estate company and is not confined to particular project. So an allottee or lender of one Project can hold all the Projects under ransom and affecting rights of stakeholders of other Projects.
IRP invites bids from third parties and existing Promoters rights are extinguished. So there is no incentive for existing Promoter to assist the RP in completing the Project.
The Resolution plan approved by COC might entail haircuts to be incurred by Allottees/Banks/OC. If haircuts have to be absorbed by allottees it affects their rights as they have to pay more for getting possession of flats thus destroying the objective of CIRP.
If NCLT adjudicates liquidation, Secured Creditors will have advantage over Unsecured Creditors (Allottees) in part satisfaction of claims thus frustrating objective of CIRP.
In vast majority of cases, banks will opt for Liquidation of estate of Real Estate company to maximize realization of Secured Creditors.
Experiment done by NCLAT to deviate from traditional CIRP to maximize the assets of Project and balance the interest of all Stakeholders.
Promoter is encouraged to keep the Project as going concern by completing the flats. So he has commercial interest in the Project. He is required to infuse funds into Project as a new lender.
IRP/RP shall demand balance amount due from allottees to complete the flats/shops.
Any funds infused are to be deposited in bank account of Corporate Debtor. Cheques are to be signed by authorized signatory and RP for utilization of funds from Bank account.
IRP/RP has right to sell any unsold flats to realize funds for completing the Project. To effect this sale, a Tripartite agreement has to be signed between Purchaser, IRP and Promoter (Not CD).
Allottee cannot ask for refund of money paid by him till commencement of CIRP. However he can request IRP to identify a third party who would be interested in taking over the allotment.
Promoter shall submit affidavit to IRP/RP along with detailed workings for timelines and cost to complete the Project and time schedule for repayment of Bank loans.
Promoter shall take a Certificate of Completion of Project from IRP/RP and submit to NCLT.
After getting approval of NCLT for completion of Project, unsold flats can be taken over by Promoter.
The Resolution cost including RP fees shall be paid by Promoter.
As per Section 29A, existing promoter is prohibited from becoming the new resolution applicant. This experiment of NCLAT may get challenged by Banks, Allottees and OC at a later date.
In the instant case where Reverse CIRP was adopted, intention of Promoter was good. If that is not the case, substantial period of CIRP will be consumed in trying to come to grips with Promoter thus frustrating the objective of CIRP.