Introduction
Due to the claims of homebuyers, the Insolvency and Bankruptcy Code, 20161 (hereinafter, “the Code or IBC”) has seen several developments since its inception. A recent judicial experiment in this respect is the National Company Law Appellate Tribunal (NCLAT) devised “reverse corporate insolvency resolution process (reverse CIRP)”, which has no genesis under the Code.
This concept was formulated to protect the interests of the allottees of real estate projects whose interests (getting possession of the unit) conflicted with the interests of other financial creditors concerned with the repayment of their money. Furthermore, even though real estate allottees are now financial creditors, the Tribunal thought they did not have the commercial expertise to understand the viability of a resolution plan.
Considering this unique position of homebuyers, the NCLAT brought in this innovation. However, judicial innovations may only sometimes lead to desirable outcomes. The danger looms over the phenomenon of reverse CIRP, given the porousness concerning the funds of the project. In terms of Section 4(2)(l)(D) of the Real Estate (Regulation and Development) Act, 20162 (hereinafter, “RERA”), 70% of the amount realised for the real estate project has to be kept in a separate account only for meeting project costs. However, India has witnessed several flagrant violations of this requirement. The ongoing “Supertech’” controversy was triggered when “Supertech Limited” did not maintain 70% of the funds in this account.
Additionally, Maharashtra has witnessed many instances of funds divergence from such accounts. The tribunals have yet to implement this condition in most reverse CIRP cases consistently. The likely outcome would be the enhancement of the risks of some stakeholders (promoters) benefiting at the expense of others. The thrust here is that an objective legal criterion for checking the funds is critical for an effective reverse CIRP process. Therefore, a shift from the ex-post determination in reverse CIRP cases to formulating an ex-ante regime can help overcome the promoter’s self-serving tendencies and bring a sense of predictability to the process….
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