The insolvency and Bankruptcy Code, 2016 marked a recent change in the economic landscape of India. With a shift towards a more creditor driven process, the IBC provides for a faster resolution, high value recovery and boost in credit availability. In recent years, the National Tribunals (the NCLTs and NCLATs) have played a major role in terms of interpretation, oversight as well as evolution of the Code to match the objectives and overpower the challenges presented in the realms of Insolvency practices and business promotion. One of the main features of the IBC is the introduction of the CIRP mechanism which sits at the heart of the Code.

Providing a time bound framework for reviving financially distressed companies, the mechanism acts as a structured opportunity for mitigating losses to any parties involved due to a company running insolvent. The comprehensive resolution process allows wither the revival of the company itself or the payment of dues to stakeholders at the very least. Providing an amicable solution for each.

Despite the developments and efforts in the field, the real estate sector in India has not been able to reap the benefits of such transparent and speedy mechanism provided by the IBC. The total realization for from the real estate sector comprised of only 1.8% of the realization from all sectors under the IBC.[1] Besides, prioritizing the rights of creditors has damaged the chances of home buyers.

Thus, they are caught between developers' commitment to complete their projects and creditors who want to recover their investments or loans. The recommendation of the Insolvency Law Committee in pursuance of the Supreme Court case of Chirta Sharma v. UOI to acknowledge the homebuyers as 'financial creditors' is a major step towards recognizing the interests of bona fide homebuyers who enter into purchase contracts on the belief of being saved in case the developer or builder faces insolvency.

Efforts to identify reverse CIRP

Apart from the IBC, the Real estate (Regulation and Development) Act, 2016 (RERA) as well as the Consumer Protection Act, 2019 provide for mechanisms for refund of homebuyers. On one hand, while they mandate the real estate companies to deposit 70% of their proceeds in a separate account for completion of the project and refunding the homebuyers in cases of default, on the other such rules and regulations do not provide for remedies when such projects take a back seat due to delays.

The 2020 Supreme Court case of Pioneer Urban Land & Infrastructure Ltd. v. UOI brought in new thresholds for to avoid fraudulent practices against Homebuyers, the mechanism under IBC still lacked in addressing the needs of Homebuyers stuck in a situation of non-completion of their payments or allotments.

A review of Section 5(8) (f) under which 'financial debt' was interpreted by the court, upholds The Second Amendment of IBC as constitutional, which has the meaning of "financial creditors" including home buyers/allottees within its scope in terms of section 5(8)(f) of the Insolvency and Bankruptcy Code. This meant that the Homebuyers, being 'financial creditors' could not be in the committee of creditor (CoC).

The process of "reverse CIRP" was introduced for the first in the case of Flat buyers Association Winter Hills - 77 v. Umang Realtech (P.) Ltd. the Hon'ble NCLAT held that

"In the light of aforesaid discussion, as we find it is very difficult to follow the process as in normal course is followed in a Corporate Insolvency Resolution Process, we are of the view, that a Reverse Corporate Insolvency Resolution Process' can be followed in the cases of real estate infrastructure companies in the interest of the allottees and survival of the real estate companies and to ensure completion of projects which provides employment to large number of unorganized workmen.".

Fulfilling the objectives of the code

The application of the concept was not only restricted to ongoing projects which are stalled due to delays but also on track real estate projects as well. The Supreme Court reaffirmed the same in the case of Anand Murti v. Soni Infratech Private Limited and Another (2022). The concept allows promoters and developers to arrange finances themselves without the need for involvement of an external party.

But, what usually bothers the homebuyers after they have got the locus standi to approach the NCLT under Section 7 as financial creditors is whether they would be treated as secured or unsecured creditors and what order would there be for satisfying their claims.

The Supreme Court also made a distinction between secured and unsecured creditors, noting that protecting all types of creditors equally would not be fair either since in case of liquidation secured creditors are likely to choose liquidation instead of resolution this will only make it impossible for homebuyers to acquire flats if the company enters into liquidation.

Secondly, it goes against the objectives of the code which provides for liquidation only where no better resolution plans can be achieved at all besides, these flats n apartments are corporate debtor's assets and hence should not directly go to homebuyers because they carry security interest of the secured creditors thus cannot be transferred to them also these flats n apartments will later on have to be returned back to such homebuyers who are unsecured claimants in this matter.

As per the Committee which has mentioned in its report, and looking at various emerging issues during insolvency process of real estate projects, on November 6th, 2023 The Central Government issued a discussion paper titled "Real Estate related proposals-CIRP & Liquidation" which discussed the amendments proposed to be made under IBC with regard to Real Estate.

These amendments include:

1. Mandatory registration and extension of projects under RERA
2. Operating a separate bank Account for each project
3. Execution of registration deeds with approval of CoC during CIRP.
4. CoC to examine and invite separate plans for each project
5. Exclusion of property in possession of homebuyers from the liquidation estate

IBC has listed a few important goals, two of which are: to revive the corporate debtor and maintain it as a going concern; and liquidate it only in case when the former is not possible. The Adjudicating Authority also uses reverse CIRP to fulfill this same objective. So that home buyers are not allowed to claim any refund for sums paid. This guarantees that the corporate debtor can continue being an ongoing business enterprise and does not disturb its activities, while at the same time ensuring timely completion of the project too. As a contrast to the regular CIRP process under the IBC, the concept f reverse CIRP is to ensure the protection of interests of the homebuyers. Unlike CIRP, this concept enumerates project- to- project basis, meaning that no claims of buyers or other creditors shall affect the other ongoing projects of the same real estate company.

Being a project specific process, reverse CIRP is initiated only on projects where default has occurred and prevents the entire company to be affected by the ongoing CIRP . This approach involves a basis to preserve the full value of assets by keeping them within their respective projects, rather than lumping them together and potentially undervaluing them. Additionally, limiting the Corporate Insolvency Resolution Process (CIRP) to specific projects streamlines the process, leading to faster resolutions.

In bankruptcy situations, the project promoter has a chance to propose a resolution plan within a set deadline. In this case, the promoter is treated as an external lender, not a Professional (RP). This ensures that resources are directed toward the resolution, following the insolvency code's principles. It's beneficial because homebuyers may not have the financial expertise to analyze resolution plans, as noted by the Supreme Court. The court believes that Section 14 of the Insolvency and Bankruptcy Code (IBC) should be interpreted to encourage resolution plan submission by promoters.

Conclusion:
Since its recent introduction, the IBC has proven to be pivotal in many aspects dealing with corporate sector in the Country. India's recent jump in the ease of doing business has attracted large corporations and businesses to set up their major offices in the country. This calls for flexibility even in business governing laws such as the IBC, 2016.

It is the judiciary which enables and paves way for a solution out of a dispute keeping within mind the best for the business as well as its stakeholders. The judiciary works as a facilitator of businesses by introducing and identifying newer processes such as 'reverse CIRP' which, although not codified by the legislature, but has surely been benefitting builders and real estate companies.

Highlighting essential considerations for the effective implementation of the reverse Corporate Insolvency Resolution Process (CIRP), the concept raises concerns about the National Company Law Appellate Tribunal (NCLAT) overlooking operational creditors' challenges. It emphasizes the impracticality of making distinct claims for projects under a common ledger.

Ambiguities regarding the impact of moratorium on non-CIRP creditors and the absence of remedies for homebuyers in uncompleted projects are noted. The concept urges NCLAT to establish transparent mechanisms preventing cross-utilization of funds between different projects under reverse CIRP. Additionally, it advocates for a balanced approach to safeguard homebuyers' interests while maintaining the influence of banks in the Committee of Creditors (COC). Clarity on the commercial implications of partial upfront payments is also deemed essential for code compliance.