Status as on- 08/08/2020

There are multiple projects in real estate industry which are either delayed or struck for long time. There may be different reasons for such inactivity but some of the reasons are as under:

• Diversion of funds from the project to another project
• Negative cash-inflow from the buyers
• Excessive demand from the land-owners of development authorities
• Lack of sales
• Dispute between developing parties  

These kinds of issue are the long-standing issue which does not solve easily. However, in the recent past, a new concept of “Reverse Insolvency” has been evolved which is the right solution for such issues. Let’s understand the concept of “Reverse Insolvency” under Insolvency and Bankruptcy Laws (IBC)

Reverse Insolvency

As per IBC Laws, if any corporate company defaults in debts exceeding prescribed amount, then the such creditor can file petition under the applicable section of IBC, before Hon’ble NCLT to initiate the Corporate Insolvency Resolution Process. On admission of such petition, an IRP is appointed by NCLT to find the resolution of said company as per the details IBC laws.

If after admission of the petition by Hon’ble NCLT filed under related sections of Insolvency and Bankruptcy Code, 2016 (IBC),  the buyers of the project and the builder or related party or other financial creditor come on a table and proposes to construct the project and the buyers of such project accepts, Then both (Builder and Buyer group/association) can file the joint application before Hon’ble NCLT/NCLAT praying that

• The promoter is ready to invest and construct the project as a financial creditor
• The buyer association or buyer group is not willing to accept any proposal other than the existing builder.

In that, Hon’ble NCLT or NCLAT may order to start the construction with IRP as supervisor.

It is special procedure brought into picture in the matter of “Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd. (through IRP & Ors.)”. This was done by the court keeping the mind the difficulties faced by buyers in case developer/builder companies go insolvent. In this case the primary company which is “Uppal Housing Private Limited” agreed to remain outside the process but act as lender and was slowed to infuse funds in order to complete the project in question. This can be used by the buyers of such projects where construction has been stalled and buyers can come together in majority to press builder to infuse funds for completing the construction.

Benefit of Reverse Insolvency-

• IRP shall be the Man of Court in the whole process and approving all the payments for the construction work.

• No fund can be diverted by the builder or promoter for any other purpose.

• Since IRP who is a man of the court, is supervising the construction work, the trust of buyer would increase hence the value of property increases

• The builder get complete right to invest and his investment shall be treated as financial debt as per IBC laws.

• The buyers can’t also make default in their payment and hence construction work goes without hindrance

• Priority to invest and construct the project increase as compared to payment to other creditors, hence more funds available for project.

• Since the builder knows all if and but of the project hence it is less costly and comfortable to get it constructed instead from any other developer.

Thus, as group of buyers the best remedy is to first file an application before the Hon’ble NCLT u/s 7 of IBC.

Conclusion

This is the best remedy available to buyers and builder to construct the pending delayed and stalled projects where the construction of the project can be done in time bound manner. IBC in comparison to RERA has much wider powers and thus buyers should explore the provisions of IBC for claiming their rights.

Disclaimer

The above article is based on the interpretation of the related laws and judicial pronouncements. The readers are expected to take legal advice before relying on this article. The author can be reached at support@centrik.in or call the IP expert at 8383011629