NCLAT Examines Scope of CIRP in IL&FS Default, Considers Project-Wise Resolution for Real Estate Projects [Read Order]

The National Company Law Appellate Tribunal(NCLAT) has looked at the ambit and procedure for conducting the CorporateInsolvency Resolution Process (CIRP) in the context of the Corporate Insolvency Proceedings initiated on account of Defaults related to IL&FS Financial Services Ltd. (IL&FS) , particularly in the context of Real Estate Entities.

The NCLAT, while dealing with the matter noted that “In the context of real estate insolvency, particularly where the default relates to financial stress faced by the IL&FS Group, a restricted Corporate Insolvency Resolution Process for the corporate debtor as a whole might be more appropriate rather than a blanket insolvency of the corporate debtor as a whole”

The appeal before the NCLAT was initiated by an order of initiation of CIRP against the real estate company, whose financial condition was closely tied to funding arrangements with IL&FS companies.

The initiation of insolvency proceedings was challenged by the homebuyers and development authorities, as they were concerned that initiating the corporate insolvency and restructuring proceedings would have an adverse impact on viable projects, thereby affecting the homebuyers and public interest as a whole.

The arguments of the appellants were that real estate companies have separate economic projects, and therefore, insolvency proceedings should be initiated against the specific project and not the corporate entity.

Further it was submitted that initiating corporate insolvency and restructuring proceedings would be unfair to viable projects and would defeat the purpose of value maximisation as contemplated under the Insolvency and Bankruptcy Code, 2016.

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The arguments of the respondents were that the IBC contemplates corporate debtor insolvency, and therefore, initiating project-wise insolvency and restructuring proceedings would be against the provisions of the code.

The NCLAT observed that there is an evolving jurisprudence that recognises the unique nature of real estate insolvency, especially with respect to the classification of homebuyers as financial creditors.

The Tribunal referred to its earlier precedents where project-wise resolution was allowed to strike a balance between the interests of the stakeholders. Although the Bench of the National Company Law Appellate Tribunal comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) was of the view that,while the IBC, 2016 ordinarily provides for insolvency at the level of the corporate debtor in the case of real estate projects particularly those which have been affected by financial distress at the group level such as IL&FS defaults may perhaps call for a refined approach.

Value maximization and protection of homebuyers’ interest are of paramount importance under the IBC regime. Therefore, the necessity to evaluate the feasibility of a project-specific CIRP mechanism was underlined.

Hence, the appeal was allowed with a direction to the adjudicating authority to examine the viability of insolvency proceeding only at the level of the specific project and to ensure that solvent and independent projects are not dragged into the insolvency resolution process. It was affirmed that insolvency resolution must continue to remain flexible and pragmatic and in consonance with the broader intent of IBC to balance stakeholder interests with value maximization.

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