1. Introduction:

1. Since the introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC“), it has gone through material shifts and one notable shift is that IBC in present times specifically addresses the concerns of the homebuyers. The Indian Judiciary, in exercise to protect the homebuyers, innovated the Reverse Corporate Insolvency Resolution Process (“Reverse CIRP“). It is unlikely that one may find the traces of this concept in the IBC because this concept has come into being through innovations by the judges who observe and note the struggles of the homebuyers day in and day out. The basic purpose of Reverse CIRP is to balance the interest of homebuyers, who want possession of their units, and financial creditors, whose interest lies in the recovery of money. Vide Amendment Ordinance, 2018, homebuyers have been brought within the purview of financial creditors. However, over these years, the judiciary has remained concerned that homebuyers lack the commercial acumen to take decisions about the viability of a resolution plan, which resultantly led to the innovation of Reverse CIRP. 

2. Overview of Reverse CIRP:

2. Reverse CIRP was first invented by the NCLAT in the landmark case Flat Buyers Association Winter Hills v. Umang Realtech Pvt. Ltd. The promoter here acting as a lender and not as a promoter, pays out money to get the real estate project completed. No third party is allowed to present the resolution plan and instead, the promoter gets an opportunity to provide funds externally as a lender along with a resolution plan to ensure timely completion of projects. The NCLAT has also held that Reverse CIRP needs to be addressed project-wise and not at the company level.
3. The concept of project-wise resolution has been further reinforced by the proposed amendments to the IBC. In the current state of affairs, a default in one project results in the triggering of the Corporate Insolvency Resolution Process against the entire company. It is in order to address this very issue that the Ministry of Corporate Affairs has proposed Amendments, which allow project-wise resolution; therefore, in cases of insolvencies specific to a particular project, the resolution process under the Code would be invoked for that specific project and not the entirety of the entity.
4. However, what came into light when the concept of Reverse CIRP was evolving is a fact that on account of it being in the nascent stage, there are potential risks that come along with its evolution.
5. The Real Estate Regulation and Development Act, 2016, has made it compulsory to reserve 70% of the money collected for a real estate project in a separate account for project expenses. On the contrary, this has often been flouted, as seen in high-profile cases involving even companies like Supertech Limited for misutilization of funds.
6. Therefore, Reverse CIRP has potential to succeed only when the monitoring of funds is done by a structured legal mechanism. Going from a system where there was an after-the-fact review, to a proactive one with specified rules might just help in preventing some misuses by promoters and bring predictability to the process. 

This article proceeds to discuss the process of Reverse CIRP, its defects, and how an ex-ante regulatory regime would work in its betterment.

The Deficiencies in the Present Regime:

7. While these amendments would come as a respite for real estate developers and homebuyers, the process remains ambiguous in nature, especially so far as the monitoring mechanisms are concerned. For instance, while the NCLAT, in the Flat Buyers case, directed the Resolution Professional (“RP”) to complete the project with the funds provided by lenders and allottees, it failed to make any reference to segregation of 70% of the funds, as mandated under RERA.
8. Similarly, the Supreme Court in Anand Murti vs Soni Infratech Pvt. Ltd. and Amit Katyal vs Meera Ahuja upheld Reverse CIRP without touching the 70% RERA requirement. Even in cases such as Whispering Tower v. Abhay Narayan, wherein project-wise Reverse CIRP was allowed by the NCLAT, the said vital provision is not mentioned.
9. However, in Supertech Ltd. v. Union Bank of India, the NCLAT directed the RP to maintain all the receivables in a separate account, in conformity with RERA. The said order seems to be fact-specific as there was already a complaint from Uttar Pradesh RERA of diversion of funds previously. This becomes an area of concern because on the issue of monitoring of funds, before the CIRP in Reverse CIRP matters, the two different approaches by the NCLAT depict that such matters ought to be made routine or standardized.

The need for an ex-ante Approach:

10. Therefore, the inconsistency in the monitoring of the funds management at the project level in Reverse CIRP demands a better and more ex-ante regulatory approach. In the absence of explicit rules about how funds are to be safeguarded, there can be a misutilization of financial resources by promoters that may put other stakeholders at disadvantage.
11. It can be avoided only if an ex-ante regime-a regime of rules and mechanisms of monitoring well in advance of the beginning of the insolvency process-is introduced. Such a regime would avoid fund diversion and bring promoter accountability at an early date. An ex-ante regime will impart more transparency and certainty to the Reverse CIRP regime and impart more protection for all stakeholders.

Conclusion:

12. The concept of Reverse CIRP is still evolving in India as there is no legislation that has been notified with respect to this mechanism in the Insolvency and Bankruptcy Code, 2016, however it has emerged as a beneficial course for resolution of distressed real estate projects.
13. While the introduction of Reverse CIRP by NCLAT has been a commendable effort to save the homebuyers, the process is bereft of clear guidelines on many aspects, especially related to the fund management. In the absence of clear rules, Reverse CIRP may actually benefit the promoters at the cost of homebuyers and creditors. This lacuna needs to be addressed by the policymakers by making RERA account requirement mandatory in all cases of Reverse CIRP.
14. The proposed amendments to the IBC on project-wise CIRP are in the right direction, but this too does not precisely meet the principal issue of mismanagement of funds. The success and legitimacy of Reverse CIRP are essentially based on clear, enforceable guidelines that ensure transparency and fairness for all stakeholders.
15. Lastly, an ex-ante regulatory regime will go a long way in safeguarding the interests of homebuyers, creditors, and other claimants while ensuring that projects in the real estate sector are brought to completion with efficiency. The proposed regime would ensure that the process of Reverse CIRP meets its promise as a just and efficient solution to the problem of insolvency in the real estate sector.

Nishka Shah, Associate, Solomon & Co. 

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