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Project-Wise CIRP in Real Estate Insolvency

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Insolvency proceedings in the real estate sector often raise a fundamental question—should distress in one project, trigger company-wide insolvency for a developer, or should the process remain confined to the affected project? The National Company Law Appellate Tribunal (NCLAT / Tribunal) recently reinforced the concept of project-wise insolvency in the real estate sector, providing significant clarity on the scope of the Corporate Insolvency Resolution Process (CIRP).

A recent ruling by the NCLAT in Navin M. Raheja v. Vipul Jain & Ors. modified an order of the National Company Law Tribunal (NCLT), clarifying that insolvency proceedings must be confined to the specific project where the default arose, rather than extending to the entire corporate entity.

Background of the Dispute

The proceedings were initiated by a group of homebuyers, being allottees of the ‘Raheja Shilas (Low Rise)’ project developed by M/s Raheja Developers Ltd., who filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The NCLT admitted the petition upon finding that debt and default were established and appointed an Interim Resolution Professional (IRP). Subsequently, the suspended director of the corporate debtor / developer, preferred an appeal, contending that since the alleged default was confined exclusively to the ‘Raheja Shilas (Low Rise)’ project, the initiation of CIRP ought not to extend to or adversely affect the Company’s other ongoing projects.

Recognition of Project-Specific Insolvency

The NCLAT examined whether the CIRP should be confined to the specific project in question? Relying on established precedents, including the judgment in Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd., the Tribunal emphasized the concept of "reverse corporate insolvency resolution process". The Tribunal noted that when allottees of a single project initiate CIRP, the process must be limited to that particular project, to protect the interests of stakeholders across different projects. The assets of a real estate company located in other cities or states, which have separate approved plans and different sets of creditors, cannot be clubbed together for maximization under a single CIRP.

This reasoning reflects commercial realities, including:
  1. Each project typically operates on separate land and approvals;
  2. Financial arrangements vary across projects;
  3. Stakeholders, especially homebuyers, are linked to specific developments.

By limiting the scope of proceedings, the Tribunal avoided unintended consequences for other projects that may be viable or nearing completion.

Key Directives and Implications

The NCLAT's decision provides a structured approach to handling real estate insolvencies. The Tribunal outlined the following key directives:

  1. The CIRP against the corporate debtor is strictly confined to the 'Raheja Shilas (Low Rise)' project.
  2. Financial creditors and institutions associated with other projects of the corporate debtor retain the liberty to prosecute their independent legal proceedings without being affected by this specific CIRP admission.
  3. Despite the corporate debtor handing over possession of the units to the petitioning allottees, the Tribunal refused to close the CIRP, because ancillary issues, such as delay compensation and electricity dues, remained unresolved.
  4. The petitioning allottees are permitted to file an application for withdrawal under Section 12A of the IBC, if a complete settlement is eventually reached with the corporate debtor.

This judgment offers clear takeaways for everyone involved, establishing that (i) Homebuyers can pursue insolvency remedies limited to their specific project while (ii) Developers can resist blanket proceedings across all their developments and (iii) that Resolution Professionals must adopt a project-specific approach.