NCLAT Backs Project-Level Insolvency Cases In Realty Sector

The National Company Law Appellate Tribunal (NCLAT) has reiterated that insolvency proceedings initiated by homebuyers must be confined to the specific project where the default has taken place.

The tribunal made it clear that these proceedings cannot be applied to other unrelated projects of the same real estate developer. This reinforces the principle that insolvency cases involving real estate firms should be handled on a project-wise basis.

What Did The Tribunal Say?

The NCLAT stated that when homebuyers file an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), the Corporate Insolvency Resolution Process (CIRP) must remain restricted to the concerned project.

The NCLAT, in its decision on Navin M Raheja's appeal, highlighted a crucial point. A two-member bench observed that expanding insolvency proceedings to encompass unrelated projects would, in fact, harm the interests of homebuyers and other parties involved in those developments.

The tribunal emphasised that the CIRP must be ring-fenced to the specific project where the default has occurred. It also held that claims submitted by creditors and stakeholders should be limited strictly to the concerned project under insolvency proceedings.

What Was The Case About?

The ruling relates to insolvency proceedings involving Raheja Developers, where the tribunal confined the CIRP to the “Krishna Housing Scheme” project instead of the entire group.

The tribunal noted that a similar position had been taken in an earlier case involving another project, Raheja Shilas, and said the same principle would apply here.

It also directed the resolution professional to issue a corrigendum to the earlier public notice (Form A), asking stakeholders related to the Krishna Housing Scheme to submit their claims within 14 days, in line with CIRP Regulations, 2016.

The case originated from an order passed by the New Delhi bench of the National Company Law Tribunal (NCLT), which had admitted a Section 7 application filed by homebuyers.

The Krishna Housing Scheme, built within the Affordable Housing framework, is eligible for benefits under both the Pradhan Mantri Awas Yojana and the Rinn Yojana. It has 11 towers containing 1-2 BHK units, comprising 1,644 residential units, and commercial areas.

The developer cited the COVID-19 pandemic as the reason for the setbacks. As a result, project costs surged to ₹204 crore, exceeding the original projection of ₹183.36 crore. Moreover, the construction remained incomplete, and possession was not granted, all outside the stipulated timeframe.

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The Key Takeaway

The decision provides clarity on how insolvency cases in the real estate sector should be handled.

The decision minimises the chances of disrupting projects already underway or those untouched by the situation, since the legal proceedings will be limited to the specific projects involved. Furthermore, it ensures that issues arising in one project won't have a detrimental effect on the stakeholders of other, unrelated projects.

Investors should monitor how this framework impacts recovery timelines and the financial stability of real estate companies.

Sources:

The Economic Times

Press Trust of India