Understand the role of NCLT and IRP in protecting homebuyers: Should you take a risky bet to invest in such real estate projects?

National Company Law Tribunal or NCLT is a quasi-judicial entity formed in India on June 1, 2016, under the Companies Act of 2013. It is extremely important in the resolution of insolvency and bankruptcy cases, especially those involving real estate developments. The NCLT is responsible for launching insolvency proceedings, appointing the Interim Resolution Professional (IRP), and supervising the resolution process. The NCLT uses a time-bound insolvency resolution procedure to ensure that cases are addressed swiftly and in the best interests of all parties, including home buyers.

Abdullah Qureshi, Associate Partner, India Law LLP, says, “Once the Corporate Insolvency Resolution Process (CIRP) is initiated, the homebuyers have to file their claims with the IRP/ RP. After such claims are duly accepted, the homebuyer(s) are recognised as ‘Financial Creditors’ pursuant to the Amendment of IBC in 2018 and the judgment of the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v Union of India. The homebuyers can then participate in the Committee of Creditors (CoC) meeting through an Authorised Representative (AR) and safeguard their interests. The IRP appoints the AR through a voting procedure as provided under IBC.”

An Interim Resolution Professional (IRP) holds the requisite qualification and license as IBBI prescribes. Abhay Itagi, Partner at law firm MV Kini, says, “The role of IRP commences with the publication of a notice in daily newspapers calling upon the creditors of the Corporate Debtor to lodge their claims with requisite supporting documents within a period of 14 days of the publication of the notice. However, per Regulation 12(2) of CIRP Regulations, the creditors can lodge their claims with the IRP/RP within 90 days of the CIRP commencement date.”

Upon receipt of the claims, the IRP will collate the claims and ascertain and classify the creditors into Financial Creditors, Operational Creditors, Workman claims, etc. and form a Committee of Creditors (CoC) comprising of the Financial Creditors if any Operational Creditor has any claims exceeding 10 per cent of the total claims, such Operational Creditor may be made a member of the CoC, albeit without any voting rights. In its first meeting, the CoC may either elect to retain the IRP as Resolution Professional or appoint another Resolution Professional.

The project would fail if the IRP and the CoC cannot revive the Corporate Debtor as a going concern during the CIRP period. However, a final opportunity exists to sell the company as a going concern during the first 90 days of the liquidation period. 

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Should one take a bet to invest in such a project? 

From the perspective of homebuyers, the decision to invest in a project that has been taken over by the successful Resolution Applicant (SRA) is purely a commercial call to be taken by assessing the financial strength of the SRA, success rate the SRA in respect of the other projects and any other adverse antecedents, if any.

Gunjan Goel, Director of Goel Ganga Developments, says, "Investing in a real estate project that has gone through NCLT procedures and is offered at a reduced price might be appealing, but it is fraught with dangers and uncertainty. Before investing, thoroughly assess the project’s present state, future possibilities, and the reliability of the new developer or investor taking over.”

While decreased rates may appear to be appealing, there may be underlying reasons for the discount, such as ongoing litigation, inadequate infrastructure, or financial problems. The IRP’s suggested resolution plan should be extensively examined and assessed for practicality and feasibility.

“To estimate the potential for future value, it is also critical to analyse the project’s market demand, location, and general economic conditions. Investing in a distressed real estate project can be profitable if done with prudence and a clear grasp of the dangers involved. It is not a decision to be taken lightly, and expert advice is strongly advised,” said Goel.