To protect homebuyers, real estate insolvency should explore project-wise resolution, not the whole company: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has ruled that the Corporate Insolvency Resolution Process (CIRP) against Vatika Limited must be confined strictly to a single project.

A Bench of chairperson Justice Ashok Bhushan and Member (Technical) Barun Mitra modified the order of the National Company Law Tribunal (NCLT/ adjudicating authority) that had placed the entire real estate company under insolvency.

The NCLAT ruled that while a financial default occurred, the legal remedy in real estate cases should prioritise "project-wise" resolution to protect unrelated stakeholders including homebuyers.

"The view of the adjudicating authority that insolvency cannot be project-wise in case of real estate company and only resolution can be done project-wise, is not in accordance with law laid down by this Tribunal and the Hon'ble Supreme Court," the NCLAT said.

Vatika Limited had raised ₹146 crore through secured non-convertible debentures in 2017, backed by project-linked securities including land, receivables and escrow arrangements.

Despite extensions granted for repayment of principal till June 30, 2024, the company defaulted on interest payments beginning March 2022.

A demand notice dated December 29, 2023 sought ₹29.72 crore towards outstanding interest, following which IDBI Trusteeship Services Limited initiated insolvency proceedings claiming over ₹274 crore in default.

The NCLT admitted the Section 7 application and initiated CIRP against the entire company, which was challenged before the NCLAT by the suspended director of Vatika, Surender Singh.

The central issue before the NCLAT was whether insolvency proceedings could be confined to a specific real estate project, particularly where the financing, security and cash flows were project-linked.

Vatika argued that the debenture funding was intrinsically tied to a single project and that extending CIRP to all projects would prejudice other stakeholders, including homebuyers.

The NCLAT accepted the argument and ruled in favour of project-wise insolvency.

"The NCLT has not even adverted to the said judgements, law laid down by this Tribunal and the Hon’ble Supreme Court is fully binding on the adjudicating authority without adverting to the said judgements which had clearly held that project-wise insolvency process can begin and where the CIRP initiated by allottees or a financial institution, with respect to one project, it cannot take in its fold in other cities or other states," the NCLAT held.

It further noted that the NCLT had "felled in error" by taking a view contrary to binding precedents.

"Adjudicating authority fell in error in taking the view, contrary to the view taken by this Tribunal, which was clearly binding on the adjudicating authority," the order said.

Beyond procedural errors, the NCLAT identified a significant discrepancy in the debt amount claimed by the financial creditor, IDBI Trusteeship Services Ltd. While the creditor sought insolvency based on a default of ₹274.13 crore, the NCLAT found this figure was contractually incorrect as it prematurely included the principal amount.

"The principal amount never became due nor there was any notice requiring the company to pay the principal amount," the NCLAT noted.

The verified default was limited to ₹29.72 crore in unpaid interest. Although Vatika paid ₹37.2 crore during the litigation, the NCLAT upheld the initiation of CIRP, ruling that such payments do not liquidate a default once the legal trigger has been pulled.

To prevent collateral prejudice to homebuyers in Vatika’s other solvent projects, the NCLAT mandated that the insolvency process be restricted to the specific development funded by the debentures - Project Aspirations in Sector 88B, Gurgaon.

Surender Singh was represented by Senior Advocates Kapil Sibal, Virender Ganda and Arun Kathpalia with advocates Vishal Ganda, Ayandeb Mitra, Manisha Singh, Diksha and Riya Palnitkar.

IDBI Trusteeship Services Ltd was represented by Senior Advocates Gopal Jain, Nalin Kohli and Abhijeet Sinha and advocates Meghna Mishra, Nikhil Ratti Kapoor, Yashodhara Gupta, Kevin Chadha and Saikat Sarkar.

Resolution Professional was represented by advocates Gaurav Mitra and Adhish Srivastava.

Omkara Assets was represented by Senior Advocate Rudreshwar Singh with advocate Eklavya Dwivedi.

Homebuyers were represented by Senior Advocate Sanjeev Sen.

Interveners were represented by advocates Akshay Srivastava, Vivek Kumar, Raveena Paniker, Aditya Rathi, Sumesh Dhawan, Kartik Nayar and Divyansh Rai.

[Read Judgment]