NCLAT New Delhi Says IRP Cannot Keep Creditors And Homebuyers Satisfied In Real Estate Insolvency

The New Delhi National Company Law Appellate Tribunal (NCLAT) on 4 August held that an Interim Resolution Professional (IRP) cannot be expected to keep all stakeholders satisfied in a real estate insolvency process, where financial creditors and homebuyers have inherently conflicting interests.

A Bench of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha dismissed appeals seeking the replacement of the IRP in the insolvency proceedings of Swastik Homebuild Pvt. Ltd., observing that an IRP must remain neutral while balancing the competing interests of financial creditors and homebuyers. The Tribunal held:

“The financial creditors in these cases and allottees, who are financial creditors in a class, are having conflicting interests. The financial creditors are more interested in recovery of their money while home buyers are interested in timely completion of the project and in getting possession of their dream homes. It is in the midst of these conflicting interests the IRP/RP is standing and therefore it is always not possible for the IRP/RP to keep all the stakeholders satisfied or happy.”

Catalyst Trusteeship Ltd. and DCB Bank had challenged the conduct of the IRP in the corporate insolvency resolution process (CIRP) of Swastik Homebuild Pvt. Ltd., a real estate developer. 

Swastik Homebuild was admitted into insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), following petitions filed by homebuyers, and Suman Kumar Verma was appointed as the IRP.

Catalyst Trusteeship Ltd. was acting as debenture trustee for the government backed SWAMIH Investment Fund, while DCB Bank was among the financial creditors. Catalyst initially held more than 84% voting share in the Committee of Creditors (CoC), while DCB Bank held 17%. However, after the IRP admitted claims filed by hundreds of homebuyers, the voting share of the institutional creditors fell sharply and they were reduced to a minority.

The appellants sought the IRP's removal, alleging misconduct. They claimed that the IRP failed to convene CoC meetings despite requests, misrepresented creditor claims and treated himself as the Resolution Professional despite not receiving the requisite 66% approval. They also objected to the appointment of consultants allegedly linked to disqualified insolvency professionals.

The National Company Law Tribunal (NCLT), Chandigarh Bench, rejected their applications, following which the appellants approached the NCLAT.

The appellants argued that the IRP had failed to provide effective leadership to the CoC and had acted maliciously and arbitrarily, particularly after they declined to approve his appointment as the Resolution Professional. They also alleged that the IRP had improperly conducted the CIRP, making the process adversarial for the CoC members.

The IRP and supporting homebuyers opposed the appeals, arguing that the appellants, who then held only 32.43% voting share, were attempting to override the majority. They submitted that the IRP had acted within the framework of the IBC by verifying claims and reconstituting the CoC. They also pointed out that subsequent CoC meetings had approved his continuation as Resolution Professional with more than 67% voting share.

The NCLAT examined the allegations against the IRP in light of Sections 18 and 25 of the IBC, which require an IRP or Resolution Professional to receive, verify and collate claims and maintain an updated list of creditors. It held that the mere admission of a creditor's claim for a lesser amount could not, by itself, justify removal of the IRP.

The Tribunal noted that the IRP had admitted 67 of 70 additional homebuyer claims after due verification. This resulted in the reconstitution of the CoC with 134 homebuyers alongside two financial creditors.

It also considered the appellants' objection to the engagement of Shreya Insolvency Professionals Pvt. Ltd. It noted that the CoC had approved the appointment and fees of the insolvency professionals at its first meeting, in which one of the appellants had participated.

Further, the Bench observed that an IRP must remain neutral, fair and free from bias. However, it recognised that conflicting interests are inherent in a real estate CIRP. While financial creditors primarily seek recovery of their money, homebuyers are concerned with completion of the project and obtaining possession of their homes. It held:

“However, there may be circumstances when all the stakeholders of the process may not be happy with the functioning of the IRP, more so when by continuously admitting the claims of the allottees/ home buyers, the voting share of the financial creditors is decreasing gradually in the CoC and ultimately has been reduced to minority.”

Lastly, the Tribunal held that an IRP must remain vigilant and conduct the CIRP in a manner that does not give stakeholders legitimate grounds to question his neutrality. It further observed that decisions concerning the continuation, replacement or change of an IRP or Resolution Professional should ordinarily be left to the commercial wisdom of the CoC.

Accordingly, the NCLAT dismissed the appeals seeking replacement of the IRP.

For Appellants: Senior Advocate Gopal Jain with Advocates Angad Verma, Prashant Kumar, Nikita Menon, Amrit Bhatia and Kriti Sharma

For Respondents: Advocates Karan Gandhi, Riya Jain and Sikhar Tiwari