Project Completion, Sale Of Flats Do Not Defeat Insolvency Plea Against Real Estate Developer: NCLT Mumbai

The National Company Law Tribunal (NCLT) in Mumbai has recently held that the substantial completion of a real estate project and the sale of flats and shops in it do not bar insolvency proceedings by a lender. The tribunal observed that such circumstances do not extinguish an unpaid financial debt.

A coram of Judicial Member Nilesh Sharma and Technical Member Sameer Kakar admitted Union Bank of India's insolvency plea against Rashmi Realty Builders Pvt Ltd over a default of more than ₹60 crore. The tribunal also rejected the developer's allegation that the proceedings had been initiated with malicious intent.

The tribunal observed, “The further contention of the CD that the project in question is substantially completed and that flats and shops therein have already been sold also does not render the present proceedings non-maintainable. The completion status of a project or sale of units therein does not extinguish the financial liability owed to the Financial Creditor, nor does it erase the occurrence of default under the IBC. The debt admittedly continues to subsist and remains unpaid.”

Union Bank's claim arose from a ₹32 crore loan extended for the Rashmi Starcity Phase II and III project at Naigaon in Palghar district. The bank approached the tribunal claiming a default of ₹60.97 crore.

Rashmi Realty Builders argued that the claim was barred by limitation. It also contended that any insolvency process should be confined to the project for which the loan had been granted.

The tribunal rejected the limitation objection. It held that the debt remained enforceable because of acknowledgments contained in the company's balance sheet.

The tribunal then examined whether the insolvency process should extend to the developer as a whole. It found that the loan documents and security documents were tied to a specific project.

As a result, the tribunal held that the insolvency resolution process should remain confined to the Rashmi Starcity Phase II and III project. It ruled that the process should not extend to the developer's unrelated projects.

Explaining its rationale, the tribunal observed,

“The principle emerging from the aforesaid judgments is that while IBC is generally entity-centric in its framework, the peculiar nature of real estate insolvencies necessitates a more nuanced and project-oriented approach in cases where the debt, security, and development activities are evidently confined to a specific project. Such an interpretation advances the underlying objective of IBC by preserving viable projects and protecting innocent homebuyers from avoidable insolvency contagion.”

The tribunal ultimately admitted the insolvency petition. It imposed a moratorium and appointed Purusottam Behera as the interim resolution professional.