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Treatment Of Homebuyers Having “Buy-Back / Surrender” Arrangement In A Real Estate CIRP

by Amit Karia

Reading Time: 4 minutes

If you are a homebuyer in real estate, it is important to understand the “Buy-Back / Surrender” Arrangement under Corporate Insolvency Resolution Process.

Introduction

In the case of a Corporate Insolvency Resolution Process (CIRP) of a real estate entity, there could be a particular category of homebuyers who may have entered into an arrangement with the developer/promoter in the name of “Buy Back / Surrender” arrangement through a special Memorandum of Understanding (MOU).

Such a clause provides an option to the allottees to cancel the allotment and surrender the unit/apartment so allotted, even before the stipulated period for the completion/delivery of the projects by the Corporate Debtor.

Whether such buyers are to be treated as homebuyers and included in the class of creditors is an important issue that needs clarity.

Illustrative Clause For “Buy-Back / Surrender”

An illustrative clause in the Agreement is given below:-

“In case the Allottee wishes to cancel the Allotment and surrender the Apartment, then he can do so at the end of XXXX months from the date of this MoU (Buyback Date) and the Company agrees to accept the cancellation and surrender of the Apartment and agrees to pay compensation calculated @ Rs. XXX /- per sq. Ft. of Super Area of said Apartment amounting to Rs. _________ /- in addition to the principal amounts paid by Allottee.”
This option to cancel the Allotment and surrender the Apartment shall lapse after the Buy-back Date (i.e., XXXX months from the Date of MoU) if it is not exercised in the manner specified.”

Hence, an allottee can cancel the allotment/surrender the purchased unit within the stipulated period from the date of the MOU.

Related Read: Corporate Insolvency Resolution Process Under IBC

CLICK HERE

How should the cases wherein the corporate debtor has entered into a Memorandum of Understanding (“MOU”) with some home buyers/allottees, referred to as the ‘Buy Back Scheme/ Surrender Scheme’ be treated by the IRP / RP?
What would be the status/classification/categorization of a person who has exercised the option provided under the ‘Buy Back Scheme/Surrender Scheme’?

A) Relevant Case Laws:

Anuj Jain – Interim Resolution Professional for Jaypee Infratech Ltd. vs Axis Bank Ltd. and Ors (2020):

The Hon’ble Supreme Court while analyzing the definition of a financial creditor, as provided under the Code, observed that:
“…what is intended by the expression “financial creditor” is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in the restructuring of the loan as well as in reorganization of corporate debtor’s business when there is financial stress.”

Ankit Goyat vs. Sunita Agarwal and Anr. (2019):

The Hon’ble National Company Law Appellate Tribunal (NCLAT) observed that:
“where the allottee gets assured returns even if such allottee chooses not to retain the apartment, then, that such agreement to sell is only a camouflage of actually financing the construction of the flat.”

Mrs. Nidhi Rekhan vs. M/s. Samyak Projects Private Limited (2020):

The Hon’ble National Company Law Appellate Tribunal (NCLAT) observed that:
“the fact that after one year of booking the flats, the first party (the allottee) can cancel or rescind the agreement and take back a refund along with assured interest, the depositor cannot be considered a person who is genuinely interested in purchasing of flats/apartments and cannot, therefore, get the status of financial creditor being an allottee in accordance with Explanation (i) of section 5(8) of IBC. Such an allottee comes into the project as a speculative investor, who for no reason cancels the allotment”

Related Read: Delay Penalty To Homebuyers In Real Estate CIRP

CLICK HERE

B) Legal Position:

If an allottee has availed of the option provided under the buy-back/surrender scheme, it is clear that he/she is not interested in seeking possession of the allotted unit. And therefore, where the option of buy-back/surrender is exercised, the alleged consideration of an agreement, which is like an investment, would disentitle the person to be categorized as a ‘home buyer’. The person cannot be considered a homebuyer and shall not be represented by the ‘Authorised Representative’ of the homebuyers.

The claimant might be considered as an unsecured financial creditor or other creditors of the Corporate Debtor, depending upon the exact terms and conditions of the MOU / Agreement and whether there is any provision for assured interest payable in the event of buyback/surrender.

Suppose despite having entered into an MOU / Agreement, the allottees have not exercised the option of buy-back/surrender. In that case, it can be said that they comply with the main apartment buyer agreement, and hence, such allottees will be granted the status of a homebuyer/allottee / financial creditor in a class.

Conclusion

The IRP / RP should carefully verify the claims received from the homebuyers/allottees and check whether the case falls in the category of ‘financial creditors in a class.’ If not, it will have to be determined whether it is to be treated as a part of ‘unsecured financial creditors’ or ‘other creditors’, depending upon the terms provided in the agreement between the corporate debtor and that claimant.

Why Choose InCorp?

With the advent of the Insolvency and Bankruptcy Code (IBC), our team actively guides financial and operational creditors through the turmoil of the non-recovery of debts and dues from defaulting entities. Our team of expert professionals helps determine complex & technical legal issues.

Our professionals offer Corporate Recovery and Corporate Restructuring services under the framework of the Companies Act as well as the Insolvency and Bankruptcy Code.

Make Your Corporate Insolvency Resolution Process Hassle-Free.

Talk to our expert today!

Delay Penalty / Delay Compensation To Homebuyers In Real Estate CIRP

by Amit Karia

Reading Time: 3 minutes

If you are a homebuyer in real estate, it is important to understand the admissibility of the delay penalty/delay compensation under Corporate Insolvency Resolution Process.

Introduction

In the case of a Corporate Insolvency Resolution Process (CIRP) of a real estate entity, there could be a provision/clause in the ‘Builder Buyer Agreement’ or ‘Apartment Buyer Agreement,’ by whatever name called, providing for payment of compensation for the delay in handing over possession beyond the prescribed time frame to the allottees/home buyers.

Whether such claims are to be admitted by the IRP / RP during claims verification is an important issue that needs clarity.

Illustrative Clause For “delay Penalty / Compensation”

An illustrative clause in the Agreement is given below:-

“If the Company fails to complete the construction on or before the Completion Date or Extended Completion Date as aforesaid and/or on such date as may be extended by mutual consent of the Parties, then the Company shall be liable to pay the Allottee a compensation for the period of delay beyond the final extended Completion Date computed at the rate of Rs. ____________ per month per square feet of the Super Built Up Area of the Apartment, provided the Allottee has not been in default in making payments as per the agreed Schedule of Payments.”

Related Read: Corporate Insolvency Resolution Process Under IBC

CLICK HERE

Whether compensation payable on account of default/ delay committed by the Corporate Debtor in handing over the possession of the units to the homebuyers/allottees as per the Builder Buyer Agreement would constitute a debt and are to be admitted as a component of the claim?

A) Relevant Provisions:

As per Sec 2(6) of the Code, a claim would include the following:-

  • A right to payment, whether or not such right is reduced to judgment, fixed, undisputed, disputed, legal, equitable, secured, or unsecured
  • A right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to the right of payment, whether or not such right is reduced to judgement, fixed, unmatured, matured, undisputed, disputed, unsecured or secured

Hence, based on the above, a claim would also include payments made as damages/compensation arising from a breach of contract.

Related Read: Winding Up Of A Company Under IBC

CLICK HERE

B) Relevant Case Law:

Pioneer Urban Land and Infrastructure Limited & Anr Vs. Union of India & Ors (2019):
The Hon’ble Supreme Court observed that:
“What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense” and includes repayment.”

C) Legal Position:

In terms of the provisions contained in the Code and the CIRP Regulations as well as the judgment passed by the Hon’ble Apex Court, the delay penalty/delay compensation shall form a part of the claim to be determined by the IRP / RP, as it amounts to a liability arising out of a breach of contract.

Related Read: Voluntary Liquidation Under IBC 2016

CLICK HERE

Conclusion

The IRP / RP should carefully verify the claims received from the homebuyers/allottees and check the supporting documents provided including the Builder Buyer Agreement, whether there is any such clause / provision for delay penalty / delay compensation.

Why Choose InCorp?

With the advent of the Insolvency and Bankruptcy Code (IBC), our team actively guides financial and operational creditors through the turmoil of the non-recovery of debts and dues from defaulting entities. Our team of expert professionals help in determination of complex & technical legal issues.

Our professionals offer Corporate Recovery and Corporate Restructuring services under the framework of the Companies Act as well as the Insolvency and Bankruptcy Code.

Make Your Corporate Insolvency Resolution Process Hassle-Free.

Talk to our expert today!

Step By Step Guide to Winding Up of the Company under IBC, 2016

by Rakesh MK

Reading Time: 5 minutes

Introduction

The insolvency and Bankruptcy Code, 2016 is one of the major laws under which the winding up or voluntary liquidation of corporate persons may occur. Liquidation or Voluntary winding up of the company under IBC occurs when all the company’s board members mutually agree not to continue the business and dissolve the company of its assets and pay off the debts.

Here is a detailed guide to winding up a company under IBC, 2016

Steps for winding up a company under IBC 2016

Section 59 of the IBC has laid down the procedure for step by step winding up of a company or voluntary liquidation. The Section has been summarised below to guide you through the process of winding up of a company under IBC, 2016:

Step 1: Directors/Partners of the company submit a declaration

The designated partners/majority of directors of the company have to submit a declaration along with an affidavit stating that:

  • The company does not have any debts. If so, the company can settle all the debts with the proceeds of the assets sold during the liquidation process
  • The winding up is not initiated to defraud any individual or a corporate person

The declaration must be annexed with the audited financial statements and record of the company’s business operations for the previous two years or since its incorporation (If it is a newly incorporated company).

Step 2: Convene a general meeting and pass a special resolution.

The designated partners are required to convene a general meeting. They pass a special resolution to

  • Appoint an Insolvency Professional(IP) registered with the IBBI to act as a Liquidator
  • A resolution to liquidate the company voluntarily due to expiration of time (If mentioned in the Articles of Association) or due to mutual decision by the members

Note: This must be done within Four weeks of submitting the declaration as mentioned in Step 1.

Step 3: File with the Registrar of Company (ROC) and IBBI

The Company shall then notify the ROC or the IBBI regarding the resolution passed by the board members to liquidate the company. Notification to the Board and ROC must be done within seven days of passing the resolution.

Step 4: The Liquidator takes over the company

Once the Adjudicating Authority passes an order for winding up of the company/liquidation and appoints the liquidator, the liquidator takes complete charge of the company, and the powers of the board of directors are suspended. The company shall extend full cooperation to the liquidator.

The liquidator shall proceed further to take possession of all the assets and determine their realisable value.

Related Read: Corporate Insolvency Resolution Process under IBC

CLICK HERE

Step 5: Make a Public announcement and verify all the claims.

During the winding up of the company, the liquidator, after being appointed, must make a public announcement in one vernacular language newspaper and an English newspaper. Post-publication, the liquidator must consolidate all the claims received by financial (secured and unsecured) creditors, Operational creditors, workmen and employees, and other stakeholders.

The liquidator must verify all the claims and either accept or reject the same within 30 days of receiving the claim’s last date. The liquidator shall inform the claimant regarding the decision within seven days of verifying the claim.

Step 6: Prepare a list of stakeholders

As per Regulation 30[1] of the Insolvency and Bankruptcy Board of India (Voluntary Liquidation) Regulations, 2017, The Liquidator, after verifying all the claims, must prepare a list of all the stakeholders to the liquidation process based on the claims verified within 45 days from the last date of receipt of claims.

Step 7: Form an opinion on all Preferential, Undervalued, Extortionate, and Fraudulent Transactions

The liquidator at the relevant stage of liquidation/ winding up of the company must form an opinion on the avoidance transactions. The liquidator can appoint a transaction or Forensic auditor to determine the company’s Preferential, Undervalued, Extortionate, and Fraudulent Transactions.

  • Post Examination of the report from the transaction auditor or forensic auditor, the liquidator must file an application with the Adjudicating Authority stating all the avoidance transactions made by the Corporate Debtor (If any)
  • The liquidator must establish that the transaction made was within one year of the commencement date and two years of the commencement date in case of related party transactions

Step 8: Realisation and distribution of assets

The liquidator may value and sell the property/assets of the corporate person in any manner approved by him. The liquidator must recover and realise all available assets at the maximum value.

The money realised from the sale of assets shall be distributed accordingly to all the stakeholders within six months of realising the amounts. The costs incurred by the liquidator during the winding up of the company/liquidation will be deducted before distributing the amounts. The distribution shall be made as per Section 53 of IBC,2016.

Step 9: Timelines for Completion of liquidation while winding up of the company

The Liquidation process must be completed within a year of the commencement of the winding up of the company/liquidation.

If the process exceeds 12 months, then the liquidator shall:

1. Convene a meeting with all the contributors/stakeholders within 15 days from the last date of winding up of the company/liquidation

2. The liquidator shall present a progress report of the current stage of the liquidation/ winding up of the company. This includes:

  • Settlement List of stakeholders
  • Details of properties or assets which are yet to be sold and realised
  • Distribution made to the stakeholders to date
  • Update on the development of any material litigations against the company (If any)
  • Status of the applications filed by the liquidator before the Adjudicating Authority

3. The progress report shall be annexed with the audited accounts of all the receipts and payments made by the liquidator for and during the winding up of the company/liquidation process

Step 10: Submission of the Final report after the completion

When the company is wound up, the liquidator shall prepare and submit a final report of the process containing the following:

  • Audited accounts of all the receipts and payments made by the liquidator for and during the winding up of the company/liquidation process
  • A statement containing a list of all assets sold/realised and the money distributed to all the stakeholders. It should also show that there are no pending litigations against the corporate person
  • An independent sale statement concerning all assets shows the realised value and the mode and method of selling the asset
  •  Details of the buyer to whom the assets are sold

The liquidator shall submit this final statement to the following:

  • The contributors of the corporate person
  • The Insolvency and Bankruptcy Board of India; and
  • The Registrar

The final stage is submitting this report and an application under Section 59(7) with the Adjudicating Authority. Once the Adjudicating Authority passes the Order under IBC, the liquidator shall preserve all the records, such as reports, registers, and books of accounts, for at least eight years after the dissolution.

Related Read: Voluntary Liquidation Under IBC 2016

CLICK HERE

Conclusion

It can be concluded that the lawmaker has aimed to provide a speedy and efficient process for winding up of the companies who wish to stop their operations and realise their assets as compared to the ‘Compulsory Winding Up’ / ‘Winding Up by National Company Law Tribunal (NCLT)’ and Section 271 of the Companies Act, 2013 where there had to be strong grounds to liquidate a company. The Primary aim for winding up the company under IBC is to obtain the maximum realisable value for the assets of the company. 

Some of the points to be checked before deciding upon the Law applicable are:

  • Whether the entity is insolvent or solvent?
  • Whether the entity has defaulted in repayment of debt(s)?

Why Choose InCorp?

With the advent of the Insolvency and Bankruptcy Code (IBC), our team actively guides financial and operational creditors through the turmoil of the non-recovery of debts and dues from defaulting entities. Our team of professionals and experts guide and advise appropriately for you to make a decision on voluntary liquidation. 

Our professionals offer Corporate Recovery and Corporate Restructuring services under the framework of the Companies Act as well as the Insolvency and Bankruptcy Code.

Looking to engage with an insolvency professional?

Talk to our expert today!

Company Liquidation Process in India Under IBC

by Muskaan Aggarwal

Reading Time: 5 minutes

If you are a stakeholder of a Company contemplating liquidation, it is important to understand the company liquidation process in India under IBC.

What Is Company Liquidation?

Company Liquidation is a process rather than a term. Liquidation is the procedure under which a company is wound up. Company Liquidation under IBC may be 

1. Voluntary (where the Company is solvent) or 

2. Compulsory (where the Company is insolvent). 

The liquidator’s function is to convert the company’s assets into cash & cash equivalents and to distribute the proceeds among the creditors to the extent possible. Any surplus is then distributed among the members of the Company under liquidation.

Effect & Consequences of Company Liquidation

  • The moratorium implemented under section 14 of the IBC shall cease to have effect from the day the National Company Law Tribunal (NCLT) passes such liquidation order
  • Subject to Section 52 of IBC, no suit or legal proceedings shall be instituted against the corporate debtor. However, a lawsuit or legal proceeding may be initiated by the liquidator only with the prior approval of the Adjudicating Authority, and on behalf of the corporate debtor
  • Under this section, the order of liquidation shall be a notice of discharge to the corporate debtor’s officers, employees, and workers, except when the corporate debtor’s business is carried out during the Company Liquidation process by the Liquidator under IBC.

Related Read: Voluntary Liquidation Under IBC 2016

CLICK HERE

Company Liquidation Process & Steps in a nutshell-

Stage I: Appointment of Liquidator

  • Appointment of Liquidator (Section 34) who has submitted the written consent in Form AA of Schedule II
  • A public announcement needs to be made in Form B of Schedule II within five days of the pronouncement of the order for liquidation to invite claims, which shall be submitted inside 30 days from the liquidation initiation date
  • Once the liquidation order passes, the resolution professional must do the filling of CIRP-5

Stage II: Verification of Claims & Reporting

  • Verification and acceptance of claims and appointment of Valuers.
  • Preparation of Asset Memorandum and other reports-
  • Asset Memorandum- To evaluate the assets of the CD and prepare a report within 75 days. (Section 35(1)(c), Reg 5(1), Reg 34)
  • Progress Report- The reporting of the progress of the liquidation within 15 days from the end of each quarter. (Sec. 35(1)(n)) 
  • Preliminary Report- Report prepared by Regulation 13 to be submitted within 75 days. (Reg 2(1)(f) r.w. Reg 13) 
  • First Progress report- The quarterly report under Regulation 15 to be submitted within 15 days of the end of every quarter (Reg 2(1)(g) r.w. Reg 15).
  • Subsequent Progress Report- In case the insolvency professional ceases to act as a liquidator, then within 15 days from the date of cessation, submit the following progress report. 
  • Sale Reports- To be enclosed with the Progress report after the sale of each asset according to Reg 5(1) r.w. Reg 36.
  • Minutes of consultation with the stakeholders – After every meeting, Minutes of consultation with the stakeholders are to be circulated as per Reg 5(1) r.w. Reg 8. 
  • The Final Report, before distribution, is to be submitted within one year according to Reg 5(1) r.w. Reg 45

Provide Copies of the reports and minutes to stakeholders in electronic or physical forms: on application from stakeholders; receipt of the cost of making reports or minutes; receipt of a confidentiality undertaking. (Reg 5(3))

Related Read: Winding Up Of A Company Under IBC

CLICK HERE

Stage III- Distribution of proceeds

  • The Liquidator shall form Liquidation Estate (subject to inclusions and exclusions) and open a bank account in the name of the corporate debtor, followed by the words “in liquidation,” in a scheduled bank, for the receiving the amounts due to the CD and initiate the sale of assets.
  • The liquidation process of any CD under the IBC Code shall be completed within one year from the liquidation commencement date, even if applications for avoidance transactions are pending.
  • The liquidator shall not sell any property, whether immovable, movable or any actionable claims of the corporate debtor under liquidation, to any person who is ineligible under section 29A of the Code to become a resolution applicant.
  • The proceeds from realisation shall be distributed by the Liquidator within 90 Days (earlier six months) from the receipt of the amount among the stakeholders. (Regulation 42)
  • The liquidator shall distribute the assets per the waterfall mechanism (Section 53) after the filing of stakeholders and the asset memorandum with the Adjudicating Authority.

Stage IV- Dissolution of Corporate Debtor under IBC

  • After liquidating all the corporate debtor’s assets, the Liquidator must file an application before the Adjudicating Authority for the corporate debtor’s dissolution under Section 54 of the Code.
  • If the Liquidator believes that there are insufficient realisable assets to cover the cost of the company liquidation and further inquiry is not necessary into the affairs of the corporate debtor, they may apply for an early dissolution (Regulation 14 of the Company Liquidation Regulations) at any time after the initial report is submitted.
  • Orders for dissolution should be filed with the appropriate authority where the CD is registered.

Laws Governing Company Liquidation of a Company

Adjudicating Authority may approve the Resolution Plan under section 31 (1) or pass an order for liquidation of the Corporate Debtor (CD) according to the provisions of Section 33 (Liquidation Commencement Date) (i.e., Chapter III of Part II of IBC) in the following cases: –

  • Where no application is filed with the Adjudicating Authority (NCLT) seeking approval of the resolution plan within the prescribed timeline (180 to 270 days, extendable to 330 days, from admission)
  • Where NCLT rejects the resolution plan for non-compliance
  • Where the Committee of Creditors(CoC) decides to liquidate the CD before confirmation of a resolution plan; or
  • Where the CD contravenes, the terms agreed in the resolution plan approved by the NCLT

The Section provides procedures for Company Liquidation which should be read in accordance with the IBBI (Liquidation Process) Regulations, 2016 (herein after referred to as Company Liquidation Regulations).

Related Read: Corporate Insolvency Resolution Process Under IBC

CLICK HERE

Conclusion

The Company Liquidation provided under the Insolvency and Bankruptcy Code, 2016 (IBC) is the last resort since the whole, and the sole intention of the IBC is to keep the CD going concern and revive it utilising corporate restructuring. The process is time-bound, efficient, and under the supervision of the NCLT. However, the process of Company Liquidation and winding up under IBC is big-budgeted & inordinately lengthy and results in almost complete erosion of asset value. The liquidator can explore any one of the following options as provided in the Company Liquidation Regulations to keep the corporate debtor as a going concern even if the Liquidation order is passed.

  • Compromise or Arrangements as per Regulation 2B of Company Liquidation Regulations.
  • Sale of Corporate Debtor as a going concern per Regulation 32(e) of Company Liquidation Regulations.
  • Sale of Business of Corporate Debtor as a going concern per Regulation 32(f) of Company Liquidation Regulations.

Why Choose InCorp?

We at Incorp, have the expertise and skills to guide you and run the entire process of Company Liquidation Process with experienced Liquidation Professionals and their teams. 

Our professionals offer Corporate Recovery and Corporate Restructuring services under the framework of the Companies Act as well as the Insolvency and Bankruptcy Code.

FAQ’s

Will the corporate debtor discontinue its business once company liquidation proceedings are initiated?

The liquidator will continue the corporate debtor business for its beneficial liquidation as he considers necessary (sec 35(1)(e) of the Code)

Should the liquidator receive the entire fee based on the amount realised immediately after the liquidation?

Liquidators will receive half of the fees based on the amount realised after realisation, and the other half will be paid after the distribution. Therefore, the liquidation fee must be paid in two stages: 50% after liquidation and 50% after distribution (regulation 4(3) of the Liquidation Regulations).

What is the Code time limit for entering into compromises or agreements under Section 230 of the Companies Act 2013?

90 days from the liquidation commencement date (regulation 2B (1) of the Liquidation Regulations)

Can a creditor appeal the liquidator's admission or rejection of claims?

Creditors can appeal to a tribunal within 14 days of receiving the liquidator's decision (section 42 of the Code).

What is the period for public notices calling for claims from interested parties?

The liquidator shall make a public announcement within five days from his / her appointment inviting the stakeholders to submit their claims or update the claims submitted during the CIRP (sub-regulation (1) and (2) of regulation 12 of Liquidation Regulations).

Make Your Company Liquidation & Corporate Recovery Process Hassle-Free.

Talk to our expert today!
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