Legal hurdles for monetising unsold real estate units in reverse CIRP: NCLAT’s key ruling

Legal hurdles for monetising unsold real estate units in reverse CIRP: NCLAT’s key ruling

Key takeaways from NCLAT’s refusal to allow monetisation of unsold units in reverse CIRP

The National Company Law Appellate Tribunal recently delivered a pivotal judgment that may have far-reaching consequences for the real estate sector undergoing insolvency resolution. The Tribunal held that monetisation of unsold units in a reverse Corporate Insolvency Resolution Process cannot be permitted unless the project’s building plan is revalidated. This decision arose from the legal proceedings surrounding The Belvedere, a real estate project in Noida, which had been subjected to a Section 7 application filed by aggrieved homebuyers against Sequel Buildcon Pvt. Ltd.

Initiation of Reverse CIRP

The case began when a group of homebuyers filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Sequel Buildcon Pvt. Ltd., alleging defaults in the delivery of apartments. The National Company Law Tribunal admitted the application, which led to the initiation of a reverse Corporate Insolvency Resolution Process for the project, The Belvedere.

A reverse CIRP is unique in that it aims to resolve the insolvency of a real estate project rather than the corporate debtor itself. In this case, the suspended promoter and the Interim Resolution Professional were directed to complete the project, with the support of a Memorandum of Understanding between the homebuyers, the suspended promoter, and EKA Life Services, a strategic financier.

The Application for Monetisation of Unsold Units

Amidst the ongoing insolvency resolution process, the IRP sought permission to monetise approximately 250 unsold units in the project in order to generate funds. These proceeds were intended to fund the construction of the remaining units and settle outstanding liabilities, which included dues to the Noida Authority and Aditya Birla Finance Ltd.

While the Noida Authority expressed no objection to the monetisation, provided that its dues were cleared with each sale, Aditya Birla Finance Ltd. raised a significant concern. The finance company, which held a second charge over the land and an exclusive charge over the receivables, argued that the monetisation of unsold units could not be validly undertaken without the revalidation of the building plan by the Noida Authority. Without this revalidation, they asserted that the construction could not proceed legally, rendering the monetisation exercise ineffective.

NCLAT’s Findings and Decision

The NCLAT, consisting of Justice Ashok Bhushan, Chairperson and Barun Mitra, Technical Member, thoroughly examined the issue at hand. The bench highlighted that the revalidation of the building plan was crucial for the continuation of construction activities. The Tribunal noted that the revalidation process had already been contested in multiple forums. A writ petition seeking revalidation was filed before the Allahabad High Court, but it had been dismissed. Subsequently, the matter was taken to the Supreme Court, where a notice had been issued, but no final decision had been made.

The NCLAT held that in the absence of a valid building plan, construction could not legally resume, and monetisation of the unsold units would not fulfil the purpose of completing the project. The bench also observed that the conditional consent from Noida Authority, which allowed monetisation provided its dues were cleared, did not address the fundamental issue of the revalidation of the building plan.

In light of these considerations, the NCLAT dismissed the IRP’s application for the monetisation of the unsold units, noting that it could not contribute to the resolution of the insolvency without the requisite legal approvals. Furthermore, the Tribunal disposed of a related application from the homebuyers, after recording the IRP’s statement that no unit would be cancelled.

Legal Implications and Future Prospects

This ruling by the NCLAT carries significant implications for the real estate sector, particularly for projects under insolvency. It underscores the importance of compliance with all regulatory and legal requirements before proceeding with financial actions, such as the monetisation of assets. The decision reinforces that mere financial expediency cannot bypass the need for proper authorisations, especially in cases involving public authorities like the Noida Authority.

The NCLAT has also directed that the appeal should be listed again on 6 October 2025 to consider whether the reverse CIRP should continue or be converted into a regular CIRP under the Insolvency and Bankruptcy Code, 2016. This development adds another layer of complexity to the ongoing resolution process, as stakeholders await further clarity on the future course of action for the project.

A Cautionary Tale for Reverse CIRP Projects

The NCLAT’s decision highlights the intricate interplay between legal compliance and the resolution of corporate insolvencies, particularly in the real estate sector. For stakeholders, including promoters, creditors, and homebuyers, this judgment serves as a stark reminder that a well-structured insolvency resolution process must account for all necessary approvals and regulatory obligations. It also reinforces the point that resolving insolvency in the real estate sector requires more than just financial manoeuvres—it demands a holistic approach that ensures the project’s legal and structural integrity.

As this case progresses, it will be closely watched by industry professionals, legal experts, and homebuyers alike, as it could set important precedents for future reverse CIRP cases in the real estate domain.