Section 7 admission upheld; CIRP to proceed under IBC and CIRP Regulations after settlement proposals rejected

NCLAT (PB) upheld the Adjudicating Authority's admission of the Section 7 application and dismissed the appeal, directing CIRP to proceed under the I&B Code and CIRP Regulations, 2016. The Tribunal found the IBC regime exclusive for resolution of the corporate debtor, including real estate entities. Multiple OTS proposals from the appellant and investors were considered but ultimately rejected by the consortium of banks; a prior OTS had been cancelled for non-compliance. Interim orders delaying constitution of the CoC were extended during negotiations, but refusal of settlement by the financial creditors requires continuation of CIRP.

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1. ISSUES PRESENTED AND CONSIDERED

1. Whether admission of an application under Section 7 of the I&B Code was sustainable where debt and default were not disputed by the Corporate Debtor.

2. Whether a "reverse CIRP" (allowing the Corporate Debtor/promoter or a proposed co-developer/promoter-investor to complete an ongoing real-estate project instead of conventional CIRP) is permissible, and if so, what preconditions and safeguards govern its adoption.

3. Whether the Tribunal/Appellate body can review or interfere with the commercial decision of a consortium of financial creditors (including rejection of an OTS) in the context of Section 7 admission and pending CIRP proceedings.

4. Whether interim orders restraining constitution of the Committee of Creditors (CoC) and permitting limited project activity under IRP supervision are appropriate, and the consequences of such interim directions for the CIRP timeline.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility of Section 7 where debt and default are not disputed

Legal framework:

1. Section 7 I&B Code: Financial creditor's right to file application on occurrence of default; adjudicating authority's role under Section 7(5) to verify existence of debt and default and either admit or reject application.

Interpretation and reasoning:

2. The Tribunal recorded that the Appellant repeatedly acknowledged debt (including by submitting OTS proposals) and expressly did not dispute debt and default before the lower Adjudicating Authority and before the Tribunal. Repeated attempts at settlement/OTS were treated as confirmatory of outstanding liability, not as sufficient to negate default. The adjudicating authority's role was limited to verifying default and admitting Section 7 when default established.

Precedent treatment:

3. Reliance on principle from authorities that adjudicating authority's function under Section 7(5) is limited to verification of default; where default is established, admission is required - consistent with Supreme Court authority cited by the Tribunal.

Ratio vs. Obiter:

4. Ratio: Where debt and default are not disputed and evidence (including conduct such as submitting OTS offers) establishes default, admission under Section 7 is sustainable; the adjudicating authority properly admitted the petition.

Conclusion:

5. The admission under Section 7 was upheld: debt/default proved and no error in admission.

Issue 2: Permissibility and preconditions for Reverse CIRP in real-estate projects

Legal framework:

6. The I&B Code and CIRP Regulations provide the statutory mechanism for corporate insolvency resolution; any deviation (including reverse CIRP) must be accommodated within the Code's framework and subject to statutory safeguards. Rule 11/NCLAT practice directions have been used in past to craft directions where appropriate.

Precedent treatment (followed/distinguished):

7. The Tribunal acknowledged and analysed prior decisions where reverse CIRP was directed in real-estate cases, summarising their factual preconditions: (a) consensual support of relevant stakeholders (notably creditors/allottees and IRP); (b) availability of a credible investor/promoter willing to infuse funds and complete the project; (c) substantial completion or demonstrable feasibility; and (d) that the resolution avoided prejudice to other stakeholders. Authorities of both this Tribunal and Supreme Court adopting reverse CIRP in appropriate fact-sensitive circumstances were discussed and not overruled.

Interpretation and reasoning:

8. The Tribunal emphasised that reverse CIRP is an accepted mechanism but is fact-sensitive and contingent on satisfaction of various preconditions in each case. Key distinguishing facts in precedent included unanimity/majority support, IRP endorsement, investor commitment with upfront funds, and limited opposition from homebuyers. Conversely, features militating against reverse CIRP include absence of creditor consent (lead bank/consortium not agreeing), divided homebuyers, lack of upfront funding commencement, and promoters/suspended directors attempting to unilaterally select co-developers.

Ratio vs. Obiter:

9. Ratio: Reverse CIRP can be directed where preconditions (stakeholder consensus or sufficient favourable support, credible and funded investor/promoter commitment, IRP concurrence or oversight, and project feasibility) are satisfied; absent these, CIRP must proceed under the Code. Observations distinguishing factual matrices in prior cases are explanatory (obiter-type) to the extent they apply only to different facts.

Conclusion:

10. Reverse CIRP was not ordered in the present facts because material preconditions were lacking: the consortium of financial creditors did not accept the OTS/revised proposals, the homebuyers were divided, and no proven commencement of construction with upfront funding had occurred. Accordingly, the Tribunal refused to permit unilateral selection of a co-developer by the suspended director and directed CIRP to proceed per the Code.

Issue 3: Scope for judicial review of creditors' commercial decision to reject OTS/revised settlement

Legal framework:

11. The I&B Code entrusts commercial decisions to financial creditors/CoC; adjudicating and appellate authorities have limited jurisdiction and cannot substitute their commercial judgment for that of creditors, except on narrow and established grounds of arbitrariness or non-compliance with statutory procedure.

Precedent treatment:

12. The Tribunal relied on jurisprudence which holds that adjudicating authorities may encourage settlements but cannot compel them; decisions of creditors/CoC on commercial questions are largely insulated from interference, subject to limited review for arbitrariness or procedural non-compliance.

Interpretation and reasoning:

13. The Tribunal held that the reasons persuading banks/consortium to reject the OTS are not subject to scrutiny in the present appeal; the consortium deliberated and declined the proposals after consideration. This is distinct from cases under Section 12A where withdrawal with requisite CoC approval (90%) has been judicially reviewable on limited grounds; here, there was no such withdrawal/CoC decision with statutorily prescribed majority placed for review.

Ratio vs. Obiter:

14. Ratio: The Tribunal cannot interfere with the consortium's commercial decision to reject an OTS absent demonstrable arbitrariness or procedural infirmity; such creditor decisions are within commercial wisdom and statutory domain.

Conclusion:

15. Challenge to the banks' rejection of the OTS was not entertained; reasons for non-acceptance are not examinable in these proceedings and do not invalidate the admission or require direction for reverse CIRP.

Issue 4: Interim reliefs - restraint on constitution of CoC and limited project continuation under IRP supervision, and exclusion of pendency period from CIRP timeline

Legal framework:

16. Tribunals possess power to pass interim directions in appeals; CIRP timelines and CoC constitution are governed by the Code and Regulations, subject to exclusion of certain periods where appeals/interim orders have stayed constitution or progress.

Interpretation and reasoning:

17. The Tribunal initially stayed constitution of CoC pending decision of consortium on OTS and permitted limited continuity of the project under IRP supervision (bank accounts to be operated jointly with IRP signature), recognizing interests of existing homebuyers and need to prevent project abandonment. These were interim, case-specific safeguards. After the consortium ultimately rejected the proposals, the Tribunal concluded statutory CIRP process should resume; the appeal period during which constitution was stayed was ordered excluded from CIRP timelines to preserve parties' rights.

Ratio vs. Obiter:

18. Ratio: Interim restraint on CoC constitution and supervised limited activity can be ordered in appeals as an equitable, case-specific measure; however, such orders do not displace the Code's scheme - once interlocutory stay lifted or appeal disposed, the IRP/CoC process resumes. Exclusion of the period during which appeal was pending from CIRP timelines is an appropriate remedy to account for delay caused by judicial intervention.

Conclusion:

19. Interim directions given earlier were appropriate as temporary measures; on final consideration, the Tribunal directed exclusion of the appeal pendency period from CIRP timelines and authorised constitution of CoC and continuation of CIRP in accordance with law.

Overall Conclusion

20. The Tribunal upheld the admission under Section 7 (debt and default established), declined to order reverse CIRP because required factual preconditions were absent (no creditor approval, divided homebuyers, no proven upfront funding or commencement), refrained from interfering with the consortium's commercial rejection of OTS, and directed the IRP to constitute the CoC and proceed with CIRP while excluding the period of interlocutory stay from CIRP timelines.

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