Jaypee Infratech Ltd – Homebuyers Dilemma
Sachin Gupta, Partner and Ashu Kansal, Principal Associate of Dhir & Dhir Associates give their assessment of the Jaypee Infratech Ltd insolvency case and its repercussions on the homebuyers. .
The 9th of August, 2017 came as a nightmare to innumerable homebuyers as the National Company Law Tribunal (‘NCLT’) admitted insolvency proceedings against one of India’s biggest real-estate developers, Jaypee Infratech Ltd. on a petition filed by IDBI Bank.
The initiation of a Corporate Insolvency Resolution Process (‘CIRP’)and the subsequent declaration of a moratorium as per Section 14 of the Insolvency & Bankruptcy Code, 2016 (‘IBC’) means that the fate of innumerable homebuyers will be contingent upon whether the CIRP culminates into a resolution plan or into liquidation of their real estate developer.
Most homebuyers belong to the middle class and have invested their life-time earnings to obtain their dream house. However, they are now left to the mercy of the insolvency proceedings for absolutely no fault of their own.
The homebuyers do not prima facie fit into the category of either a Financial Creditor or an Operational Creditor as defined under the IBC.
Interestingly, as per the waterfall mechanism envisaged under Section 53 of the IBC, once the costs of conducting the insolvency process are cleared, it is the Financial Creditors’ whose claims are to be satisfied in priority to all other claims – thus, the homebuyers do not have any clarity as to where they stand for the recovery of their hard earned money.
The distressed homebuyers would thus require immediate options as towhat remedy they can seek and obtain in the ongoing insolvency proceedings in order to either preserve their property or to recover their invaluable financial investment.
Move to accommodate Home Buyers as Creditors
The Central Government introduced RERA, codifying the requirements of refund, compensation and payment of interest on delayed projects.One only needs to think how the Hon’ble Apex Court of the country stepped in to the rescue of innocent home buyers, directing Unitech and Parsvnath to refund amounts to home buyers for failure to deliver their flats in time.
In accordance with the big shift in the legal environment that is now strongly protective of homebuyers’ interests, the Insolvency and Bankruptcy Board of India (‘IBBI’) has readily made a move to accommodate homebuyers suffering on account of the CIRP, allowing them to file their claims as other creditors in the insolvency process, for the time being.
The IBBI introduced a new form ‘F’ by amending the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 as per Rule 9A(1) of which, a person claiming to be a creditor, other than a Financial or Operational Creditor shall submit proof of its claim to the interim resolution professional or resolution professional.
While the IBBI may only have acted to avoid much chaos from the homebuyers, yet the move echoes the intention of the IBBI to retain the confidence of stakeholders’ interests for investment in the real estate market.
If a financial institution fails, the Government is there to secure its investors, but there is no such legal protection that can prima facie be made out for the homebuyers.
Homebuyers or Financial Creditors
The investments homebuyers make represent the same stream of cash flow that is considered as ‘credit’ when made by the banks in favour of the real-estate developers.
The loan is obtained by the real-estate developer by mortgaging the land to its bank and thereafter, obtains an NOC from the bank, in order to sell the flats, which are eventually sold with the proportionate land rights on it to the homebuyers.
Thus, after the homebuyer enters into an agreement/allotment with the real estate of developer for purchase of flat which is along with proportionate land rights, an encumbrance/lien in favor of the Homebuyer is created.
As a result, any action to sell the land to any third party will always carry the encumbrance/lien created in favour of the homebuyers, on an “as is where is” basis. This means that payments to the homebuyers, towards clearing of the encumbrance/lien over the land, would directly or indirectly have to be made by whoever acquires rights to the land.
It is the demand for flats by the homebuyers that creates the supply of investment to the real-estate developer. If there is no financial investment of the homebuyers, the banks would not come into the picture at all.
Remedies for the homebuyers
During CIRP: It seems that the IBBI has been mindful of how a moratorium can prejudicially affect innocent parties– such as the innumerable homebuyers, depriving them of remedies for their legitimate claims against the Corporate Debtor.
Provision is thus made to allow certain amounts to be set aside for persons that are prejudicially affected from a moratorium under the IBC Regulation 31 of the IBBI (Insolvency Resolution Process for Corporate Persons). Thus, without even having to prove themselves as financial or operational creditors, the claims of the homebuyers will be adjudicated and reliefs will be made available to them under the existing mandate of the IBC.
As insolvency resolution process costs are given first priority of payment, a determination that homebuyers are prejudicially affected and entitled to such costs will mean that they have priority of payment over and above the financial creditors, under the IBC. Therefore, the amount under the insolvency process costs, will serve both as security and a remedy for the homebuyers against the uncertain outcome of the CIRP.
Regardless of whether homebuyers are included as Financial or Operational Creditors, certain amounts must be set aside for them on account of the immense prejudice they have suffered from the moratorium.
Liquidation of the Real-estate Developer: Before the enactment of the IBC, an order of liquidation or winding up against a corporate entity could be challenged in court for realization of remedies flowing from a specific transaction. The IBC however imposes a moratorium,not only during the CIRP, but it also bars the institution of any suits or legal proceedings both by and against the Corporate Debtor upon an order of liquidation against it, under Section 33(5) of the IBC.
Again, there is provision in the IBC to accommodate the interests of persons in respect of their transactions which are prejudicially affected by an order of liquidation against the Corporate Debtor. The IBC allows the notification of specific transactions which can be enforced regardless of the bar on proceedings by or against a Corporate Debtor.
Homebuyers that are affected by liquidation of real-estate developers ought to be able to enforce their contracts to obtain refund, compensation and interest, as provided under the RERA. If not, the whole purpose of making real estate developers compliant with the provisions of the RERA will be defeated by the outcome of a liquidation order from insolvency proceedings under the IBC.
The IBBI (Liquidation Process) Regulations, 2016 makes a provision to accommodate any debt of a stakeholder that is made payable at a future time. As per Rule 28, a person may claim an amount that was not due on the liquidation commencement date, but is still entitled to contribution from the realization of assets, as any other stakeholder.
This provision can be quite beneficially applied by the homebuyers towards obtaining a refund, compensation and interest, which though not due yet, i.e., at the insolvency commencement date, will eventually become due on the inability of the corporate entity to deliver timely possession on account of a liquidation order.
In view of the above stated provisions of the IBC, homebuyers still have hope of a logical end to their efforts towards getting their dream house. What’s more, the Supreme Court has stayed the CIRP against Jaypee Infratech Ltd., on being apprised of the situation of homebuyers, through a petition brought before it.
The future of implementation of the IBC depends, to a great extent, on the manner in which its provisions are interpreted, so as to allow growth of credit and investment in various markets. It will be heartening to see IBC provisions beneficially employed in consonance with the objective of promoting a robust economy with the ease of doing business.