Has Insolvency and Bankruptcy Code failed homebuyers?

Recently, a homebuyer approached the Supreme Court to prevent the impending liquidation of Jaypee Infratech Limited. The developer failed to deliver thousands of homes in Noida. Under India’s bankruptcy law, in the event of liquidation, homebuyers may get little back since they are not ‘secured creditors’. These are parties – such as banks – that get precedence when spoils are distributed.

The lingering question – has the law, the Insolvency and Bankruptcy Code, 2016 (IBC), failed homebuyers?

Many sense this is the case. Advocate Aishwarya Sinha, who filed the petition in the Supreme Court on behalf of homebuyers, points out that the IBC was amended to help homebuyers but that was a job only half done. In June 2018, the President of India gave his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. It provides “significant relief to homebuyers by recognising their status as financial creditors. This would give them due representation in the Committee of Creditors (CoC) and make them an integral part of the decision making process,” an official release stated.

“The amendment only elevated homebuyers to participate in the CoC meetings,” Sinha tells Business Today. “But it never factored in a situation as to what happens when the CoC fails? Once CoC fails, we are back to square one. Under Section 53, you will be unsecured creditors, at the bottom of the pecking order. The amendment was half-way through – not a foolproof plan for homebuyers in the long run,” he adds. The definition of a ‘secured creditor’ has not been amended thus far to include homebuyers. The solution, Sinha suggests, lies in altering this definition.

Turns out that in the case of Jaypee, the CoC failed – a classic case study in why the IBC is not foolproof when it comes to real estate, particularly in safeguarding interests of homebuyers, many of whom invest their life savings to purchase apartments.

Here is how the CoC failed.

The petition moved by Sinha says that “the ground reality is that a resolution plan benefitting the home buyers is nowhere in sight”. The resolution plan submitted by a resolution applicant can be approved by the CoC if 66 per cent votes are cast in its favour. However, in Jaypee’s case, homebuyers form 59.4 per cent of the voting share while banks and financial institutions garner 40.6 per cent share. On paper, there are 23,606 homebuyers who claim Rs 14,315 crore. There are 13 banks and financial institutions claiming Rs 9,783 crore.

“The voting trend till date on various agendas put forth for voting, presents a grim picture. Of all agendas put forth for voting before the Committee of Creditors, wherein minimum votes required is 66 per cent, not a single agenda has been approved. The primary reason for the said rejection has been constant abstention, of a large number of home buyers,” the petition adds.

The CoC received two serious bids at resolution. One was from the National Buildings Construction Corporation Limited and the second from Suraksha ARC. CoC did not accept both bids. Time has now run out. The insolvency resolution process should be completed within a period of 270 days as per the law. That period lapsed on May 6, 2019. This implies that Jaypee Infratech Limited will automatically go into liquidation. Sinha, therefore, moved the petition on May 4.

Many now feel IBC doesn’t suit real estate cases such as this. “If you ask me if IBC has helped resolving real estate cases, I would say no, and we are struggling on that front. The way it got started and the way we tried to accommodate many classes of creditors over a period, it did more harm than good to homebuyers,” Sanjeev Ahuja, Director of Ensemble Resolution Professionals Ltd, who has been involved with Jaypee Infratech as an advisor to the Interim Resolution Professional, says.

In a typical resolution set-up under the IBC, where there is corporate debtor under stress, a white knight picks up the asset after paying an agreed upon amount, albeit after banks agree to a haircut. “This should not and cannot apply in a real estate scenario. In a real estate scenario, someone has to step in and assess the pending work left, the cost of executing it, figure out the money available,” Ahuja says. There could be unsold inventory, or a piece of plot that can be sold, for instance. “So the resolution applicant should state that this is the amount required to complete the project, this is his fee, and then complete the project and get out. This is what is required in a typical real estate case unlike what is prescribed in the IBC,” he adds.

Not all is lost for homebuyers yet. The National Company Law Appellate Tribunal (NCLAT) made some interesting observations on July 2. In an order, Justice S.J. Mukhopadhaya, the Chairperson of NCLAT, Justice A.I.S. Cheema, and Kanthi Narahari, Members (Technical) say the Appellate Tribunal wants to understand the problem better.

“In a real estate business, the business is limited to a particular project and primary business is to allot constructed area to allottees. For keeping the company a going concern and for maximisation of assets, the only way is to complete the infrastructure and to allot it to allottees. In this background, as the Corporate Insolvency Resolution Process stands at a different footing than other companies (Corporate Debtor), the question arises as to whether the ‘resolution plan’ should be looked into from different aspect and angle,” the order reads.

“For hearing such issues, we intend to hear one of representatives of lenders (Banks), representatives of the NBCC (Resolution Applicant), who is dealing with the ‘Resolution Plan’, representatives of allottees (one or two lawyers), Resolution Professional and other stakeholders (representative of ‘fixed deposit holders’) to know as to what are factors to be noticed in a proposed ‘Resolution Plan’ for the purpose of finding out the validity and feasibility and other aspects and whether the NBCC should be allowed to recast its plan in a manner, which is beneficial to allottees and which may amount to maximisation of assets of the ‘Corporate Debtor’ and other stakeholders including lenders and fixed deposit holders,” the order added.

NCLAT will deliberate over this case on July 17.