Insolvency — the good & bad of it

Amit Kumar

The recent decision of the National Company Law Tribunal, Allahabad Bench (August 9, 2017) to admit the petition of IDBI Bank against Jaypee Infratech under the Insolvency and Bankruptcy Code, 2016 and also appointment of Interim Resolution Professional in respect of Jaypee Infratech to carry out the functions under the Code, has created huge public uproar. The homebuyers/investors who have entered into agreements with Jaypee Infratech and its associate companies  to buy  flats, plots, villas etc.  in their various projects are in the grip of fear and uncertainty regarding their investments.  There is lack of clarity among buyers in this regard. A recent Magicbricks Consumer Choice Poll revealed that about 90 per cent of investors are unaware of their rights and how these are impacted when their developer is declared insolvent.

A buyer is apprehensive of being caught in a legal mess that can  endanger not only his investment but also his claim on under-construction flats, which are yet to be formally transferred in his name. 

The fear of losing one’s life time savings is not only limited to those who have invested in the projects of JaypeeInfratech, but it has become a cause of concern  also for those who have  entered into similar agreements with other realty companies. 

Everyone is dreading being caught in a similar situation under Insolvency and Bankruptcy Code and whether they would be in position to make any claim against the developer subjected to insolvency proceedings. 

Understanding the Code

As far as companies are concerned, the Insolvency and Bankruptcy Code, 2016  can be  applied to these (termed in the Code as 'Corporate Debtor')  if  they default in the payment of Rs 1 lakh or more. 

The main concern is whether the payment made against the purchase of flat comes under financial debt or not? This question assumes importance as the Code gives right to only financial creditors, corporate debtor and operational creditors to initiate insolvency and bankruptcy proceedings. If the payment to a company made  for the purchase of flat/shots/plot etc. is not classified as financial debt under the Code,  then the person making the payment has no right to seek insolvency and bankruptcy proceedings against the Company. 

Section 2(8) of the Code defines ‘financial debt’, which among others includes debt along with interest given against the consideration for the time value of money and also includes money borrowed against the payment of interest. In simple words  the ‘Time Value’ of money means prices associated with the length of time that an investor must wait until his investment matures or the relating income is earned. 

Respite for buyers

The I & B Code is another powerful legal recourse available to purchaser/buyer to take thedeveloper to task. The homebuyers have been empowered by the Insolvency and Bankruptcy Code (see box) and it is another tool in their hands to recover their investment from developer by invoking provision of theCode.  

Under the I & B Code,    homebuyers are equally entitled to make claim for refund of the investment from the developer like any other investor.  Their claim against the realty company is not lost upon the appointment of interim resolution  — professional or admission of the petition under Code against the developer. But it gives them powerful legal recourse to protect their investment by approaching the Adjudicating Authority against the developer, which is defaulting in the payment of assured return. 

Buyers can benefit

E Jayashree Kurup, Head-  Content and Advisory, suggests that, “The effort with insolvency is to ensure that buyers get their homes and lenders get their money.  Being the first such case in real estate, the status of different classes of creditors, including buyers, is being defined. Once this is done, buyers will benefit from insolvency as work is in progress and handover of completed projects is being expedited.”

In the case of developers such as Jaypee, whose borrowing is backed by assets whose net worth is far more than the borrowed amount, this problem can be resolved when the handing over process begins in a phased manner and consumer receivables start flowing in regularly.

In the Jaypee Aman project, under the leadership of the Insolvency professional Anuj Jain, the units were almost at completion stage and 25 units had even been handed over to users over the weekend. The last instalment of their payments fuels liquidity in the company which is used to give possession of 450 + units in Aman and one tower of Kosmos in the next 45 days, exceeding number of deliveries to 1,150 units. Thus, consumers stand to gain by the insolvency route.

The flashpoint

As many as 32,000 buyers had booked their homes in 27 different housing projects of Jaypee Infratech. They have been left in the lurch as the insolvency proceedings have been started against the company for defaulting on a Rs 526 crore loan.

What is the buyers’ plea

Flat buyers, under the Insolvency and Bankruptcy Code of 2016, do not fall in the category of secured creditors like banks and hence can get back their money only if something is left after repaying the secured and operational creditors, one of the pleas filed by some homebuyers said.

The buyers had contended that around Rs 25,000 crore worth of money of flat buyers and others had been at stake and the insolvency proceedings were initiated ‘for a petty sum of Rs 500 crore’.

}Insolvency is invoked by a lender when the company does not have enough liquidity to service the debt taken from lenders to execute the project. All Jaypee Infrastructure buyers should have filled their claims forms by August 24. If buyers have not done so, they can still go to Jaypee Infrastructure website and fill Form F giving details of their flat number, the amount paid and the tripartite agreement with the builder and bank that has been executed. — E Jayashree Kurup, Head- Content and Advisory, Magicbricks.com

— The writer is advocate-on-record, Supreme Court of India