SC’s Jaypee Infratech Verdict: Have The Homebuyers Really Won?

Jaypee Infra was one of the 12 large corporate accounts identified by the banking regulator for immediate insolvency

The year-long battle of Jaypee Infratech Ltd’s homebuyers has come to an end. The Supreme Court has directed the insolvency process to start afresh, which means the homebuyers will be able to participate in the resolution process as financial creditors. But experts BloombergQuint spoke to said this end is the beginning of a new battle for homebuyers.

Jaypee Infratech was part of the list of 12 large corporate accounts identified by the banking regulator for immediate insolvency action in June 2017. Lenders, led by IDBI Bank, took the case to the National Company Law Tribunal, to be admitted under the Insolvency and Bankruptcy Code.

Since the company was expected to deliver residential apartments to around 32,000 homebuyers in Delhi prior to the insolvency move, the homebuyers had approached the apex court seeking relief.

Supreme Court’s Directions

To summarise the apex court order:

• The insolvency resolution process of 180 days will start from 9 August, extendable by 90 days if the National Company Law Tribunal approves.
• The committee of creditors is to be reconstituted afresh; homebuyers to be included as financial creditors.
• The resolution professional can invite fresh bids, apart from the three already in fray by – Adani Infrastructure, Lakshdeep Investments and Cube Highways.
• Jaypee Infratech or its parent Jaiprakash Associates Ltd and their promoters will be ineligible from participating in the insolvency process as per Section 29A of the Insolvency and Bankruptcy Code, 2016. This section lays down ineligibility criteria for resolution applicants and bars promoters of defaulting companies from participating in the resolution process.
• The insolvency process against parent Jaiprakash Associates can be initiated.
• Rs 750 crore, deposited by Jaiprakash Associates, to be transferred to NCLT.

Why The Supreme Court Directed So

The apex court has directed so on grounds that:

• The court should not take upon itself the burden of supervising the intricacies of a resolution process.
• An insolvency resolution process outside the Insolvency Code will involve the court in an “insuperable burden” of evaluating intricate matters of financial expertise.
• Directing disbursement of the amount of Rs 750 crore to homebuyers who seek refund would be manifestly improper and cause injustice to the secured creditors.
• The court does not want to supplant the mechanisms laid down under the Insolvency Code.
• It can’t make any exception for promoters which could lead to breach of provisions under the Insolvency Code.

What Do The Directions Mean For Homebuyers?

The Supreme Court has rightfully restrained itself from giving into the temptation of finding a solution for homebuyers without considering the interests of other creditors, Sitesh Mukherjee, litigation head and partner at law firm Trilegal, told BloombergQuint. Mukherjee is representing some of the homebuyers in this case.

The outcome is good for the sanctity of the insolvency process, but this means the second round of the battle for homebuyers has just begun, H Jayesh, founding partner at law firm Juris Corp said.

Challenge 1: Evidence For Claims

Some of the issues which will now crop up could’ve been dealt with by the Supreme Court but unfortunately they haven’t, Jayesh pointed out. Maybe because nobody brought it to the notice of the court, he added.

For instance, under the Indian Registration Act, an unregistered document cannot be used as evidence and in many similar cases of delayed construction, especially in and around Delhi, homebuyers do not register the sale document until possession.

If the law says that one can’t use an unregistered document as evidence, on what basis will the resolution professional treat these homebuyers as financial creditors, Jayesh asked. it can’t be merely on the basis of the agreement.

The Stamp Act is even more stringent. An unstamped document is not supposed to be treated as evidence and is supposed to be impounded. Can the resolution professional disregard these laws? The Supreme Court hasn’t said other laws can be ignored.  

H Jayesh, Founding Partner, Juris Corp

Challenge 2: Representation On CoC And Voting Process

The insolvency regulations allow creditors in a class – which now includes homebuyers – to be represented on the Committee of Creditors by an insolvency professional. As per the regulations, homebuyers will have to pick one professional out of the three presented to them by the interim resolution professional.

This raises the question as to whether homebuyers should be represented project-wise or should there be only one representative on their behalf?

Mukherjee said it would be prudent to go with the first option.

Representation is necessary for the orderly conduct of the creditors’ committee. Since Jaypee has four to five projects, it would be better if the homebuyers are represented project-wise to ensure a smooth process.

Sitesh Mukherjee, Partner, Trilegal

The Supreme Court order has noted that only 8 percent of the homebuyers have opted for refunds, while 92 percent want possession of the flats they were promised. Their representative on the CoC will have to vote on the agendas as per the directions of the homebuyers, but the real issue would be during the creditors’ committee deliberations, Jayesh said.

While the representative will be directed on how to vote, they will be pretty much on their own as to which way to jump in when deliberations are taking place. For instance, criteria for inviting bids, manner in which the bids will be evaluated etc.

H Jayesh, Founding Partner, Juris Corp

While it may seem like homebuyers have won this battle – after qualifying as financial creditors – their challenges have just begun, he added.

Challenge 3: The Mortgage Lender-Homebuyer Conflict

Many of Jaypee Infra’s homebuyers have taken home loans to buy the properties, the apex court order has noted. Does this mean that even if the homebuyers end up taking a haircut as part of the insolvency process, the rights of the home loan companies will be intact?

There is some guidance on this by the NCLT, Jayesh pointed out. In one case, a homebuyer had invoked insolvency against a developer but the court had held that since the homebuyer had abrogated his rights in favour of the home-loan company, the process cannot be initiated, he explained.

The other issue is: how would a haircut apply to homebuyers?

Either you say, instead of 1000 square feet, you get only a 800 sq ft flat – this is possible in situations where the construction hasn’t reached that stage. Or, you say that if earlier the per square feet rate was Rs 7,000, it will be Rs 8,500 now. These are the two ways a homebuyer can suffer a haircut.

H Jayesh, Founding Partner, Juris Corp 

“If the mortgage companies are made to share the liability, it will be worse by robbing Peter to pay Paul.” - H Jayesh, Founding Partner, Juris Corp

The liability of a homebuyer to his lender and his exposure to the builder are two independent contracts, Mukherjee added. The fact that a homebuyer has taken a haircut won’t allow him to take any concession from the home loan company, he said.

(This story was originally published on BloombergQuint.)