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In an ongoing insolvency case against real estate company Jaypee Infratech, the Supreme Court on Monday directed the company to deposit Rs 2,000 crore by October 27. The apex court also asked the Interim Resolution Professional (IRP), appointed by the National Company Law Tribunal (NCLT) to take over the company’s management and work out a plan to protect the interests of home buyers and creditors.
The recent stay order passed by the Supreme Court on the insolvency proceedings under the Insolvency and Bankruptcy Code (the Code) against Jaypee Infratech has raised serious concerns regarding the adequacy of the Code in dealing with defaulting real estate companies. This was evident as the order of the Allahabad Bench of the NCLT admitting the insolvency resolution application filed by the financial creditor under the Code led to considerable angst among thousands of home buyers who had invested their hard-earned savings with the builder company. The agitation among home buyers, coupled with the ambiguity regarding their legal standing under the Code, has highlighted the need for a discourse on the manner in which insolvency of real estate companies ought to be dealt with.
Are home buyers creditors?
The paramount concern for home buyers with insolvency proceedings against builder companies arises from the uncertainty of their legal positioning under the Code. It is unclear whether the home buyers would be categorised as a creditor and if so, under which category. This uncertainty has been exacerbated by the Insolvency and Bankruptcy Board of India (the IBBI) by inserting Regulation 9A to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2017 titled “Claims by other Creditors”. By virtue of this newly added regulation, the IBBI has introduced a class of “other creditors” which does not fall under the ambit of financial or operational creditors. The amended regulation also introduces a separate Form for registration of claims by other creditors (which was made applicable to home buyers in the Jaypee Infratech matter) therefore, purportedly suggesting that flat owners will be considered as falling outside the purview of financial or operational creditor.
Section 3(10) of the Code defines a “creditor”as “any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder”. It is pertinent to note that section 3(6)(b) of the Code provides that a “claim” means a right to remedy for breach of contract under any law for the time being in force where such breach gives rise to a right to payment. On a joint reading of the definition clauses of the Code, it seems logical to conclude that a home buyer would be a creditor for the purposes of the Code. Further, home buyers should be treated as unsecured creditors of the builder company as payments made by them are in lieu of real estate and they have no security over the unconstructed or partly constructed flat. Therefore, in the event of a liquidation, as per the priority waterfall under section 53 of the Code, the financial creditors (such as banks) would receive bulk of the liquidation proceeds and flat owners being unsecured creditors are unlikely to receive any substantial amount.
Further, the role to be played by the home buyers in the resolution process is unclear and most likely diluted as they may not be categorised as financial creditors. It is pertinent to note that under the Code, the committee of creditors consists of financial creditors and the committee has the decisive authority over the resolution plan as it needs to be approved by 75% majority of the committee of creditors. Therefore, by not categorising home buyers as financial creditors, it is feared that they will most likely be deprived of any real representation in the resolution of the builder company.
In addition, the insolvency resolution process under the Code can be triggered either by a financial creditor, operational creditor or the builder company itself. The Code does not recognise “other creditors” as a category of creditors which can trigger resolution process. Therefore, for the sake of public interest and legal propriety, it appears reasonable for home buyers to be able to trigger the code and clarity on this aspect is also much required. Further, the Apex Court is likely to shed light on this matter in the Jaypee Infratech case.
Are home buyers remediless under the Code?
In spite of the looming uncertainty over the role and rights of home buyers under the Code, the buyers may not be rendered remediless. In our view the home owners have myriad remedies even if the builder is under the corporate insolvency resolution process (CIRP) process.
Firstly, it is important to understand that simply because the builder company is under CIRP does not necessarily mean that homebuyers have no remedy. The entire debate about banks/financial institutions being given priority in payments as opposed to homeowners is a bit premature since it presumes that the builder has gone under liquidation process. Needless to say, initiation of insolvency process under the code does not mean corporate debtor is under liquidation; instead all efforts are put in by the stakeholders to resurrect the company for the initial CIRP period. Further, same bank typically finances both the builder company and the home owners and therefore, they are likely to be more invested towards finding a resolution and would act towards balancing the interests of both the financial creditor and the home owners.
Secondly, though after commencement of CIRP, buyers cannot file cases in courts for recovery of money, their right to get allotment of houses does not get diluted. Accordingly, they can approach the Insolvency Resolution Professional (IRP) and/or state development authority to issue necessary directions to IRP or company to get the necessary allotment done.
Thirdly, the embargo on home buyers to approach the civil/consumer courts is limited to a period of CIRP (moratorium under the Code extends to 180 days). In the event the resolution plan fails or the 180 day period is completed without finalisation of a resolution plan, the moratorium is lifted and remedies under applicable law will be revived.
Fourthly, resolutions under the Code are typically achieved due to write off of the debtby the lenders. This might actually help the builder company to utilise its assets and deliver demands of home buyers. Further, the possibility of a new builder taking over the builder company cannot be ruled out and in such eventuality, the home buyers have increased chances of receiving the flats. In other words, CIRP may yield favourable results in terms of substituting the beleaguered builder with a more financially viable one which may be a win-win for all.
Fifthly, home buyers also have the option of being a “resolution applicant” under the Code and submit a Resolution Plan to the IRP delineating the payments already made by them and details of the flats booked. In fact, the home owners can come in unison, hire an expert and submit a detailed resolution plan whereby they can propose possible solutions and can perhaps also be ready to take minor haircuts in lieu of delivery of their property.
Lastly, it is fallacious to assume that the Code is antithetical to the interests of the home buyers. The essence of the Code is to preserve economic value and to facilitate continuity of a company. A rehabilitated builder company is more likely to deliver its promises to the home buyers as it has to safeguard its reputation and brand image.
To conclude, we must avoid a myopic view of the CIRP process and every CIRP proceedings should not be assumed to be heading towards liquidation. It is indeed undeniable that in a liquidation scenario, the home owner may not be able to recover their dues, however to assume that every CIRP would end in liquidation is also slightly pessimistic. In the absence of a specialized legislation such as the Insolvency Code, even the consumer court cannot guarantee the delivery of the flats where the builder is facing serious liquidity crunch. Also, executing decrees awarding compensation to home buyers for deficiency in service by builder company which is already in distress might not be easy. The Code’s aim to eradicate multiplicity of legal proceedings will be defeated and tangible remedies will evade buyers. In such a scenario, the builder would in all probability be wound up and home owners may be remedy less. Under the provisions of the Code, the buyers have a glimmer of hope of the rehabilitation of the builder which could ensure delivery of flats much to the delight of the buyers.
Atul Sharma is managing partner, Link Legal Indian Law Services. Siddharth Srivastava is partner, Insolvency & Restructuring, Link Legal Indian Law Services