Jaypee case: SC order exposes lacuna in insolvency code, necessitates amendment
The Supreme Court order in the Jaypee insolvency case is a clear indication that the government must amend the Insolvency and Bankruptcy Code (IBC) and give adequate representation to homebuyers’ interest.
Enacted last August, the IBC aims to first restructure the debt of a company, failing which, it goes into liquidation. The Code has made provisions for the appointment of insolvency resolution professional after the company fails to pay the debt of its creditors.
But while it gives representation to all types of creditors in the resolution proceedings of a company, it doesn’t recognise homebuyers’ as creditors nor has it any provision to represent them in resolution proceedings.
This lacuna was first highlighted in the Jaypee Infratech insolvency case, in which the savings of about 32,000 buyers is involved. The Supreme Court on Monday directed Jaiprakash Associates — the parent company of Jaypee Infratech — to pay up Rs 2,000 crore by October 27, and sought the formulation of a plan to protect affected homebuyers within 45 days.
Insolvency proceedings against Jaypee were admitted by the Allahabad bench of National Company Law Tribunal on August 9 after IDBI Bank, the lead consortium of lenders to the construction firm, moved a petition that the company defaulted on a Rs 526-crore loan.
But last month, the Supreme Court put the insolvency proceedings on hold after homebuyers petitioned it to ensure their investments were protected.
Legal and insolvency experts say in case of a real estate company, the insolvency code acts against the interests of the homebuyers.
Besides the non-representation of buyers’ interest, the insolvency resolution process (IRP) puts a moratorium under Section 14 of the Code on institution of fresh suits, pending suits, recoveries, etc.
So buyers are neither properly represented in the IRP nor can they go for any for legal remedy anywhere.
“When the SC stayed the insolvency resolution process (IRP) on September 4, it was a clear indication that there was some lacuna in the code,” said Ashwarya Sinha, a Supreme Court lawyer who represents Jaypee buyers.
“It has further fortified on September 11 when the SC appointed two lawyers to espouse the cause of the home buyers in the IRP and protect their interests,” he said.
Sinha said it’s an indication to the government that the code is incomplete because it doesn’t factor in the interests of the real estate.
Venket Rao, expert on insolvencies, said unlike other industries, real estate is one where the customers i.e. home buyers are in a different footing and their claim or involvement with the real estate company under insolvency is much longer and larger.
“One can argue that IBC could not be made industry specific but in the current situation, it calls for a special carve-out situation. The message from the SC order is clear and loud that an amendment is called for in the Code,” Rao said.
Homebuyers also say that the SC order has put to rest a lot of questions being asked earlier with regard to the misuse of the insolvency process by real estate companies to further delay the project as the Code gives six months time to complete the resolution process.
“Realising the plight of the buyers, SC has asked IRP to finish the process in 45 days,” says Pushkar Singh, a Jaypee buyer.
Adds Rajinder Mallik, another buyer, “With this apex court’s landmark order, homebuyers’ say in the entire process of insolvency of real estate companies has become a must.”