The government is looking for a solution for the vexed issue of homebuyers having little right to the assets of a real estate firm going for liquidation under the insolvency code. It may even put them on par with secured creditors, who are currently ahead of all others in the order of precedence. However, since this requires amendment to the Insolvency and Bankruptcy Code (IBC) 2016, the change, if effected, could be limited to only future cases. However, for the government to offer such a relief, the IBC has to be amended, and it won’t rush into such an amendment without weighing all angles and having adequate inputs, said a source.
So any such relief is unlikely to benefit the 32,000 homebuyers in Jaypee Infratech – who are fighting a case in the Supreme Court to ensure their rights are not subverted in the process of insolvency resolution or liquidation – unless the apex court or any other legal authority decides to grant them such a right now. Same goes for the 3,000-odd homebuyers of an Amrapali project where the National Company Law Tribunal (NCLT) has ordered the initiation of insolvency proceedings. Currently, secured creditors are placed third in the order of preference to share the proceeds, after meeting the cost of liquidation and workers’ dues, while the IBC doesn’t explicitly provide for the rights of homebuyers who fall into the category of neither financial nor operational creditors.
“The proposal (to put homebuyers ahead of secured creditors) is yet to be finalised. But such amendments to the IBC will be considered by and by to strengthen the insolvency framework. The Supreme Court’s judgment in the Jaypee case will have a bearing on the course of policy-making in this regard,” said a source. It seems the government wants to wait for the Supreme Court verdict in the Jaypee case; it also is monitoring the impact of the Real Estate (Regulation and Development) Act 2016 (RERA), which provides for additional rights to homebuyers for under-construction units. However, with many states having diluted RERA provisions, homebuyers feel their rights are not adequately protected. The humanitarian angle apart, what makes a strong case for giving precedence to the rights of homebuyers over secured creditors is the fact that they take loans from banks to purchase flats. So they have to repay the loans regardless of whether they get the possession of flats or not, said a source. “So it will be a double whammy for them if their rights are not given priority over secured creditors’ in case of an insolvency resolution or liquidation; it will be a travesty of justice.”
As of now, rights of homebuyers, including those of Jaypee’s, could be decided on the basis of the contracts they have got into with the builder, unless the Supreme Court decides to give them extra relief, said another source. “The government wants to ease the pain of flat buyers and is fully sympathetic towards their agony. It will see how best to address their problems,” he added. The one-year-old IBC is evolving and as and when unique and sectoral issues (like the current flat buyers’ case) crop up, the government and the Insolvency and the Bankruptcy Board of India (IBBI) will respond to the challenges, they said. Last month, coming to the relief of homebuyers who have invested in projects of Jaypee, the IBBI came up with a new form to enable them to submit their claims in case of any resolution/liquidation is undertaken under the IBC. Prior to the move, forms for claims were meant for only financial creditors (such as banks, NBFCs, etc) and operational creditors, including workers and regular employees, of a company going for liquidation.
The NCLT recently admitted a petition, filed by IDBI Bank, for initiating insolvency proceedings against Jaypee Infratech for a loan default of Rs 526 crore. Unsure that their rights will be protected in the insolvency process, the homebuyers approached the Supreme Court. The apex court last week restored the insolvency resolution proceedings against Jaypee Infratech but asked its parent company Jaiprakash Associates to deposit Rs 2,000 crore on or before October 27, in a bid to ensure that homebuyers’ interests are protected as well. A Bench headed by Chief Justice Dipak Misra directed the insolvency resolution professional (IRP), appointed by the NCLT, to take over the management of the company and submit within 45 days an interim resolution which will include the interest of low- and middle-income homebuyers. The IBC is aimed at the turnaround of stressed assets or, in case of liquidation, their quick monetisation.