Jaypee Infra homebuyers facing crisis; where do they stand? Find out here

After clarifying the rights of the creditor and debtor under the recent Insolvency and Bankruptcy Code (IBC), the Supreme Court is now faced with a public interest issue surrounding the application and interpretation of IBC to home-buyers. This case would have ramification across the real estate sector, and the industry must gear itself for not only the Real Estate Regulation Act, but also the rights of home-buyers under IBC.

In the case pertaining to Jaypee Infratech Limited (JIL), the Supreme Court, on September 11, directed that (i) the insolvency resolution professional (IRP) shall forthwith take over the management of JIL—the IRP shall formulate and submit an Interim Resolution Plan within 45 days and the said interim resolution plan shall make all necessary provisions to protect the interests of the home-buyers—and (ii) the advocates representing the home-buyers shall participate in the meetings of the committee of creditors under Section 21 of the IBC to espouse the cause of the home-buyers and protect their interests.

Given this backdrop, the following actions may be undertaken and the following issues may arise which would require the intervention of the SC from time to time

Proof of claims: The operational and financial creditor of JIL, respectively, shall submit to the IRP, Form B and Form C, evidencing their claims, as required under the Insolvency Resolution Process of Corporate Persons Regulations, 2016. Going strictly by the definitions of financial debt and operational debt provided under the IBC, the home-buyers may not be construed as either financial or operational creditor. They will have to then submit their claims under Form F. The IRP would then collate all the claims against JIL.

Constitution of committee of creditors: Once the claims are collated, the IRP would then have to constitute a committee of creditors. Based on the provisions of the IBC, the committee of creditors would only consist of financial creditors.

Appointment of resolution professional: As per the IBC, the first meeting of the committee of creditors shall be within seven days of the constitution of the committee, and the creditors, by a majority vote of 75%, must either resolve to appoint the IRP as the RP or appoint another RP. All the necessary compliances in this regard under the IBC will have to be made, and since the matter is now sub-judice before the SC, necessary applications may also be required to file before the apex court.

The IBC provides that notice of the committee meetings would be given to the suspended board members and operational creditors if the amount of their aggregate debt is not less than 10% of the debt. However, the suspended board members and operational creditors shall not have a right to vote in such meetings. Also, the IBC provides that financial creditor shall vote in accordance with the voting share assigned to him based on financial debts owed to such creditor and the RP will determine the voting share to be assigned to each creditor. By the direction of the SC, the advocates representing the home-buyers will participate in the creditors meeting. But, the following issues could arise: (a) Will the representative of the home buyers have the power to vote in creditors meetings; and (b) If yes, what would be the proportion of their vote? This issue would further gain prominence because the RP can undertake some actions, like raising interim finance, create any security interest, etc, only after getting approval from 75% of the voting share of the creditors and such actions may affect the rights of the home-buyers.

The Supreme Court has directed the IRP to submit an interim resolution plan within 45 days which shall contain all the necessary provisions to protect the interest home-buyers. It is a herculean task considering that the interim plan must take into account the interest of all stakeholders, including that of the home-buyers, involved.

Also, the SC will have to take into consideration the fact that under the IBC, if the resolution process is not complete within a maximum period of 270 days, liquidation would be initiated. The waterfall mechanism in case of liquidation has been prescribed under the IBC, and the issue that would come up is to analyse the position of home-buyers in the said waterfall mechanism provided under Section 53 of the IBC. While the SC has protected the interest of the home-buyers in the interim by asking JAL to deposit Rs 2,000 crore with it, the issue with respect to interpretation of law are still left wide open and same would have to be taken after due inputs from all stakeholders: the Centre, banks and home-buyers.

Thus, we see that the issues which have been raised in this case are very complex and nuanced, and the Supreme Court would have to ensure that the interest of the home-buyers are protected without affecting the letter and spirit of IBC.