Just when it seemed the Supreme Court (SC) had given the insolvency process a big boost through the Innoventive Industries judgment last week, the stay on the judgment of the Allahabad bench of the National Company Law Tribunal (NCLT)—at the behest of buyers who had not got their flats from Jaypee Infratech—threatens to derail the process. And, from the point of view of the home-buyers, if the SC stay in the Jaypee-IDBI Bank case looked like a victory, the case has taken a fresh turn with IDBI Bank asking the apex court to restore insolvency proceedings which had been ordered by the Allahabad bench. From the point of view of the lenders, it is a lot easier to try and recover dues via the Insolvency and Bankruptcy (I&B) Code, 2016. Once an insolvency petition has been admitted, no other suits can be filed against the company—in other words, no existing litigation can obstruct the path of the lenders. Indeed, the authority of the IBC is total because it prevents the debtor from transferring, or encumbering or disposing of any assets or any legal rights. As such, the Allahabad bench’s order prohibits any action to foreclose, recover or enforce any security interest created by the corporate debtor—Jaypee Infra—in respect of its property.
However, from the perspective of home-owners, initiating insolvency proceedings leaves them with little or no recourse to the money they have paid the company. They are technically not financial creditors and legal experts say they cannot claim to be creditors of any sort since the money they have paid is simply an advance and not a loan. While there is a lot of pressure on SC to take a view on humanitarian grounds and not allow insolvency proceedings, this will be a setback not merely for the financial lenders—in this case, IDBI Bank—but also for the NCLT and the IBC. To be sure, the Jaypee case is very different from the other corporate cases like those of an Essar Steel or an Alok Industries in that a large number of individuals are involved in this case. However, should the SC overrule the NCLT order, it would give corporate defaulters the room to challenge such orders in the future, making it difficult for banks to recover their dues, running into several lakh crore rupees. As it is, several companies have already raised objections to the insolvency proceedings, though almost all of these have been overruled by the NCLT benches. So it is critical the authority of the NCLT benches is not undermined.
Giving home-owners the status of financial creditors would set a bad precedent; it would allow other stakeholders to claim a similar status, derailing the insolvency process. At the same time, given their numbers, it is important that home-buyers get back their money or the apartment they had purchased. The best way out, as a senior executive of SBI suggested, would be for home-buyers to agree to share the pain by taking haircuts. What is most important is a quick resolution of the problem; for instance, the projects could be sold to other developers who could complete them. Litigating endlessly will help neither the lenders nor the wannabe home-owners.