Jaypee Infratech Bankruptcy Case – The Final Bid – by Ms. G Vidya Kamath

Jaypee Infratech Bankruptcy Case – The Final Bid 

Abstract

The divisional bench of Supreme Court in Anuj Jain v Axis Bank Limited [2020] ibclaw.in 06 SC held that ‘the claims of the Stakeholders (Homebuyers) are within the Insolvency Structure and their rights cannot be brushed off”, thereby alienating all the transactions benefiting the Corporate Debtor within the ordinary course of business. On March 2021, the Court had directed both the contenders, state owned NBCC and Suraksha to submit a revised final bid of Jaypee Infratech by June 4^th 2021.

Factual Matrix

Briefly under the Jaypee Infratech, the two companies Jaypee Prakash Associates Limited ,the holding company (JAL)  had issued letters to homebuyers and the payments by them were diverted into their respective bank accounts by Jaypee Infratech Limited (JIL), accumulating a sum of  25, 000 cores in all for their “Wish Town” project. The Corporate Debtor JIL had mortgaged certain properties as collateral security to the lenders and other financial institutions of JAL. However, JAL was a public listing company holding 71.64% of the share value of JIL. Interestingly, the properties furnished by JIL in favour of the financial institutions of JAL shall constitute a “Third party” standing, constituting no Debtor relation with JAL’s lenders.

On enquiry, it was alleged that the funds were diverted by Jaypee Infratech groups into the promotion of Yamuna Express development. Aggrieved by the same, the homebuyers approached National Consumer Disputes Redressal Commission (NCDRC), but the matter was not adjudicated. Further the application was moved to Apex Court as PIL by the hearing through NCLT, as a matter sub-judice.

Upon the Commencement of the Corporate Insolvency Resolution Process (CIRP), the Interim Resolution Professional (IRP) rejected the claims of JAL lenders to be admitted as financial creditors as they were not captured within the definition of Section 5(7) of the IBC. The NCLT rejected the avoidance of certain mortgaged claims by JIL in favour of JAL’s lenders, disallowing the preferential transactions as fraudulent and undervalued. On appeal to NCLAT, the adjudicating authority reversed the NCLT verdict, favouring JAL’s lender for their inclusion as Financial Creditors. However, on further appeal the Supreme Court interpreted its view based on Section 29A overruling the NCLAT orders by reinforcing the NCLT pronouncement. The court highlighted its view on “inclusion and the recognition of Financial Creditor” within Section 5(8) of the IBC.

Currently the on-going 4^th bidding process comprising of lenders, homebuyers have submitted their bidding amount in the meeting of CoC, while the Supreme Court has ordered NBCC and Suraksha group to submit their fresh bid, amidst the corona crisis.

Scope of Financial Creditor

The interpretation of the term “Financial Creditor” was enacted with the intention of including only those to whom the financial debt is owned, limiting the definition to the Corporate Debtor and Financial creditor. In the present case, the collaborated debts of the two companies have created a legal mess deflating claims of lenders, financial institutions and homebuyers. The lenders of JAL would never fall within the purview of this section as JIL was “unrelated party” furnishing security on behalf of JAL. In the sense, JIL in reality would not constitute to be the Corporate Debtor of JAL’s lender. The inclusive definition of financial creditor is chained with definition of financial debt, “to whom the debt is owned or legally transferred to against consideration of time value of money”.

Erstwhile under the Insolvency Bankruptcy (Amendment) Code Ordinance 2018, the additional note under the explanation of Section 5(8) has included “homebuyer”, meaning that any amount raised by allottees under Real estate projects (defined as per Regulation Development Act 2016) with the commercial borrowing can trigger the Insolvency proceedings.

The objective behind the Insolvency Code is to consolidate the interests of the Stakeholders against all, including the shareholders of the management by restructuring the Corporate Debtors business and enhancing the dues of the financial debtor with an efficacious resolution plan. In Swiss Ribbons Pvt. Ltd. vs. Union of India the Supreme Court upheld the validity of the Insolvency Bankruptcy Code 2016 and emphasized that a “default” in the financial debt owned is sufficient to trigger the Insolvency Procedure.

The Supreme Court rectifying the IBC Amendment 2018 held, “the inclusion of the real estate allottees as financial creditors under section 5(8)(f) is permissible enough to trigger the insolvency proceedings against the real estate project owners, as well as, eligible to be included in Committee of Creditors (CoC) by their authorised representatives.

While the on-going insolvency proceedings exclude the creditors of JAL to participate in CoC as a member of JIL’s financial creditor, which otherwise shall defeat the proviso under this Code. Subsequently, the lenders of JAL were disqualified as Financial Creditors in JIL’s insolvency case.

Appropriate Jurisdiction – RERA, IBC or CPA

The author limits its vision only to Homebuyers seeking appropriate jurisdiction in relation to the Redressal mechanism. The respective legislations under the Real Estate Regulation Authority 2016 (RERA), Insolvency Bankruptcy Code 2016 (IBC) and Consumer Protection Act 1986 (CPA) are concurrent in safeguarding the rights of homebuyers over the blacklisted defaulters, yet the applicants are left in a dilemma. The provisions under RERA do not barricade the view of the applicants under the Consumer Protection Act while on the other hand; the court has not yet fixed a standard principle for the parties to opt for.

However, the three bench judge in Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors [2019] ibclaw.in 13 SC highlighted that all the three concurrent remedies (RERA, CPA, and IBC) are available to the allottees as a rescue in case of default by the project owners. While the Insolvency Code shall have an upper hand in safeguarding the interest of the allottees over the RERA, in case of dispute, though the financial creditors are open to opt for either the Consumer Protection Act or permitted to trigger the application under the Insolvency Procedure.

In a similar case, the High Court was knocked by 62 developers challenging the orders of National Consumer Disputes Redressal Commission in Ajay Nagpal v. Today Homes and Infrastructure Private Limited questioning, “Whether after the commencement of RERA, the homebuyers can proceed with their application under Consumer Protection Act”.  The high Court held that the remedies under RERA and CPA are concurrent; following the judgement of the Supreme Court (Supra), the court rejected the petition with the reference that the institution CPA was enforced before the Section 71 of RERA and thereby cannot be ousted.

It is evident following the precedents over the question of jurisdiction, that it is open to the homebuyers to have their remedial action by either by their proceedings under RERA, CPA or by triggering IBC.

Conclusion

The conclusive statement in Jaypee Infratech insolvency is that in the last meeting of CoC, the Interim Resolution Professional of JIL Anuj Jain stated that the NBCC plans is non-compliant with the provisions of IBC while the Suraksha group will keep with itself the Yamuna Highway and complete the housing project within a period of 42 months.

With the alternatives available to the allottees, the system in itself has created a chaotic environment. Even in the present case the NCDRC has mistaken by not adjudicating the matter, while it had the appropriate jurisdiction to do so. Apart from the above mentioned alternatives, the allottees could have proceeded under the Debt Recovery Tribunal. The open option available to the applicants maybe cumbersome at times, as proceedings of the courts colludes with statutes of different legislations projecting errors in interpretations of law. Thereby, it is necessary to have a codified structure of law under IBC, so that the tri-lemma of courts can be put to an end.