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Sep 12, 2017 02:11 PM IST | Source: Moneycontrol.com

Jaypee case: SC ruling protects both homebuyers and bankruptcy law

The middle path may be found by bringing NBCC into the picture, writes Madhuchanda Dey.

Jaypee case: SC ruling protects both homebuyers and bankruptcy law

Madhuchanda Dey

Moneycontrol Research

The Supreme Court yesterday reinstated the insolvency process of Jaypee Infratech and the tone of the decision points to a resolution process, which would at least partially protect the interest of most of the aggrieved parties.

Background

Supreme Court’s order staying insolvency proceedings against Jaypee Infratech (the real estate arm of JP Associates) earlier had raised concerns about the sanctity of the insolvency process.

The court, in a landmark decision yesterday, directed the Insolvency Resolution Professional (IRP) to take over the management of the company and submit an interim resolution plan that takes into account the interest of homebuyers within a period of 45 days.

The court also asked Jaiprakash Associates to deposit Rs 2,000 crore with the court by October 27 to cover the unit's liabilities towards homebuyers in its residential projects. Any property to be sold by them would have to be approved by the court.

Why is this a win-win for all the aggrieved parties?

The interest of the consumers (homebuyers) is paramount. By making the parent pay for the unfinished project, the court has protected the interest of the consumers as well as the lenders.

What is significant in the decision is that it has restored the sanctity of the insolvency process by giving the company back in the hands of the Insolvency Resolution Professional and not to the promoter.

Once NCLT initiates the resolution process, the creditors appoint an interim Insolvency Professional (IP) to take control of the debtor’s assets and company’s operations, collect financial information of the debtor from information utilities, and constitute the creditors’ committee. Then the committee has to then take decisions regarding insolvency resolution by a 75% majority.

How will a middle path be found?

The middle path may be found by bringing NBCC into the picture. NBCC, the central government's engineering and construction undertaking, and has become the de-facto choice for being project management consultant for big ticket projects rolled out under government’s initiatives like redevelopment, smart cities, housing for all etc.

The Ministry and lenders would be exploring the possibility of giving the mandate to NBCC to complete the stalled projects of Jaypee Infratech.

Why would NBCC be keen?

Most of the distressed assets in the system have some intrinsic value and Jaypee Infratech is no exception. Jaypee Infra's land parcels adjacent to the Yamuna Expressway between Noida and Agra are a lucrative asset, should they get monetised at the right juncture.

While the contours of the resolution are not known, the lenders may also be a party to the future upside in the value of the land parcel alongside NBCC.

How does this help?

For the homebuyers, there is a glimmer of hope that their properties under construction will get completed in the future with a government-owned contractor taking over the onus of building the project.

For the bankers, the resolution process doesn’t get derailed. Moreover, in an unprecedented move, IBBI (Insolvency and Bankruptcy Board of India) had earlier made the homebuyers a party to the insolvency process, but with a status of unsecured creditors.

However, under normal insolvency process, should any company go for liquidation, of the amount received after providing for the insolvency cost, in the waterfall structure, financial creditors are paid first followed by operational creditors.

Since home buyers are unsecured creditors their claim would be somewhere in the bottom. This was a bone of contention for the home buyers as the liquidation value is almost always less than outstanding debt. There was widespread apprehension that bankers might have to take further haircut to accommodate the home buyers.

With the interest of the homebuyers now taken care of separately (by asking the promoters to pay for the unfinished project and probably getting the government contractor to finish the job), banks are not incrementally worse off in the resolution mechanism.

Should this plan get implemented in a time-bound manner, it will be a success story that will restore hope in the resolution mechanism.
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