This will be a huge upside to JIL’s valuation in the insolvency process
In a development that could prop up the value of embattled real estate firm Jaypee Infratech, the Allahabad bench of the National Company Law Tribunal has ordered that 759 acres of land given to its holding company Jaiprakash Associates be returned to it as the transfer was “fraudulent, preferential and undervalued”.
“This will be a huge upside to JIL’s valuation in the insolvency process,” say corporate experts, adding with the land being transferred back to JIL, its value of around Rs 5,000 crore will be added to the company’s liquidation value.
NCLT has ordered that such transactions, which took place over two years between August 2015 to August 2017, would be considered reversed.
What does the NCLT order say?
In a 77-page judgment, NCLT’s Allahabad bench noted that “since the corporate debtor was facing financial stress and was unable to honour its project completion deadlines and failed in its commitment to deliver possession of flats to homebuyers in time, it was facing litigation from flat buyers in some forums. The corporate debtor has approximately 30,000 flats under construction. The mortgage was created in complete disregard to the interests of the creditors and stakeholders of the corporate debtor and the homebuyers at large. It has defaulted in payment of loans and other financial assistance borrowed from financial creditors, including fixed deposit holders. Its account was declared as a non-performing account on September 2015 by LIC and on March 31, 2016 by other lenders. The corporate debtor was in dire need of funds during the period and was facing severe liquidity crunch to complete the construction of projects and deliver the flats to homebuyers as well as honour the payment obligation to financial creditors including the fixed deposit holders.
Since the corporate debtor itself was in dire need of funds and could have sold or mortgaged unencumbered land to raise funds to complete construction of flats in a timely manner and to fulfill its obligation to its creditors and prevent value deterioration erosion or insolvency but it chose to give away the land to secure the debt for a related party. The mortgage was created in complete disregard to the interest of the creditors and stakeholders of the corporate debtor. Now JAL has defaulted to its lenders exposing the mortgaged land to the risk of being sold to recover the dues payable by JAL,” it said in its order.
“The directors of the corporate debtor despite being fully aware of the said fact of default admittedly failed to exercise due diligence in minimizing the potential loss to its creditors and entered the transactions which were on face of it were entered to give benefits to its related party with the clear intent to defraud it creditors. This land could have been sold today to generate cash that would have been sufficient to complete the construction of flats. The flat buyers are directly affected adversely by this decision,” it said in its order.
Some transactions as recent as March 2017
Corporate lawyers say that some of these transactions are as recent as December, 2016 and March 2017 and more importantly, they were executed after RBI’s first list of defaulting companies was out and it was certain that JIL will head for the corporate insolvency resolution process (CIRP). It was more than clear that these transactions were in bad faith and to defraud the home buyers of JIL and for the benefit of banks and JAL. This also raises questions on the conduct of independent directors and institutional nominees on the boards of JAL and JIL, both public listed companies.
“Unfortunately, the IBC allows only a 2 years look back period for fraudulent transactions and therefore no one will ever get to know the extent of fraud committed on home buyers. The least court could do now is to choose the highest bidder, expedite construction of apartments and use the value of this returned land for payment of delay penalty to home buyers who have been waiting since 2008 for their flats unaware that promoters and prime lending institution of this country are working against homebuyers’ interests, like clockwork,” says Abhishek Dubey, a Delhi-based corporate lawyer and a homebuyer.
This case also questions the oversight of the Securities and Exchange Board of India and the Reserve Bank of India, that a fraud of thousands of crore of rupees can be pulled off by public listed companies, and prime banking institutions of India, he says.
JIL resolution professional (RP) Anuj Jain, in his petition, had earlier alleged that the transfer of the land amounted to asset stripping. In February this year NCLT-appointed resolution professional Jain had approached the bankruptcy tribunal, alleging that 858 acres were “fraudulently and wrongfully” mortgaged to secure loans of Jaiprakash Associates.
The RP had alleged that that said land of JIL which was valued at around Rs 5,000-6,000 crore was mortgaged to secure loans taken by JAL from State Bank of India, ICICI Bank, IDBI Bank and Standard Chartered Bank. The transfer took place when the banks had started classifying JIL as an NPA due to loan defaults.
Jain had contended that the land could have been sold or mortgaged by JIL to raise funds and complete the construction of flats. The company is required to deliver around 33,000 flats of which more than 25,000 are yet to be completed.
On August 9 last year, the Allahabad bench of the NCLT had accepted lender IDBI Bank’s plea and admitted Jaypee Infratech as a case under insolvency resolution for defaulting Rs 526 crore. It appointed Anuj Jain as the insolvency resolution professional from BSSR & Co.Earlier this week, the Supreme Court issued a stay order on Jaypee Infratech’s liquidation till June 15, asking the promoter of the company to deposit Rs 1,000 crore as security against homebuyers’ claims. If Jaiprakash Associates is not able to bring the money in by the deadline, the liquidation proceedings would continue as scheduled. The apex court will now hear the matter on July 4.