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MC Explains: SBI’s insolvency plea against Jaiprakash Associates may lead to tough times for homebuyers

Going by the pace at which insolvency petitions are admitted and cases are resolved, the wait for thousands of JAL homebuyers may only get prolonged.

With the State Bank of India filing an insolvency plea against Jaiprakash Associates, the flagship construction company of the Jaypee Group, for defaulting on payment of Rs 6,893 crore, the wait for thousands of homebuyers invested with the group for more than a decade may only get longer, legal experts said.

SBI filed its application with the Allahabad bench of the National Company Law Tribunal (NCLT) on September 19. The bank proposed that the court appoint Bhuvan Madan as the interim resolution professional.

Jaiprakash Associates Ltd. (JAL) defaulted on payments to the tune of Rs 2,897 crore to lenders on February 28 – Rs 1,544 crore of overdue interest and Rs 1,353 crore due to lenders, according to a statement issued to the bourses.

“We are continuously divesting assets to repay loans. Our efforts in this direction are continuing,” a JAL spokesperson told Moneycontrol. “Under RERA supervision, homes for homebuyers are being constructed. JAL has been working continuously with the objective to repay loans and accordingly, steps have been taken from time to time to reduce loans. We shall keep addressing lenders' concerns.”

Group projects

JAL is constructing projects including Jaypee Greens, Jaypee Wishtown, and Jaypee Greens Sports City, which is home to the F1 track, all in the National Capital Region. The parent company also owns cement plants, hotels, and golf courses.

Lenders to JAL include ICICI Bank, Axis Bank, IDBI Bank, Canara Bank and Bank of Baroda. About 32 banks have advanced loans to JAL, which owes a total of Rs 27,000 crore to creditors.

Insolvency proceedings are currently ongoing against Jaypee Infratech Ltd. (JIL), a group company, that went in for a company insolvency resolution plan (CIRP) on August 9, 2017, leaving over 20,000 buyers in the lurch.

JAL has an estimated 5,000 homebuyers. JIL homebuyers are now worried about whether construction of their projects will continue if the insolvency petition against JAL is admitted.

“If JAL goes into NCLT, we are not sure if the new IRP appointed for JAL will allow construction to continue. JIL is the owner but construction, development and maintenance come under JAL,” said Jayashree Swaminathan, who booked a 2,000 square foot apartment in Kensington Park Heights, a JIL project in Noida, in 2010.

There’s uncertainty over whether homebuyers will get their flats (applications for occupancy certificates for about 49 towers are to be submitted by March 2023), on time, she said. It’s also not clear if JAL will continue to maintain the apartments of those who have received possession, she added.

JIL proceedings

The JIL resolution process entered its sixth year on August 9, 2022. The committee of creditors approved the resolution plan of Suraksha submitted to the NCLT on July 7, 2021. Since then, the case has been pending with the tribunal for its approval.

In a hearing on September 28, JAL’s counsel argued that Suraksha’s right to terminate all contracts of JAL such as development and maintenance agreements once the plan is approved by NCLT cannot happen without cost.

Suraksha’s lawyer brought up the point that because JIL and JAL have the same promoters, their account books, data, and hardware are held jointly and need to be segregated. The next date of the hearing is September 29.

JAL is the third company of the Jaypee Group to face insolvency proceedings, after JIL and Andhra Cements.

According to Sandeep Bhuraria of Zeus Law, SBI’s insolvency petition against JAL may put the fate of thousands of allottees/home buyers of the company in jeopardy. The homebuyers of JIL are still waiting for the outcome of similar proceedings initiated before the NCLT, he said.

“Unfortunately, sometimes the time taken in legal proceedings under the Insolvency and Bankruptcy Code, 2016, defeats the very objective of the code, i.e., timebound resolution of the corporate debtor,” Bhuraria said.

If the NCLT admits insolvency proceedings against JAL, homebuyers/allottees should promptly submit their claims to the interim resolution professional as per the public notice, he advised.

“Often, homebuyers, being unaware of the provisions of the code, do not submit their claims with requisite proof or in the prescribed form… This requires certain effort and vigilance on the part of the homebuyers. However, if for any reason, a claim is not submitted during the period prescribed in the public notice, the same can be submitted on or before the 90th day from the insolvency commencement date,” he said.

Avikshit Moral, a partner with IndusLaw, said considering the quantum of debt and the experience of JIL, the insolvency process may take time, which in effect will delay the projects and impact the homebuyers.

“Typically, such a resolution process needs to consider several complicated issues like statutory permissions, stamp duty, and title issues, which makes it complicated as compared to other resolutions. While the courts have always kept and will keep the interest of homebuyers as the linchpin for any resolution, a quick and practical solution will require everyone, including the approving authorities, the concerned RERA authorities, the government machinery, and the homebuyers, to work together and be on the same page,” said Moral.

Group insolvency process

Mukesh Chand, senior counsel at Economic Laws Practice, is of the view that the JAL case is a classic example of how the legal and judicial process is not equipped to handle large and complex insolvencies like those of real estate companies, where a large number of stakeholders is involved. JIL’s insolvency was initiated in 2017 and the end is nowhere in sight. Similarly, an insolvency application against JAL filed by ICICI Bank in 2018 has not been admitted.

“It is the failure of almost four years of efforts to arrive at a negotiated solution that led SBI to file an independent application for insolvency of the company. Further, in most large real estate projects, interdependence between the group is such that these issues could only be addressed by way of a group insolvency process,” said Chand. “The road ahead is complex for creditors of JAL as this petition will now be considered by the adjudicating authority in the light of the Supreme Court judgement in the Vidharbha Industries Power case.”

In the Vidarbha Industries Power case, the Supreme Court said the IBC grants discretionary power to the adjudicating authority to admit a financial creditor’s application. The ruling varied with the view that an application must be admitted if the adjudicating authority is satisfied that a default has occurred.

“In light of the developments on the real estate front, lenders may need to relook at their financial models for such projects and devise a mechanism to address defaults well before it reaches the stage of insolvency,” Chand said.

Raj Bhalla, a partner at law firm MV Kini, said, “The decision of SBI to proceed against JAL may be a positive step for the lenders to resolve their total debt… but the fate of thousands of homebuyers of the Jaypee Group… will become uncertain.”
Vandana Ramnani
first published: Sep 29, 2022 07:20 am