Apartment owners who are part of such insolvent projects should explore protection granted by the statute and try and compel the state development authority to recover the money from the developer and complete the project and keep its promise of providing housing to owners
In a big setback to homebuyers of Jaypee group, the Allahabad bench of the National Company Law Tribunal on Wednesday declared Jaypee Infratech as an insolvent company. Homebuyers are unsure whether they will get their homes for which they have been waiting for years and have invested their life-long earnings.
What has happened? The NCLT has appointed insolvency professional Anuj Jain as CEO of Jaypee Infratech. As of now the board of directors of the company has been suspended. Jain will now sit with Jaypee’s creditors to see if a resolution of the company’s debt is possible. He will be given six months to revive the company. This period can be extendable by another three months.
Homebuyers will be given two weeks (until August 24) to raise claims related to their investment in the Jaypee projects. What this means is that homebuyers will have to give details of the amount they have paid the company on a prescribed form. This is a legal requirement that will record the total amount that may have to be paid back to the homebuyers in case all attempts to revive the company fail.
Any recovery proceedings against the company will now remain stayed or transferred to NCLT until the restructuring exercise is complete. All orders of compensation against the company will also be dealt by NCLT. Any claim in any other court will also be dealt by NCLT, say legal experts.
In case the turnaround doesn’t happen, the company’s assets will be liquidated and sold to recover the money. The amount will first be distributed among secured creditors such as banks and the remaining amount will be passed on to the unsecured creditors who are the homebuyers or others like contractors.
Homebuyers should know that while they cannot file cases in courts for recovery of money after the company has been classified as insolvent, their statutory rights are not eclipsed. “The right to get the allotted house does not get diluted, if he or she so prefers,” says SK Pal, a Supreme Court lawyer.
Is there be a solution going forward? Pal says apartment owners who are part of such projects should explore protection granted by the statute and try and compel the state development authority to recover the money from the developer and complete the project and keep its promise of providing housing to owners.
“That duty should be cast on the authority that had entered into an agreement with the developer; how is it that it never envisaged a situation wherein the construction company could get liquidated? After all it was the authority that had given land to the developer to construct under certain terms of license. It still continues to be the owner of the land,” he says.
Interestingly, the Noida Authority has written to the Uttar Pradesh government for a forensic audit on the fund flow of builders in Noida who have defaulted. Realtors owe the Authority around Rs 10,000 crore so far, as per reports.A unique case: Jaypee Infratech, with interests in road and real estate sectors, has a consolidated debt of Rs 7,922 crore as on March 31.
The Reserve Bank of India in June identified 12 non-performing accounts totalling 25 percent of India's gross NPAs, which can be immediately taken up under the Insolvency and Bankruptcy Code. Besides Jaypee, the list of 12 defaulters includes Monnet Ispat, Jyoti Structures, Electrosteel Steels, Amtek Auto, Essar Steel, Bhushan Steel, Bhushan Power and Steel, Jaypee Infratech, Lanco Infratech, ABG Shipyard, Alok Industries and Era Infra & Engineering.
Experts say that most of the other companies are business to business firms but Jaypee Infratech’s case is unique because thousands of homebuyers are involved. Also, in this case, the housing projects are being developed by Jaiprakash Associates but the land is with JP Infratech. “The intention is to revive the company. The board of directors will get suspended for six months and replaced with the creditors’ committee (liquidators) who will attempt to revive the company by restructuring its debt,” says Sahil Sethi, lawyer with Saikrishna & Associates.
Debt restructuring of the company may actually help. All this while there was a stalemate as the company had to deal with claims from banks and homebuyers. In the next six months it can actually take stock of the situation and focus on reviving the company but if that does not happen and the company is liquidated, it will prove to be a disaster, says Sethi.
Will new completion timelines be pushed further? The company had submitted fresh delivery schedules to the Authority a few months ago and promised to give possession of 6,000 flats by October 2017. “We will give possession of another 8,000 flats by 2018. We will finish and offer possession of the remaining flats in 2018-19. Homebuyers should trust we will deliver as our project got delayed due to adverse market conditions,” Sameer Gaur, Director, Jaypee Infratech, had said a few months ago.
However, with the focus now shifting to paying back debt, it is highly likely that timelines will be pushed further due to this development, say experts. Phone calls made to the company spokesperson were not answered.
What happens if a developer is declared insolvent? Unsold inventory in the company’s name becomes the property of the liquidator. Inventory sold before the date of the order remains out of the liquidation process (a property bought by an individual before the date of the order will remain out of its ambit) but the larger issue here is that of completion of the project. Experts are asking if the sale agreements have been executed with 60 percent of buyers and the project is not complete, how will the remaining 40 percent of the project be executed?That’s when the government may have to step in and take a call, they say.