Thousands of aggrieved homebuyers moved to court recently, citing gaps in the Insolvency and Bankruptcy Code. With some top developers in the NCR filing for insolvency, about 90 per cent of investors are unaware of their rights and how they are impacted when their developer is declared insolvent, reveals a Magicbricks consumer choice poll.
In light of the Jaypee Infrastructure Group being run by an insolvency resolution professional at the behest of IDBI Bank (presently stayed by the Supreme Court), E Jayashree Kurup, Head-Content and Advisory, Magicbricks, explains, 'Insolvency is invoked by a lender when the company does not have enough liquidity to service the debt taken from lenders to execute the project. Today, consumers have the choice to understand the process and act.
The effort with insolvency is to ensure that buyers get their homes and lenders get their money. Being the first such case in real estate, the status of different classes of creditors, including buyers, is being defined. Once this is done, buyers will benefit from insolvency as work is in progress and handover of completed projects is being expedited.'
Further, Divya Malcolm, Principal Associate, Kochhar & Co, explains, 'The Code empowers either the financial or operational creditors to initiate an insolvency resolution process of a corporate debtor before the National Company Law Tribunal (NCLT). For this purpose, the NCLT appoints a resolution professional (RP). He enjoys sweeping powers; even the management of the debtor vests in him. One of the prime tasks of the RP is to identify the financial creditors and constitute a committee thereof. Effectively, this committee consisting of banks or financial institutions is placed in the driver's seat and calls the shots. Thereafter, the RP works out a plan for the revival of the debtor and submits it to the committee. It is for the committee to decide in favour of the revival plan or the liquidation of the debtor. Each decision of the committee requires a majority vote of 75 per cent. The entire process must be completed between six and nine months.'
One must keep in mind that homebuyers from a real-estate company, despite having paid large sums towards the purchase of flats, neither qualify as financial creditors nor operational creditors. Worse, in case of liquidation of assets, they rank second last as unsecured creditors, just above the promoters themselves.
In the case of developers such as Jaypee, whose borrowing is backed by assets whose net worth is far more than the borrowed amount, this problem can be resolved when the handing-over process begins in a phased manner and consumer receivables start flowing in regularly. While previously, the Supreme Court had asked Jaypee Infratech to deposit Rs 2,000 crore by October 27, the apex court has now reportedly asked the company to deposit Rs 10,000-15,000 crore more to ensure the homebuyers got their money back.
In the meanwhile, pan-India homebuyers' pressure group, Fight For RERA, has knocked on the Prime Minister's door to seek an amendment to the Insolvency & Bankruptcy Code 2016 to prioritise homebuyers' interest in insolvency proceedings. It has suggested initiating an exercise to collect data of all incomplete projects across India and track the number of homebuyers who are stuck in such projects. The group argues that developers should not be allowed to take shelter under the Code, leaving behind millions of homebuyers in the lurch.
As Malcolm concludes, 'The media is abuzz about at least six other real-estate companies going the Jaypee way. Poor monitoring of end use of funds, large ambitions of promoters and ever-greening of bad loans are a few of the factors that have created a situation that makes Mallaya look like a minnow.'
At this stage, the point of deliberation must be: Even if the funds were diverted, where have they gone? That's the missing trail that needs to be investigated.