Jaypee's home buyers Vs creditors: Will the insolvency resolution professionals do a balancing act?

With the Supreme Court order going in favour of Jaypee home buyers, the insolvency resolution professional's (IRP) situation becomes a bit tricky now, as a fresh resolution plan would have to evenly meet the interests of both home buyers and financial creditors, without harming the interests of either party.

Although, Jaiprakash Associates Ltd (JAL), the holding company, has been asked by the apex court to deposit Rs 2,000 crore in court by 27 October, the point here is: home buyers’ money at stake is much more, around Rs 25,000 crore. This was pointed out by senior advocate Ajit Sinha, appearing for petitioner Chitra Sharma before the Supreme Court.

According to lawyer Khushboo Shah of MDP & Partners, this sum could act as basic compensation towards the money invested by home buyers in the Jaypee Infratech projects. But considering the deposited amount, how much a buyer would actually get from it could be less than 10 percent of the amount invested by each buyer in the Jaypee project. So, Shah surmises this is just to give home buyers an assurance that the law is on their side.

Representational image. Reuters

Representational image. Reuters

So, how, the IRP will go about being fair to both the parties without being unfair to one could be a landmark step and set a precedent for the nation. The insolvency proceedings initiated by IDBI against Jaypee Infratech were for a sum of around Rs 500 crore.

The challenges that the IRP would have to deal with would be of a different nature. First, this is a test case in real estate sector. Other industries are clear as there are no third party rights created in terms of buyers etc. In northern parts of the country, builder-buyer agreement takes place, and this is how Jaypee sold its projects to home buyers. In Maharashtra, 20 percent of people register properties and then transfer rights.

Secondly, the matter is of a public interest where thousands of people have put in their hard earned money, in most cases their only asset which is being affected.

Considering that the law itself is new, IRP could face difficulty in balancing out people on one side and the bank laws on the other side. This is a sensitive matter, says Mudassir Zaidi, executive director North, Knight Frank India, and it will have an effect on the existing lending system. If banks can’t lend and recover money as they are in the business of mortgaging, the question then arises is whether they should lend to real estate or maintain caution. Even if they are lending to riskier sectors like real estate, banking fraternity should also weigh the long-term impact on its books.

Still, a fine balance would have to be maintained by IRP between the two parties to solve the matter in the best possible manner and even it would mean modifying tools and bankruptcy code to help the situation.

Lawyers and experts say. this is how a resolution plan could broadly work out to be: To ensure that assets are enough to pay off either, IRP will ask somebody else or look at the funds available. Either home buyers would be given money as refund or IRP would have to come out with an investor for the particular property and develop the property left by Jaypee Infratech and assure flats to the buyers in a manner promised by the developer.

Financial creditors come first in the waterfall as a resolution before NCLT. But in view of SC statement that banks need not be so selfish- it is to be seen whether they will let home buyers take the first lead as recovery for dues, says Shah. That means the bank would have to take a backstep before the court.

At the moment, we are looking a narrow screen. The IRP will need to carefully study the impact of the final resolution act that will structurally impact the industry as well as other sectors too.

One thing is clear. With SC backing, home buyers can rest assured that they will have a better position and their interests will be taken care of.

Updated Date: Sep 15, 2017 17:14 PM

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