Jaypee Infratech Insolvency proceedings to continue at NCLT. SC orders fresh bidding, bars Jaypee Group/Promoters

Jaypee Infratech Insolvency proceedings to continue at NCLT-We cannot be unmindful of interests of 92% of home buyers who preferred possession of homes-SC

ABCAUS Case Law Citation:
ABCAUS 2460 (2018) 08 SC

The instant writ had been filed under Article 32 of the Constitution for protecting the interests of home buyers in projects floated by Jaypee Infratech Limited (JIL) which is a special purpose vehicle created by its holding company, Jaiprakash Associates Limited (JAL).

National Company Law Tribunal (NCLT) Allahabad in pursuance of petition filed by IDBI Bank Limited initiated Corporate Insolvency Resolution Process (CRIP) against in respect of JIL and an Interim Resolution Professional (IRP) was appointed under the provisions of the IBC. JIL, in pursuance of the order of NCLT called for submissions of claims by creditors clarifying that home buyers could fill in Form -F as they could not be treated at par with financial and operational creditors.

The present writ had been instituted for the following reliefs:

(i) A declaration that Sections 6,7,10,14 and 53 of the Code are ultra vires in so far as only financial or operational creditors are recognized, disregarding other stakeholders such as the home buyers;

(ii) The order of the NCLT be set aside;

(iii) The Union of India be directed to notify under Section 14(3) that the provisions for moratorium contained under Section 14(1)(a) shall not apply to consumers and that the home buyers be allowed to exercise the rights available to them under the Consumer Protection Act 1986 and the Real Estate (Regulation and Development) Act 2016;

(iv) A forensic audit of JIL and JAL be conducted for the period from 2009 to 2017; and

(v) A direction be issued to the Union of India to protect the interests of home buyers in the larger public interest.

The petitioners had contended that the rights conferred upon them by special enactments including the Consumer Protection Act 1986 and by RERA could not be divested. Suspension of the right to seek redressal before an adjudicatory forum under Section 14(1)(a) would, it was asserted, leave the home buyers without a remedy. Section 238 of the IBC gives it an overriding effect over other laws in existence.

According to the petitioners, the home buyers, had been left in the lurch. When the petition was instituted, they had no locus in the CIRP. Liquidation would leave the home buyers to face an uncertain future. It was apprehended that the disposal of assets would deprive them of their right to own a home. The Hon’ble Supreme Court had stayed the Proceedings before the NCLT.

It was submitted by the Attorney General to the Court that the order of stay would result in a consequence which was unintended: control of JIL would be restored to the erstwhile management. Such a consequence would affect the rights of creditors and of the consumers as well. In the meantime, as a result of the ad-interim stay, the IRP had handed over records to JIL. Home buyers contended that if the order of stay was being modified to enable the IRP to take back control, it was necessary to have their representative on the Committee of Creditors as the regime of the Act did not at that stage include any representation for the home buyers on the CoC.

Accordingly, the Hon’ble Supreme Court had modified its order and directed that,

First, following the discipline of the IBC, the IRP was permitted to take over management of JIL and to proceed to formulate an interim resolution plan within a stipulated period;

Second, the IRP was directed to ensure that necessary provisions were made to protect the interests of home buyers. To facilitate the views of the home buyers being placed before the CoC this Court nominated a senior counsel practicing before this Court to participate in those meetings under Section 21 of the IBC;

Third, JAL as the holding company of JIL was directed to deposit a sum of Rs 2,000 crores on or before 27 October 2017 which was later extended.

The Hon’ble Supreme Court observed that the web portal by the amicus curiae, indicated that 8% of the home buyers had sought a refund of their monies while 92% had preferred possession of the homes which they have purchased.

The Hon’ble Supreme Court noted that an amount of Rs 750 crores plus accrued interest was lying in deposit before the Court pursuant to the interim directions and the home buyers had earnestly sought the issuance of interim directions to facilitate a pro-rata disbursement of this amount to those of the home buyers who seek a refund.

The Hon’ble Supreme Court observed that the claim of the home buyers who seek a refund of monies deserves to be considered with empathy. Yet, it opined that it was not inclined to accede to it for more than one reasons. Firstly, during the pendency of the CIRP, it would as a matter of law, be impermissible for the Court to direct a preferential payment being made to a particular class of financial creditors, whether secured or unsecured. Therefore, for the present, the Court left open the question as to whether the home buyers are unsecured creditors or secured creditors. Directing disbursement of the amount of Rs 750 crores to the home buyers who seek refund would be manifestly improper and cause injustice to the secured creditors since it would amount to a preferential disbursement to a class of creditors. Once we have taken recourse to the discipline of the IBC, it is necessary that its statutory provisions said the Hon’ble Supreme Court.

The Hon’ble Supreme Court opined that it cannot be unmindful of the interests of 92% of the home buyers many of whom would also have obtained loans to secure a home. They would have a legitimate grievance if the corpus of Rs 750 crores (together with accrued interest) is distributed to the home buyers who seek a refund. The purpose of the process envisaged by the IBC for the evaluation and approval of a resolution plan is to form a composite approach to deal with the financial situation of the corporate debtor. Allowing a refund to one class of financial creditors will not be in the overall interest of a composite plan being formulated under the provisions of the IBC. Thirdly during the course of the hearing, the Court has been apprised of the concerns of the secured creditors, chief among them being the IDBI bank limited. In its submissions before this Court, IDBI bank has emphasised that one of the major reasons for the enactment of the IBC was to protect the interest of lenders. The debt owing to the banks and financial institutions has been secured by the assets of JIL, to protect their interests. This debt originates in the public deposits of the banks and financial institutions, who are answerable to their stakeholders. Fourthly, the RBI has moved this Court for permission to initiate an insolvency resolution process. Parliament enacted the Banking Regulation (Amendment) Act 2017 by introducing Section 35 AA and Section 35 AB into the Banking Regulation Act 1949.

The Hon’ble Supreme Court observed that the amendment empowered the Central government to authorise RBI to issue directions to any banking company to initiate an insolvency resolution process in respect of a default as understood under the IBC. The RBI constituted an Internal Advisory Committee (IAC) consisting primarily of its independent directors. The IAC took up for consideration accounts which were classified either partly or wholly non-performing from amongst the top 500 exposures in the banking system as on 31 March 2017. As a first step, the IAC recommended all such non-performing asset accounts with fund and non-fund based outstandings exceeding Rs 5,000 crores. The IAC has initially taken up twelve accounts involving total exposure of Rs 1,79,769 crores. JIL was one of the twelve accounts in respect of which directions have been issued to banks for initiating insolvency resolution. Subsequently, the IAC recommended that in respect of those accounts where 60% or more had been classified as NPAs as on 30 June 2017, banks may be directed to implement a viable resolution plan within six months failing which the accounts may be directed for a reference under the IBC by 31 December 2017. JAL was one such entity. No viable resolution plan could be found as a result of which it is also required to be referred for CIRP. RBI has carried out this exercise as a matter of economic policy in its capacity as the prime banking institution in the country, entrusted with a supervisory role, and the power to issue binding directions. The position of the RBI as an expert regulatory body particularly in matters of economic and financial policy has been reiterated in several decisions of the Court

The Hon’ble Supreme Court observed that the facts which have emerged before the Court from the application filed by the RBI clearly indicated the financial distress of JAL and JIL. The apprehensions of the home-buyers in regard to their financial incapacity was borne out by RBI, as a responsible institution had urged before the Court. the IBC had been enacted in the form of a comprehensive bankruptcy law and with a specific legislative intent. With the amendment brought about by the Ordinance promulgated in June 2018, the interests of the home buyers have been sought to be safeguarded. Accordingly, the Court acceded to the request made on behalf of the RBI to allow it to follow the recommendations of the IAC to initiate a CIRP against JAL under the IBC

The Hon’ble Supreme Court issued the following directions:

(i) In exercise of the power vested in this Court under Article 142 of the Constitution, we direct that the initial period of 180 days for the conclusion of the CIRP in respect of JIL shall commence from the date of this order. If it becomes necessary to apply for a further extension of 90 days, we permit the NCLT to pass appropriate orders in accordance with the provisions of the IBC;

(ii) We direct that a CoC shall be constituted afresh in accordance with the provisions of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, more particularly the amended definition of the expression “financial creditors”;

(iii) We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three short-listed bidders whose bids or, as the case may be, revised bids may also be considered;

(iv) JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A;

(v) RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC;

(vi) The amount of Rs 750 crores which has been deposited in this Court by JAL/JIL shall together with the interest accrued thereon be transferred to the NCLT and continue to remain invested and shall abide by such directions as may be issued by the NCLT.

The proceedings pending before the Hon’ble Supreme Court were also disposed off.

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