IN THE SUPREME COURT OF INDIA
W.P. (C) No. 744 of 2017
Chitra Sharma and Ors.
Union of India and Ors.
Date of Judgement
09 August, 2018
Dipak Misra, C.J.I; A.M. Khanwilkar, J.; D.Y. Chandrachud, J.
The Insolvency and Bankruptcy Code (IBC) is a comprehensive bankruptcy law with a specific legislative intent. The amendment brought about by the Ordinance promulgated in June 2018 brought the home buyers within the purview of financial creditors under the IBC and hence necessarily a part of the Council of Creditors (CoC). The case envisages the CIRP that is initiated and the procedure of instituting a new resolution plan. The eligibility criteria of bidders and the process of asset disposal in the light of protecting the interests of home buyers are further conferred in the present case.
Facts of the case
These proceedings have been initiated under Article 32 of the Constitution for protecting the interests of home buyers in projects floated by Jaypee Infratech Limited (JIL). JIL is a special purpose vehicle created by its holding company, Jaiprakash Associates Limited (JAL) for the Yamuna Expressway Agreement for which the finance was obtained from a consortium of banks, IDBI Bank being the lead bank, against a partial mortgage of lands acquired in the NOIDA-Agra sector and a pledge of 51% of the shareholding held by JAL. A housing plan was envisaged for the construction of real estate projects in two locations of the land acquired. IDBI Bank Limited instituted a petition against JIL before the National Company Law Tribunal (NCLT) at its Bench at Allahabad seeking the initiation of a Corporate Insolvency Resolution Process (CIRP). A default of Rs. 526.11 crores in the repayment of dues by JIL was claimed by IDBI Bank.
NCLT initiated the CIRP in respect of JIL and an order of moratorium was issued under Section 14. An Interim Resolution Professional (IRP) was appointed and submissions of claims by creditors were called for. On 16 August 2017, Regulation 9(a) was inserted to include claims by other creditors and a press note was released by the Board clarifying that home buyers could fill in Form-F as they could not be treated at par with financial and operational creditors.
The home buyers invested in residential projects, many by obtaining loans, proposed by JIL and JAL in the National Capital Region which was to be possessed within thirty to thirty-six months of the booking. Due to delay in handing over possession, numerous flat buyers filed consumer complaints before the State and National Consumer Disputes Redressal Commissions. In June 2017, RBI is stated to have published a list of the top 12 defaulters in the country including JIL which was declared to be in default of an amount approximately of Rs. 8,000 crores to its lenders.
When the petition was instituted, homebuyers had no locus standi in the CIRP. Because of liquidation, the disposal of assets would not redress their grievances. The Court issued a notice on 4 September 2017 for the proceedings before the NCLT at Allahabad to remain stayed against which IDBI Bank Limited filed an application for vacation. The Attorney General submitted before this Court that the order of stay would result in a consequence where the control of JIL would be restored to the erstwhile management affecting the rights of creditors and consumers as well. In the meantime, the IRP had handed over records to JIL.
Court modified this order on 11 September 2017 and permitted the IRP to take over management of JIL and to proceed to formulate an interim resolution plan within a stipulated period. The IRP was directed to ensure that necessary provisions were made to protect the interests of the home buyer and a senior counsel was nominated by the court to participate in the meetings of CoC. JAL as the holding company of JIL was directed to deposit a sum of Rs 2,000 crores on or before 27 October 2017. The mechanism evolved by the Court was intended to provide a representation of home buyers and to secure their interest as they were not even regarded as financial creditors in the CoC.
JAL sought vacation of the direction for the deposit of Rs 2,000 crores or for a modification that would enable JAL to transfer its rights under a concession agreement in respect of the Yamuna Expressway but the Court declined to modify the direction.
The court appointed amicus curiae who was to open a web portal on which details of the home buyers would be uploaded with a separate portal for home buyers of JAL. It was informed to the Court after gathering information from the portal that an amount of Rs 1300 crores was required to be refunded by way of principal alone to the home buyers who were seeking refunds, which according to JAL was 8% of the homebuyers, rest seeking possession of flats.
To redress the grievance of home buyers, a direction was issued by the Court restraining the developer from raising demands towards outstanding or future instalments in respect of those flat buyers who had expressed a desire to obtain refunds.
The Court allowed JAL’s request to submit a representation to the IRP as one of the intending bidders in the resolution plan. JAL also proposed the Court to permit it to alienate specific assets to secure compliance with the interim directions of this Court for the deposit of Rs 2,000 crores which were not met with despite numerous directions; however, it was gravely opposed by the other party.
In the case of JIL, the period for completing the CIRP was extended by 90 days to end on 12 May 2018. During the process, the IRP invited expressions of interest specifying that the IRP must protect the interests of home buyers and provide for expeditious completion of the work of construction. JAL submitted a resolution plan too which was found to be ineligible because of the bar contained in Section 29 A of the IBC. Out of rest nine, five were inconsistent and a discussion took place with four resolution applicants. The CoC decided to shortlist the resolution plan of Lakshdeep investments & Finance Pvt. Ltd. along with Sh. Sudhir Valia and relatives (Lakshdeep) for negotiation. Meanwhile, JAL submitted a representation which was rejected as a result of the statutory bar contained in Section 29A and its failure to convince the CoC of its ability to tie up funds for construction. The resolution plan of Lakshdeep was put for voting but only 6 % of the votes cast were in favour of it, as against a three-fourth majority requirement which was then needed under Section 30 (4). Accordingly, the IRP informed the NCLT that no resolution plan was approved by the CoC within a period of 270 days which came to an end on 12 May 2018.
The total financial debt due to the financial creditors on the date of the commencement of corporate insolvency (9 August 2017) stood at Rs 9,984.70 crores. As per Section 33(1) of the IBC, liquidation follows upon the rejection of a resolution plan. However, the liquidation of JIL will not sub-serve the interests of the home buyers. A home is recognized to be part of the right to life and thus it is imperative for the Court to provide justice within the meaning of this fundamental constitutional guarantee.
Statue and provisions discussed
Section 21- Insolvency and Bankruptcy Code, 2016
Section 29A -Insolvency and Bankruptcy Code, 2016
1. Should the Corporate Insolvency Resolution Process be initiated against the Respondent in the present case in light of protecting the interests of the homebuyers?
Arguments from Petitioner:
The IBC recognized only three categories or classes namely (i) corporate debtors; (ii) financial creditors and (iii) operational creditors. The homebuyers contended that not being protected by IBC, 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 leave the home buyers without a remedy as Section 238 of the IBC gives it an overriding effect over other laws in existence.
Further, it was contended if the order of stay at NCLT, Allahabad was being modified to enable the IRP to take back control, it was necessary to have their representative on the Committee of Creditors. The regime of the Act did not at that stage include any representation for the home buyers on the CoC.
The proposal submitted by JAL/JIL to the IRP was opposed by the petitioners on various grounds because of the bar as per S. 29A(b) and (g). Its inability to deposit the required amount as ordered by the court reflects the financial crisis and non-availability of resources which would render it impossible for them to complete construction of the project. The previous inordinate delays also show the incredibility to hand over the house to the homebuyers on time.
Arguments from Respondent:
On behalf of IRP
When asking for a vacation of direction to deposit Rs. 2,000 crores by JAL, the counsel for IRP drew the Court’s attention to the fact that the rights under the concession agreement belong to JIL which was subject to proceedings under the IBC as a result of which such a request for alienation could not be permitted.
After the refusal of the proposal of JAL/JIL to the IRP, the learned senior counsel on behalf of IRP submitted that essentially, the Court has two options before it. The first option would be to revive the process of corporate insolvency by extending the period of 270 days specified in the IBC to enable fresh consideration to be made of the prospect for a resolution which would now have to take into account the interests of the home buyers under the amended IBC. The second option would be for this Court, in the exercise of its jurisdiction under Article 142, to appoint a Committee under its directions to find a resolution that can preclude the need for the liquidation of the corporate debtor. The counsel on behalf of JAL also relied on the second option to proceed outside provisions of IBC as proposed by the counsel for IRP.
On behalf of JIL/JAL
Learned senior counsel appearing on behalf of JAL submitted the perspective of the developers. JAL has sought to assure that it would double the strength of existing workers for the construction of its projects as possession is left to be provided to 21,532 home buyers. JAL sought permission to dispose-off certain assets to deposit post-dated cheques of Rs 600 crores with the Registry of this Court. JAL seeks to continue the stay of liquidation proceedings against this deposit and on the direction of this Court allowing the IRP to remain in management.
It is submitted that with the expiry of the timelines prescribed in the IBC for the CIRP, there should be the liquidation of the corporate debtor, however, it is not in the interest of the home buyers and thus the only solution would be envisaging an arrangement outside the provisions of the IBC. It was contended that the project should not be stopped midway and the role as developers of JAL should not be discounted, to protect the interests of the remaining 21,532 buyers who await possession. Their rights are preserved under the Real Estate (Regulation and Development) Act 2016. It has been submitted that an independent committee of experts should be constituted by this Court to evaluate the financial capability of JAL/JIL to continue executing the ongoing projects.
It has also been submitted that following the opening of the web portal under the directions of the Court, only 8% of the home buyers have opted for refunds while 92% have chosen not to claim refunds thereby implying a confidence in the ability of JIL/JAL to complete the project.
To secure justice, the Court held that the Corporate Insolvency Resolution Process should be revived and Council of Creditors reconstituted as per the amended provisions to include the home buyers. The IRP is permitted to invite fresh expression of interest for submission of resolution plans and the Court disallowed JIL/JAL to participate in the CIRP. Recourse to the power under Article 142 is allowed at the present stage for the limited purpose of recommencing the resolution process afresh from the stage of appointment of IRP by extending the period which has been prescribed for the completion of the resolution process. The Court held that it would not be appropriate for the Court to appoint a Committee outside the IBC to oversee the CIRP and assume the task of supervising the work of the Committee.
In the light of IBC, the Court has to decide upon the protection of rights of home buyers which were not protected under IBC initially. However, by the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 which came into force on 6 June 2018, the homebuyers came to be recognized as financial creditors. Due to the amendment, amounts raised from allottees under real estate projects are statutorily regarded as financial debts. Such allottees are brought within the purview of the definition of ‘financial creditors’. Section 7 of the IBC creates a statutory right in favour of financial creditors to initiate the corporate resolution process. Being financial creditors under the IBC, allottees in real estate projects necessarily constitute a part of the CoC as per Section 21. Financial creditors are entitled to a voting share proportionate to the extent of the financial debt owed together with an 8% interest per annum. On 13 July 2018, a circular had been issued by the Insolvency and Bankruptcy Board of India in pursuance of Regulation 16A to facilitate the process of appointing an authorized representative for classes of creditors governed by Section 21 (6A) (b) of the IBC.
The proposal submitted to IRP on behalf of JAL was not accepted by the Court by referring section 29A of the IBC which was brought with an intention to ensure that persons who are responsible for the insolvency of the corporate debtor do not get to participate in the resolution process. The participation of such persons would undermine the salutary object and purpose of the Act. Keeping this object in mind, Section 29A creates a bar on their eligibility. Section 30 of the IBC, as amended, also clarifies that a resolution plan of a person who is ineligible under Section 29 A will not be considered by the CoC. Section 29A (c) and (g) precludes JAL/JIL from being allowed to participate in the resolution process. The Court has also recognized the lack the financial capacity and resources to complete the unfinished projects.
Unfortunately by the time that the Ordinance came into being on 6 June 2018, which conferred a statutory status on home buyers as financial creditors period of 270 days had expired; the resolution plan of Lakshdeep was rejected and the IRP informed NCLT that no resolution plan had been approved within the extended period of 270 days on 12 May 2018.
The Court held that the CIRP should be revived and CoC reconstituted as per the amended provisions to include the home buyers. It would be open to the IRP to invite fresh bids except that of JAL which is barred under Section 29A.
The home buyers have earnestly sought the issuance of interim directions to facilitate a pro-rata disbursement of the amount deposited before the Court amounting to Rs. 750 crores to those of the home buyers who seek a refund. However, during the pendency of the CIRP, it would be impermissible for the Court to direct a preferential payment being made to a particular class of financial creditors, whether secured or unsecured. It would also be unfair to the interests of 92% of the home buyers many of whom would also have obtained loans to secure a home. Even the concerns of secured debtors, like IDBI bank, have to be taken care of. Moreover, JIL was one of the twelve accounts in respect of which directions have been issued by RBI to banks for initiating insolvency resolution as per the Banking Regulation (Amendment) Act 2017. JAL was an entity where more than 60% of accounts were classified as NPAs and no viable resolution plan within six months could be found, the result of which was for it to be referred for CIRP. JAL was classified under the SMA – II category by banks as early as on 3 October 2014 and as an NPA since 31 March 2015. After witnessing the financial distress of JAL and JIL, the Court found it reasonable on behalf of the RBI to allow it to follow the recommendations of the IAC to initiate a CIRP against JAL under the IBC.
Edited by Parul Soni
Approved & Published – Sakshi Raje