On Wednesday, the government allowed home buyers to file claims against real estate companies facing liquidation. The government’s intervention came in the wake of panic in the National Capital Region last week after IDBI Bank initiated insolvency proceedings against real estate company Jaypee Infratech for failing to repay its loans. Those who had made advance payments for homes being built by the company in Noida were anxious that the sale of its assets to repay banks would leave them in the lurch.

Finance Minister Arun Jaitley assured the home buyers that the company could still be revived to deliver the promised homes. The Insolvency and Bankruptcy Board of India – a regulatory body set up last year to monitor insolvency processes – released a new form allowing buyers to claim money from such firms by qualifying themselves as creditors to the company.

But a closer look at the regulations shows there might still be trouble ahead for home buyers. They might not be able to recover their money if the company is finally declared insolvent and its assets sold. This applies not just to Jaypee Infratech but any real estate firm that could potentially be taken through insolvency proceedings by banks.

Currently, infrastructure companies, which include real estate firms, account for 22% of the estimated Rs 10 lakh crore of bad loans in the banking sector, according to India Ratings. Jaypee Group, for instance, was among the top 12 accounts recommended by the Reserve Bank of India for insolvency proceedings to respective banks in June. Jaypee is not the only one being dragged to the National Company Law Tribunal over defaults. Other real estate companies such as Lanco Infra are also going through similar insolvency processes for non-payment of debt.

Scroll.in explain why home buyers may still face a challenge recovering their money.

Can a company be dragged to court for not delivering projects on time?
The Insolvency and Bankruptcy Code was enacted last year to fast-track the process of winding up companies that are no longer performing. It lays down the procedure to be followed if a company fails to pay its dues on time. According to the code, such a company can be taken to the National Companies Law Tribunal – a court that specifically addresses cases related to a business concern by either its financial creditors or operational creditors.

Financial creditors, according to the code, are banks and financial institutions that have provided funds to the company, usually in lieu of interest payments along with the principal amount. Operational creditors, on the other hand, are those who are owed goods or services or have been assigned the debt liability through a transfer and include employees of the company with pending dues.

According to the Insolvency and Bankruptcy Code, any financial or operational creditor can file a petition against a company for not paying its dues if the total amount of default is more than Rs 1 lakh.

While the law clearly states that financial and operational creditors can approach the court over default, lawyers are divided on whether home buyers can be classified as operational creditors.

“How is a home buyer an operational creditor to a business? I don’t get it,” said Chitranshul Sinha, manager at law firm Dua Associates in Delhi. He added that operational creditors are usually entities that have a claim on a company’s money rather than those who are yet to receive goods and services from it.

However, clause 20 of section 4 of the bankruptcy code defines an operational creditor as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”. Clause 21 defines operational debt as “a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority”.

Regardless, in the case of Jaypee, Anuj Jain, who has been chosen as the insolvency resolution professional, has called for home buyers to send in their claims – essentially categorising them as operational creditors of the company. With the new form, the home buyers can file claims as creditors other than operational or financial creditors of the company but it does not change the outcome of the proceedings for them, especially in case of liquidation where proceeds from the sale of assets will be distributed in the same order as earlier specified under the code.

What does the court do after admitting a petition?
The National Company Law Tribunal gets a two-week period to admit or decline a petition filed by creditors against a company. If the petition is admitted, it has to assign an insolvency resolution professional who takes over the process of resolution.

“The resolution professional is supposed to publish a public notice about the company’s liquidation. They invite claims by financial and operational creditors,” said Sinha. “After the claims arrive, the professional sets up a committee of financial creditors who decides upon the resolution process.”

This committee is required to submit its claim to the tribunal and it also appoints an insolvency professional who takes over the day-to-day management of the company until the resolution has been approved.

How long does it take to revive or liquidate a company?
The bankruptcy code states that it is meant to revive a company and ensure it keeps functioning as a going concern (one that is operational and making a profit). This is why the code puts a moratorium of six months on all civil proceedings against such a company to allow it to be revived.

“It means that all civil cases against the company are stayed and there’s no scope for anyone filing any fresh cases against it in any kind of courts,” said Ravinder Singh, an advocate from Delhi who has represented home buyers in consumer courts against real estate companies. “The idea of the moratorium is to give the ailing company a breather and bring back its operations on track.”

The National Company Law Tribunal has 180 days to give its verdict on the case based on the resolution process submitted by the committee of financial creditors. However, the deadline to submit and decide upon the case can be extended to 270 days in exceptional cases with the tribunal’s approval and if 75% of the committee members agree that the case needs more time.

According to Chitranshul Sinha, “Even after that, if no resolution plan comes up, or if NCLT [National Company Law Tribunal] rejects the proposal, then the company is listed for liquidation.” He added that the liquidation process is then carried out by a liquidation professional who lists the company’s assets for sale and recovers as much money as possible, which is then distributed among the creditors as specified in the bankruptcy code.

Jaypee Group officials meet agitating home buyers in Noida. (Credit: Virendra Singh Gosain/HT)
Jaypee Group officials meet agitating home buyers in Noida. (Credit: Virendra Singh Gosain/HT)

What is in store for home buyers?
Home buyers who have paid money in anticipation of getting possession of a house are in for a long wait, according to lawyers. This is because the insolvency process takes at least six months and if the mode decided is something other than liquidation, the wait is bound to get longer.

“If there’s a scenario where the resolution process manages to somehow revive the company and gets the project going again, then also people will need to continue making payments to the company to keep the project running until it is completed because all the money that the developer had is now gone,” said Ravinder Singh.

He added that it depends on the plan that is arrived at since home buyers can have different expectations – some may want their money back while others may demand possession of their homes. However, the final verdict given by the tribunal will apply to all parties without discrimination, Singh said.

This also means that in case of liquidation, the dues of the company’s creditors will have to be repaid in a set format of priorities in which home buyers rank quite low.

If the company is liquidated, who gets the money first?
According to the bankruptcy code, the resolution professionals’ fee gets top priority once the money comes after liquidation. This is followed by employees’ wages. Home buyers would be behind six other classes of creditors. Only when these six classes have recovered their money would they be able to recover some of theirs. Here is a full list of beneficiaries from the liquidation of a company’s assets in order of priority, according to the code:

  1. Insolvency resolution process costs and the liquidation costs paid in full.
  2. Workmen’s dues for the period of 24 months preceding the liquidation commencement date and debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52.
  3. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.
  4. Financial debts owed to unsecured creditors.
  5. Any amount due to the Central government and the state government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date.
  6. Debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.
  7. Any remaining debts and dues (where other creditors such as home buyers are likely to be repaid).
  8. Preference shareholders, if any, and
  9. Equity shareholders or partners, as the case may be.

What are the potential loopholes in the process that should worry home buyers?While industry has hailed the bankruptcy code as a great move to resolve non-performing assets and liquidate companies quickly if they turn sick, it is yet to find its feet on the ground. The law, which came into force only last year, is yet to deliver a final verdict on any company. For now, only resolution professionals have been appointed in most cases and resolution plans are being worked out for the rest of the companies, according to Sinha.

“Mostly everyone associated with the company will have to take a haircut on the money the company owes them,” Sinha said. “I don’t see the law settling for these things in the next six months or a year and there’s been a lot of divergence between different benches. We have to look up to National Company Law Appellate Tribunal [an appellate authority where the National Company Law Tribunal’s judgements can be challenged by either parties] judgements. Thankfully, NCLAT has been given well reasoned judgements.”