Jaypee coming under Insolvency Act could cause catastrophic banking crisis in India

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Last week, IDBI invoked Insolvency and Bankruptcy Code 2016 in the National Company Law Tribunal (NCLT) of Allahabad in respect of Jaypee Group Of Companies for failing to pay the installments to IDBI against the credit. NCLT has accepted the application as filed and appointed Anuj Jain as the administrator to preside over the affairs of the company and its assets so as to either revive or sell assets to protect the following in that order:

  1. Financial Creditors (Typically Banks and Financial Institutes): From those the company has borrowed money.
  2. Operational Creditors: Contractors, Suppliers and Vendors to whom the company owes money on account of material or service supply.
  3. Employees and Workman Claim.
  4. jaypee insolvency act
    Photo: Salman Ali (Hindustan Times)

In real estate sector, home buyers from whom the builder has taken money as forward sale and a case of borrowing has occurred should be actually categorised as financial creditors (Reference Para 85 subpara c of the Code). However, the home buyers have been categorised as operational creditors and their stake in recovery mechanism is after bankers and financial institutions. This has created a distrust amongst the buyer in the whole process which is based upon the trust.

Home buyers invested into a project that was legal and approved by the Noida Authority and various banks. Bank approval was based on the financial ability to complete a project by the builder. None of the buyers would have invested in this project if approval of banks were not attached and advertised to lure the buyers.

It is, therefore, a case of honest home buyers being duped by a nexus of builder-banker & Noida Authority. A total of about 28,000 home buyers have been waiting for six to seven years for the builder to deliver their dream homes. Many meetings and representation at various levels have resulted in no gain.

IDBI, partner in crime?

Home Buyers view IDBI and other banks as being a partner in crime in duping honest middle class people. IDBI has further helped Jaypee Associates by invoking Insolvency and Bankruptcy Code. The immediate impact of such callous act has been to nullify numerous court cases in High Court and consumer courts. It has come as a big relief to the builder courtesy IDBI.

What this means is that no claims can be preferred in the moratorium period of 180 days. Creditors cannot pursue any other legal charges against the builder till liquidation of assets is complete. Builder will also not face any criminal charges for siphoning off thousands of crores of rupees of home buyers.

Congress advt 2

In the meantime, the biggest question remains, Who will complete and handover the project to home buyers? The builder has been let off under the garb of bankruptcy. The administrator being a chartered accountant has no prior experience of executing the sick project of this size. His primary task will be to protect the interest of creditors. Will government of India or UP or Noida Authority complete the project?

It is expected that one more industrialist will take Mallya route and government, once again, will not be able to extradite the defaulter businessman will be protected under insolvency act. The Administrator has yet not issued a ban on directors’ travel to foreign countries as is required by the Code.

Unrest among buyers

Jaypee home buyers staged a massive protest over the weekend and Pankaj Singh, the local Noida MLA, assured them that their demands will be met and interest protected. Five demands of home buyers were as follows;
1. All assets of Jaypee should be taken under government control
2. Government should give a time-line of completion of project
3. Launch a CBI Inquiry to find out the amount and mechanism of embezzlement of funds paid by the home buyers towards construction of property
4. The directors should be jailed for criminal conspiracy of defrauding 28,000 home buyers.
5. NCLT’s ultimatum to fill claim form must state that the rights of home buyers are same as that of financial creditors and guarantee the completion of projects. Until this happens, bankers have no claim on the property or assets of the company

#NoHomeNoEMI

Home buyers have unanimously agreed to stop making payments to bankers towards repayments of their loans also known as EMIs as the project has now moved into the moratorium period of 180 days. No creditors or Debtors can also further any legal action against buyers during this period.

Having paid EMIs for years, the buyers feel cheated particularly after learning that bankers colluded with builders to trap them with home loans. #NoHomeNoEMI has been initiated against all defaulting builders and their bankers who have made millions by cheating the honest middle-class, wanting to take possessions of their dream homes. Builders, Bankers and authorities have no fear of law but home buyers fear the law, police and goons hired by builders and bankers.

As a result, they become easy targets for blackmailing by bankers and builders. Bankers who gave construction loan and credibility certificates to builders to lure the buyers had a duty to oversee the expense and money flow to prevent the diversion of funds by them. It must be investigated if bankers were benefitting out of the fraud or just they were simply incompetent to perform their duties.

#NoHomeNoEMI has the potential to cause one of the biggest financial turmoils and many banks could collapse as there are nearly 30,000 disgruntled buyers of Amarpali, who have joined this movement.

Just in the National Capital Region alone, it is estimated that over two lakh home loans are trapped in failed projects with builders being simply not being bothered. The government must take immediate steps to prevent the catastrophe waiting to happen.

(Khalid Ehsan is a retired Indian Air Force officer. Views expressed here are the author’s own. Janta Ka Reporrter does not necessarily  endorse them)

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