BANKRUPTCY CODE IS AN IMPEDIMENT FOR HOME BUYERS

            [ This article was published in the New Indian Express on 5.9.2017 under the title: BUILDING APARTMENTS IN THE AIR ]

     The declaration of JayPee Infratech as insolvent under the new Insolvency and Bankruptcy Act 2016 is just the tip of a massive real estate ice berg which has the potential to sink hundreds of thousands of families. Other developers will follow the same exit route soon, not only in Delhi NCR but all over the country, given the impunity with which they have been siphoning off the money of home buyers. The Unitech Directors are already in jail and a bankruptcy petition has also been filed against Amrapali by two banks.

     Matters have been allowed to reach this low point by successive venal governments in UP and Haryana which have been happily approving projects without any oversight or questions. The scale of the emerging problem can be gauged from the fact that in Greater Noida alone there are 203 projects, of which 82 are “critical”, i.e have taken money from buyers but are in no position to deliver the flats. Jaypee has swallowed up Rs.17000 crores from 30000 applicants, Amrapali from about another 10000 victims. Builders in Noida also owe thousands of crores to banks and Rs. 7200 crores to the Noida authority as land dues! Gurgaon is another bubble waiting to burst, and other metros will soon follow suit.

     All these developers, like Jaypee, will in all likelihood be declared insolvent/bankrupt by the NCLT( National Company Law Tribunal) under the new Bankruptcy Code. The Act, however, is so framed that the home buyers are not likely to get any relief or recover any substantial part of their moneys. Firstly, the builders have had enough time to transfer their funds elsewhere and will leave behind empty shells from which little can be recovered by way of auction. Secondly, they have built fire-walls around their other assets which in all probability cannot be touched. Thirdly, the home buyers are not even mentioned in the list of seven entities entitled for payment of dues following liquidation of a company under the Act! They are neither investors, nor financial creditors, nor operational creditors, nor workmen! The simple truth is that this Act is intended to primarily help the Banks, and is therefore hopelessly inadequate  in resolving the peculiar problems of consumers or casualties of the real estate sector- the home buyers.

     The time has therefore come for the government to seriously consider the following issues/questions:

[1]  Home buyers have been given a raw deal under the Code. They are the last category when it comes to a refund whereas they are the biggest investors in the company declared bankrupt. IDBI Bank ( which will get the first priority) has to recover only Rs. 526 crore from Jaypee whereas the buyers have put in 17000 crores. And yet they are not considered as secured investors!

[2]  A bank ( or any other creditor) can approach the NCLT if its dues are not paid and trigger the Insolvency process, but a home-buyer cannot even if s/he has not been provided the home for which s/he has paid. This is patently unfair and must change.

[3] A home buyer cannot be a part of the Creditors’ Committee which will finalise the plan for redistribution of the realised assets of the insolvent company, since s/he is neither a financial nor an operational creditor. This is illogical and unjust considering that s/he has the maximum stakes in the company and has the most to lose.

[4] The built-up assets of the bankrupt company ( at whatever stage of completion) belong to the applicants who have paid for them. How then could they have been mortgaged by the said company to the Banks as security for loans ? This is  a fraud on the home buyers: no second ( or “pari passu”)charge can be created on an asset without the written concurrence of the party to whom it is already pledged- in this case the home buyer. The builder company has the right to create the charge only if it constructs the flats with its own funds first, and then subsequently sells them. But that is not the business model followed by either Jaypee , Unitech , Amrapali or any other builder. They follow the “ pay as you build” model and take advance payments in instalments at every stage of the construction; the flats therefore belong to the applicant-buyer and cannot be mortgaged without his consent. The primary  lawful lien on these assets, therefore, is that of the home buyer and not of the Banks. The Code should recognise this.

[ 5] Another injustice heaped on the home buyers is that once the NCLT starts the bankruptcy process the former cannot approach any other court or Consumer Forum  for redressal of their grievances. This is not equitable since the builder company can drag the matter through our notoriously sluggish legal system for years together, while the individual home buyer, usually subsisting on a salary or a pension, can only wait, watch and pray.

[6]  Another interesting question that arises is: how can the banks give two loans against the same flat/property- one to the buyer, and one to the builder? Is this prudent banking practice ? By doing so the banks are over exposing themselves, for if the builder fails to deliver then both loans go bad ! The only one who makes a killing is the builder, which is what appears to be happening in the instant cases- the promoters of both, Jaypee and Amrapali, will happily exit after limiting their losses, and the banks and buyers will be left holding the proverbial can.

[7]  The Bankruptcy Code contains no specific provision for either a forensic audit or initiation of criminal action against the promoters of the company by the RP ( Resolution Professional) if he finds that funds have been siphoned off or fraud committed. This provides them an undesirable immunity.

     The Code as it stands today is apparently intended to help the Banks recover their NPAs. It does not recognize the different character of the real estate sector and its notorious track record. It needs to be amended suitably to instil faith in the public. The Union Finance Minister has given some tepid assurances that the interest of the JayPee home buyers will be protected. It means little in the absence of specific enabling provisions in the Code. He needs to convert the standard rhetoric into appropriate legislation in Parliament.