Insolvency Code needs a few tweaks

The Supreme Court’s decision to stay the order passed by the Allahabad Bench of the National Company Law Tribunal (NCLT), which initiated insolvency proceedings against Jaypee Infratech, has come in for some sharp criticism. Even senior officials in the corridors of power say that the decision would only help in derailing the insolvency process, as some of the big bad boys in India Inc would take advantage of the ruling by the country’s apex court to delay efforts to oust them from their companies. 

Such criticism is unwarranted. For one, the ruling will not affect other insolvency cases, as the Jaypee Infratech case is unique in nature. The Supreme Court was hearing a case that dealt exclusively with homebuyers. It’s a fact that under the Insolvency and Bankruptcy Code of India (IBC), 2016, lenders to builders are ranked above unsecured creditors such as homebuyers. In any case, the IBC is not a consumer-protection law, and while it gives representation to all types of creditors in the resolution proceedings of a company, it doesn’t recognise homebuyers as creditors.

While writing the IBC, its authors perhaps never thought that such a case involving thousands of homebuyers would ever come up before the NCLT. This is a glaring omission and the government would be well advised to bring in amendments to the IBC on an urgent basis so that homebuyers do not lose out to banks and financial institutions when a defaulting builder’s properties are liquidated and debts settled.

What makes it worse for homebuyers is that the insolvency resolution process (IRP) puts a moratorium on fresh suits, recoveries, etc, leaving them with simply no remedy once a real estate company is admitted for insolvency. Admittedly, the job is a tricky one as the amendments would have to evenly meet the interests of both homebuyers and financial creditors, without harming the interests of either party. That’s because banks will not lend to real estate if their right to recover money is affected. After all, they are in the business of mortgaging — a point the Supreme Court missed while observing that banks need not be so selfish. 

On the other hand, one has to also agree with the court when it says that thousands of homebuyers, many of whom have already paid 95 per cent of the price as demanded by Jaypee Infratech as early as 2011-12, can’t be left in the lurch. It can’t be anybody’s case that public interest should be ignored. One tends to agree with the public interest litigation which said that when the assets will be liquidated, flat buyers will virtually get peanuts since secured creditors will be safeguarded first in the insolvency proceedings.  

There have been suggestions that if changes in Section 9 of the Code take time, the other option before the government is to elevate homebuyers to a new category of trustees just through a notification so that their interests are protected.

It’s unclear, however, what the apex court is trying to achieve by asking Jaiprakash Associates to deposit Rs 2,000 crore by October 27 this year. Apart from the fact that it’s too little as the homebuyers’ money at stake is much more – around Rs 25,000 crore – will the court order detention of the promoters if they fail to pay up, just as it did in the case of Sahara’s Subrata Roy? The case of the latter is dragging on for years without any viable solution in sight. But that’s another story.

It’s a good signal that the Insolvency and Bankruptcy Board of India is open to the idea of tweaking the law. That is evident from its decision to ask for public comments on the bankruptcy code. There is no doubt that the IBC is a significant step forward from the earlier regime, which had a series of overlapping regulations under which lenders, company promoters and other creditors could initiate competing proceedings in different forums and regions.

But beyond the Jaypee Infratech case, there are other areas as well where the IBC needs to improve. For example, the Code should specifically provide that the promoters of companies, which have entered the insolvency process, are not allowed to bid for them. If lenders have not been able to convince them to repay debts and make their companies solvent for so long, it’s patently unfair to allow them an opportunity to regain control at bargain prices. Lenders should not be the only ones to lose out. A case in point could be the Ruias who are reported to be dead set against giving up ownership of their steel business and are interested in bidding for Essar Steel, which has entered the bankruptcy process. Also, the Code should give an opportunity for borrowers to get a fair hearing before any matters are admitted to tribunals empowered to rule on these cases.

The other area to look at is to prevent recurrence of cases such as Synergies Dooray Automotive, which was earlier seen as the first success case of debt recast under the insolvency code. The case is now embroiled in a major controversy after allegations of related party transaction executed through a complicated transaction. The matter is now before the tribunal.

These are early days for the Insolvency Code and a few amendments are necessary to make the significant experiment a success and improve the credibility of the entire process.