Pin­ing for home

Some builders in Noida and Greater Noida go for in­sol­vency, leav­ing thou­sands in the lurch. The trou­ble is that the law does not give much say to home buy­ers

Governance Now - - CONTENTS - RK Gupta

Some builders in Noida and Greater Noida go for in­sol­vency, leav­ing thou­sands in the lurch. Who will pro­tect home buy­ers?

Jaypee group, con­sid­ered a safe, sta­ble and promis­ing busi­ness group, for­ayed into real es­tate by of­fer­ing lux­ury hous­ing at Jaypee greens golf course, and then ven­tured into large hous­ing projects, cater­ing to the needs of dif­fer­ent seg­ments, in Noida and greater noida, which forms part of the na­tional cap­i­tal re­gion.

Jaypee group had en­tered into an agree­ment with the ut­tar Pradesh gov­ern­ment for the Ya­muna ex­press­way project and in lieu of that a sig­nif­i­cant piece of land was al­lot­ted on lease by the noida author­ity to Jaiprakash in­dus­tries lim­ited, now known as Jaiprakash As­so­ciates lim­ited (JAL), for res­i­den­tial and com­mer­cial de­vel­op­ment along the noida-greater noida ex­press­way.

From the avail­able doc­u­ments, it is no­ticed that Jaypee group formed Jaypee in­frat­ech lim­ited (Jil) on April 5, 2007, by virtue of which cer­tain rights of ma­jor­ity of its lease­hold land con­ferred upon JAL were as­signed in favour of Jil by ex­e­cut­ing sev­eral

as­sign­ments deeds.

JAL of­fered book­ing of flats on this land and pay­ments were col­lected by Jil on the in­struc­tions of JAL, as per al­lot­ment let­ters/de­mand let­ters. The let­ter of al­lot­ment was is­sued on JAL let­ter­head and coun­ter­signed by Jil with­out dis­clos­ing or spec­i­fy­ing any con­trac­tual re­la­tion­ship. in terms of the let­ter of al­lot­ment/de­mand let­ters, buy­ers made pay­ments in good faith con­sid­er­ing that a re­puted busi­ness house was of­fer­ing the flats and banks were fi­nanc­ing the same. Ini­tially, project de­vel­op­ment work was be­ing car­ried out ex­pe­di­tiously. it, how­ever, slowed down from 2014, when 70-95% pay­ment had been made by cus­tomers.

The rea­son for the de­lay in hand­ing over flats was jus­ti­fied by JAL, say­ing it was due to the on­go­ing re­ces­sion in the real es­tate mar­ket. But they as­sured that the flats would be de­liv­ered soon and buy­ers had no rea­son to doubt it as con­struc­tion work was still be­ing car­ried out.

How­ever, Au­gust 9, 2017, was a dark day in the in­dian real es­tate sec­tor’s his­tory, specif­i­cally for Jaypee Group in­vestors, as the na­tional com­pany law Tri­bunal (nclt) Al­la­habad’s in­sol­vency or­der was ob­tained by idbi Bank, with the con­sent of Jil man­age­ment, for recovery of its de­faulted loan amount of ₹5,26,11,40,827.

Anuj Jain was ap­pointed the in­terim res­o­lu­tion pro­fes­sional (irp). The in­sol­vency or­der re­sulted in sus­pen­sion of the Jil board and all pend­ing le­gal cases/suit and barred fil­ing of any new suit against Jil dur­ing the mora­to­rium pe­riod of nine months com­menc­ing from Au­gust 9.

The in­sol­vency and Bankruptcy Code (IBC) came into ef­fect in 2016 and, in my opin­ion, the Jil in­sol­vency or­der is the first or­der that has been ob­tained by con­sent, i.e., un­con­tested by Jil, af­fect­ing the rights of more than 25,00030,000 home­buy­ers.

it is also learnt that the or­ders on three en­ti­ties of Am­ra­pali group – ul­tra-home con­struc­tions, Am­ra­pali in­fras­truc­tures, and Am­ra­pali sil­i­con city – were re­served by nclt, new delhi, on Au­gust 10, 2017 on pe­ti­tions filed by Bank of Bar­oda.

The or­der on the three com­pa­nies of the Am­ra­pali group would de­cide the fate of an­other about 40,000-50,000 buy­ers, forc­ing the gov­ern­ment to think and make nec­es­sary amend­ments in the ibc with re­gard to the real es­tate sec­tor.

Though the 2016 code is a land­mark step to­wards pro­vid­ing an um­brella leg­is­la­tion for the laws re­lat­ing to bankruptcy and in­sol­vency res­o­lu­tion con­cern­ing both in­di­vid­u­als/firms and cor­po­rate en­ti­ties, none­the­less this com­plex leg­is­la­tion has var­i­ous prac­ti­cal, lo­gis­ti­cal and le­gal hur­dles.

it ap­pears that while draft­ing ibc, 2016, the leg­is­la­ture con­tem­plated the in­ter­est and safety of fi­nan­cial cred­i­tors and op­er­a­tional cred­i­tors, but in­ad­ver­tently failed to con­tem­plate and con­sider the pe­cu­liar na­ture of the real es­tate in­dus­try and the home buy­ers who pay in ad­vance for pur­chase of their res­i­den­tial flats and com­mer­cial prop­er­ties un­der bonafide be­lief and trust that the builder shall de­liver the same within the spec­i­fied time. To put it sim­ply, the home buyer is ex­cluded from the res­o­lu­tion process as the ibc does not recog­nise him as a cred­i­tor.

The de­vel­oper raised loan for de­vel­op­ment of flats when the en­tire project was funded by the home buy­ers them­selves. The golden rule of this in­dus­try is that the in­ven­tory is sold in ad­vance and funded by the cus­tomer ei­ther on down-pay­ment plan (DPP) where 90-95% is paid on al­lot­ment or con­struc­tion-linked pay­ment plan (clpp) where 30-40% is paid on al­lot­ment and the rest is paid as per clpp. Thus, home buy­ers are fund­ing the en­tire project de­vel­op­ment and this is the rea­son that they pay ‘ser­vice tax’ on the amount paid to the builder as it amounts to ser­vice availed by them.

Thus, the de­vel­oper is re­ceiv­ing funds from the cus­tomers as well as from the banks on the same as­set. does it not amount to ‘dou­ble fi­nanc­ing of a sin­gle as­set’, i.e., against the same piece of land?

There is no dis­clo­sure by JAL or Jil to its buy­ers about the mortgage of the land where­upon flats have al­ready been al­lot­ted to the buy­ers and per­haps to home loan grant­ing agen­cies.

it is star­tling why the noida author­ity granted no ob­jec­tion cer­tifi­cate (noc) to builders for mort­gag­ing the as­set to bankers, which al­ready be­longs to the buy­ers.

JAL sold flats/plots from 2008-09 to 2014-15 and from the mas­ter data drawn from the min­istry of cor­po­rate

The de­vel­oper re­ceives funds from the cus­tomers as well as from the banks on the same as­set. Does it not amount to ‘dou­ble fi­nanc­ing of a sin­gle as­set’, i.e., against the same piece of land?

af­fairs web­site, it is ob­served that loans taken by Jil from banks in 2008 and 2009 stand re­paid.

The loans out­stand­ing as on date re­late to the pe­riod from novem­ber 24, 2011, till march 7, 2017. This clearly shows that Jil cre­ated mortgage of the same land on which flats are be­ing sold to home buy­ers who pur­chased un­der de­vel­op­ment stage.

As per the au­dited fi­nan­cial state­ment (AFS), as on march 31, 2016, the to­tal as­set base was ₹18,301.15 crore, out of which Jil has in­vested ₹10,062.17 crore at the Ya­muna ex­press­way. Jil has also in­vested in share­hold­ing of Jaypee Health­care lim­ited by in­vest­ing ₹427.50 crore.

The AFS shows that the paid-up share cap­i­tal of Jil is ₹1,388.93 crore, and bank loans are ₹8,212.90 crore, to­gether amount­ing to ₹9,601.83 crore, to fund in­tan­gi­ble as­set, i.e., Ya­muna ex­press­way hav­ing its book value at ₹10,062.17 crore.

These fig­ures prove that the orig­i­nal loan was taken for con­struc­tion of the Ya­muna ex­press­way by Jil and ad­di­tional loans taken for this pur­pose were se­cured by mort­gag­ing the land that be­longed to the flat buy­ers who had paid money for pur­chase of their flats with pro­por­tion­ate right in that land, with­out the knowl­edge and con­sent of the flat buy­ers.

The money re­ceived by Jil from flat buy­ers was de­posited in the bank ac­count of Jil and, there­fore, it is in the knowl­edge of lend­ing banks that the land so mort­gaged to them be­longs to the flat buy­ers, as the money from such flat buy­ers was de­posited in the bank ac­count of the lend­ing banks of Jil it­self.

The Ya­muna ex­press­way project was not a profit-mak­ing propo­si­tion. How­ever, prof­its were made from the sale of land on which flats were booked by the flat buy­ers. If it is pre­sumed that Jil paid in­ter­est to its bankers for fund­ing Ya­muna ex­press­way project at the rate of 12% per an­num in 2009-10, the bankers have earned in­ter­est at least equal to their loan amount.

idbi Bank, hav­ing known all these facts, filed its pe­ti­tion for in­sol­vency of Jil in nclt for recovery of their dues from the mort­gaged land that be­longs to the flat buy­ers and it is also sur­pris­ing how Jil con­sented for its in­sol­vency or­der. it comes to my mind that since as­sets be­long­ing to the flat buy­ers were at stake, Jil con­sented for the in­sol­vency or­der. How­ever, is it not true that the ac­tion of idbi Bank it­self has put thou­sands of cus­tomers in a dif­fi­cult po­si­tion?

The flat buy­ers are not recog­nised as cred­i­tors un­der ibc, 2016 and, there­fore, they can­not be a part of the com­mit­tee of cred­i­tors to con­sent or dis­sent for res­o­lu­tion process un­der ibc, 2016 to be car­ried out in a pe­riod of six to nine months un­der the man­age­ment of irp.

is it not cor­rect that the fate of home buy­ers is left in the hands of par­ties who ob­tained con­sented in­sol­vency or­der to de­cide the pay­ment of bank dues from as­sets be­long­ing to home buy­ers? The an­swer in my opin­ion would be ‘Yes’. Per­haps this in­sol­vency or­der is the first un­con­tested or­der un­der IBC.

The need of the hour is that the home buyer should be in­cor­po­rated as pref­er­en­tial cred­i­tor un­der ibc, and should be part of the cred­i­tors com­mit­tee by mak­ing the de­sired amend­ment in the ibc, so that the home buy­ers can de­cide some strin­gent ac­tion against the builder, if re­quired, or are part of the fu­ture course of ac­tion to de­cide the fate of their own money.

un­for­tu­nately, if some­thing goes wrong dur­ing res­o­lu­tion process and Jil is pushed into liq­ui­da­tion, then the recovery of the amount paid by the flat buy­ers may re­main a dream.

There­fore, to bring ibc in con­so­nance with its ob­ject of be­ing “ad­e­quate, ef­fec­tive” and for “speedy res­o­lu­tion of dis­putes”, it is es­sen­tial that the most ef­fected party, the flat buyer, is not left at the whims and fan­cies of oth­ers and be given pri­or­ity in the hier­ar­chy of pay­ment, by mak­ing im­me­di­ate nec­es­sary amend­ments.

Is it not cor­rect that the fate of home buy­ers is left in the hands of par­ties who ob­tained con­sented in­sol­vency or­der to de­cide the pay­ment of bank dues from as­sets be­long­ing to home buy­ers?

Pho­tos: arun KU­MAR

Flat buy­ers in Jaypee Group projects are dis­traught

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