Should SC Have Stayed Insolvency Case Against Jaypee? Answer is No – And Yes

Did the Supreme Court do the right thing by staying the insolvency proceedings against Jaypee Infratech in a petition filed by home buyers who have preferred claims against the company?

The answer is no – and yes. The whole point of legislating an Insolvency and Bankruptcy Code is to speed up the process of resolving bad debts, where creditors can seek to recover the assets that are still salvageable, and distribute the net proceeds among themselves, workers, and unsecured creditors. If the courts start intervening at the drop of a hat – which means months of proceedings at the National Company Law Tribunal (NCLT) will now face interruptions by courts – the 180-day deadline for resolving dues will invariably stretch beyond reasonable limit. The courts must thus restrain themselves, if the IBC is to work.

However, in this specific case, the Supreme Court’s intervention is probably the result of a gap in protection for home buyers, who are essentially unsecured creditors to builders till they get possession of their homes. As an Economic Times editorial points out, the Real Estate Regulation and Development Act (RERA) allows buyers to claim compensation from the builder if the home is either not delivered, or delivered late. But it does not say what will happen if the builder is taken to the NCLT for insolvency, which is the case with Jaypee.

Jaypee Infratech was taken to the bankruptcy court (ie, NCLT) by IDBI Bank for defaulting on a Rs 526 crore loan. The Allahabad bench of the NCLT, after hearing all, decided that Jaypee be declared insolvent.

This posed a problem for home buyers, who had sought remedies from the builder from various consumer courts. The Supreme Court stay on the NCLT order declaring Jaypee insolvent thus means that these consumer court cases can continue.

The problem in the case of home buyers is that they are supposed to be protected by RERA, which has no clause dealing with an issue like insolvency of the builder. Even though buyers can get some compensation even in insolvency proceedings, the hierarchy of entitlement will probably put them lower down the pecking order than secured creditors, and possibly employees of the firm declared insolvent.

The Supreme Court’s intervention is warranted in this specific case, since there is a gap between the insolvency law and what is intended under RERA. The government needs to amend the law to make the entitlement hierarchy clearer in the case of retail home buyers.