28 August, 2018
By utilising its powers under Article 142 of the Indian Constitution, the Supreme Court of India has delivered an unprecedented decision on August 09, 2018 in Chitra Sharma & Ors. v. Union of India and Ors[1]., and other connected matters (the Jaypee / homebuyers Case)[2]. In this era of evolving jurisprudence on the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court, by this landmark decision, has settled some highly debated issues with respect to its implementation and has provided much required certainty. This has been achieved by the Supreme Court paving the way to reset the clock by re-commencing the Corporate Insolvency Resolution Process (CIRP).
Background
The decision of the Supreme Court has come exactly one year after the Allahabad Bench of the National Company Law Tribunal, Allahabad (NCLT) admitted a petition filed by IDBI Bank Limited (IDBI Bank) under the IBC to initiate CIRP with respect to Jaypee Infratech Limited (JIL), upon the latter’s default in repayment of dues.[3] The NCLT vide its order August 09, 2017 commenced CIRP against JIL, whereby it imposed a moratorium which prohibited the institution or continuation of any suits or proceedings against JIL. In accordance with provisions of the IBC, an Interim Resolution Professional (IRP) was appointed.
Aggrieved by the NCLT’s Order, various homebuyers who had invested their money in numerous residential projects of JIL and its parent company Jaiprakash Associates Limited (JAL) came before the Supreme Court by way of multiple Writ Petitions and Special Leave Petitions. Their main grievance was that despite being vital stakeholders they had no locus in the CIRP, therefore the provisions of the IBC should be declared ultra vires.
They also wanted equal status as financial creditors as their claims were not covered under any of the provisions of the pre-amended IBC.
Sympathetic to the cause and interest of the homebuyers, the Supreme Court stayed the NCLT Order vide its order dated September 04, 2017 (Stay Order). However, upon an application filed by IDBI Bank, the Supreme Court was apprised of the unintended consequences of the Stay Order, the primary being the transfer of control of JIL to its promoters, who had already failed in delivering the flats and repayment of loans. Pursuant to this application, the Supreme Court vacated the stay and allowed the CIRP to continue and directed the IRP to take over the management of JIL.[4] It is interesting to note that this decision was taken even though Section 29A[5] had not even been contemplated, which was later added into the statute book to prevent persons who contributed to the default of the companies, to regain control of the corporate debtor. JAL was directed not to alienate any asset without permission of the Bench and to deposit a sum of Rs. 2000 crores before it.
Further, to ensure that homebuyers are protected, the Supreme Court nominated a senior counsel to represent the cause of the homebuyers in the Committee of Creditors (CoC). Later on, the Insolvency and Bankruptcy Board of India (IBBI) also introduced Form F for categories other than financial and operation creditors to file their claims.[6] The CIRP continued and by an order dated March 21, 2018, the Bench directed the Resolution Professional to finalise the Resolution Plan, but not to implement the same without leave of the Supreme Court.
Over the course of the proceedings, JAL made several applications before the Supreme Court such as seeking an extension of time to comply with the direction to deposit money before the Supreme Court, transferring concession agreements, alienating specific assets, and to participate as one of the intending bidders in the resolution plan that was being formulated by the IRP, etc. In the meantime, in light of JAL’s huge debts, the Reserve Bank of India (RBI) filed an application seeking the Supreme Court’s permission to initiate CIRP against it.
Several Resolution Applicants submitted Resolution Plans to the Resolution Professional for JIL, out of which four Resolution Plans that complied with the IBC were placed before the CoC for its consideration. Even JAL submitted a Resolution Plan, but, it was rejected in light of the statutory bar under Section 29A of the IBC. The CoC did not approve any of the Resolution Plans that were placed before it within the statutory time frame of 270 days. It is pertinent to note that shortly after expiry of the CIRP period for JIL, the IBC was amended by way of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018[7] (Ordinance) with effect from June 06, 2017.[8] The Ordinance included homebuyers as financial creditors under the IBC, which allows them to initiate CIRP and be a part of the CoC under Section 7 and Section 21 respectively.
Issue
As the possibility of liquidation of JIL[9] became real, a number of stakeholders made submissions before the Supreme Court that liquidation would not subserve the interest of any of the stakeholders, especially the homebuyers, and that CIRP should be extended so that new/revised resolution plans may be considered and the best plan approved. On the other hand, JAL requested the Supreme Court to hand over management of JIL to them as they were willing to construct flats. This was opposed by all stakeholders in view of JAL’s non-compliance with the Supreme Court’s order to deposit even Rs.2000 crores, as well as the statutory bar imposed under Section 29A of the IBC.
Decision
The Supreme Court in its judgement passed certain significant directions, in effect re-commencing the CIRP. In order to do justice to the interests of all the concerned stakeholders in the CIRP of JIL, and to prevent it from going into liquidation, the Supreme Court directed that the initial period of 180 days be revived with effect from August 09, 2018 (extendable by a further period of 90 days under the provisions of IBC, if required), and a new CoC be constituted in accordance with the amended provisions of the IBC to enforce the statutory status of the homebuyers as financial creditors.
The Supreme Court has also directed that the IRP would have the option of inviting fresh bids so that there is a wider field of choice provided to the CoC, and in this entire process JIL and JAL along with their promoters would remain ineligible to participate in the CIRP in light of the bar under Section 29A of the IBC. The Court also acceded to the request of the RBI to initiate CIRP against JAL in order to address the financial distress of JAL.
The money deposited by the JAL is to be transferred to NCLT to take an appropriate decision with regard to the same.
Supreme Court Reinforces Discipline of the IBC
The Supreme Court has given primacy to the IBC, and the processes and institutions under it. It has in unequivocal terms rejected JAL’s proposal in light of the bar under Section 29A of the IBC. The Supreme Court categorically observed that the provisions of Section 29A are intended to ensure that persons responsible for insolvency of the corporate debtor do not participate in the resolution process as their participation would undermine the salutary object and purpose of the IBC. The Supreme Court observed that the enactment of the IBC has created a paradigm shift in the way the entire CIRP is regulated and governed, which has led to change in the basic premise of a “debtor in possession” to a “creditor in possession”. The Jaypee Case has captured the essence of the Resolution as being a market driven one, wherein primacy is given to the commercial decisions.
The Supreme Court also noted that the IBC at its time of enactment did not capture and recognise the interests of the homebuyers, which have now been safeguarded by way of the Ordinance.
The Supreme Court while recognising the homebuyers as financial creditors, has left the question open as to whether the homebuyers are secured or unsecured creditors. An important aspect of the judgment is that the Supreme Court did not accede to payment of amounts deposited by the promoter to homebuyers on the ground that it would be a preferential payment to one class of creditors. The IBC is a legislative framework that is well-equipped to deal with the concerns of all stakeholders. Keeping that in mind, the Supreme Court has, in its wisdom, taken recourse to the discipline of the IBC and upheld the processes to be followed under it.
For further information, please contact:
L. Viswanathan, Partner, Cyril Amarchand Mangaldas
l.viswanathan@cyrilshroff.com
[1] W.P. (C) 744 of 2017.
[2] Judgment dated August 09, 2018 by Bench comprising of Hon’ble Mr .Chief Justice of India Dipak Misra, Hon’ble Mr. Justice D.Y. Chandrachud and Hon’ble Mr. Justice A.M. Khanwilkar in W.P.(C) 744 of 2017, also available at: https://www.sci.gov.in/supremecourt/2017/25878/25878_2017
[3] CP (IB) 77/ALB/2017.
[4] Order dated September 11, 2017 in W.P. (C) 744 of 2017.
[5] Inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2018, w.e.f. November 23, 2017.
[6] Vide notification no. IBBI/2017-18/GN/REG013 dated August 16, 2017, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Amendment Regulations, 2017 came into effect.
[7] As per the Ordinance, definition of “financial debt” under Section 5(8) has been amended to include amounts raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.
[8] Ordinance available at: http://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Jun/186195
[9] IBC envisages a period of 180 days (extendable by 90 days upon CoC approval) within which CIRP is required to be completed. Any failure in approval of the resolution plan within this time period, leads to liquidation of the corporate debtor as per Section 33 of the IBC.
