W.P. (C) NO. 744 OF 2017
Relevant Terms Relating to the Judgment, for reference to understand
What is NCLT (National Company Law Tribunal?)
National Company Law Tribunal (NCLT) is a quasi-judicial structure to regulate and resolve civil corporate disputes. The higher forum where appeals from the Tribunal are dealt with, i.e. Appellate Tribunal is called the National Company Law Appellate Tribunal (NCLAT). The power to establish NCLT and NCLAT has been derived from Article 245 of the Constitution of India.
NCLT follows the Code of Civil Procedure and is subject to any rules formed by the Central Government. The jurisdiction of the tribunal includes the following:
- Class Action – This comes under Section 245 of the Indian Companies Act, which takes action against frauds and improprieties where the shareholders and depositors are the main victims. There has been a long chain of cheating where the companies registered under the law drain dry the investments and savings of their investors and shareholders. The Companies Act, 2013 has presented measures to effectively bring down the offenders by subjecting the guilty to punishment, wherein they ought to give compensations to the victims for the losses on account of the fraudulent practices.
- Refusal to transfer shares – Under Sections 58 and 59, if a company refuses to register a transfer or does any malpractices leading to dissatisfactory of the transferor or transferee, the latter is entitled to appeal to the National Company Law Tribunal, after a period of two months.
- Oppression and Management – A member can file an application for past and present instances of oppression and mismanagement. Thus it sets forth remedies for any member or ex-member of a company or Central Government subjected to the crime under scrutiny.
- Reopening of accounts and Revision of Financial Statements – Company cannot suo moto open their accounts and revise their financial statements. NCLT has the authority to direct a particular company to reopen its accounts under certain given circumstances.
- Deregistration of Companies – The Tribunal can deregister or dissolve companies that are found to have attained ‘registered’ status through illegal and wrongful manner. In essence, the procedural errors of registration of companies can be investigated or questioned by the Tribunal, if found suspicious. Also, the court can declare the liability of members unlimited.
- Deposits – Deposits under the Companies Act, 2013 include any receipt of money in the form of a loan or deposit in any other form by a company. Deposit Rules, with regard to the Tribunal, provide aggrieved depositors with the remedy of class actions so that they can seek justice for the omissions of the companies which hurt their depositor rights.
- Power to Investigate – The Tribunal can authorize an investigation into the affairs of any company if or when an application is filed against the particular company by 100 members. The investigation can be extended to the ownership of companies. Also, if a person outside the company is able to provide conditions acceptable to NCLT, the latter holds the power to authorize an investigation. The court can in course of action freeze company assets under given conditions and place restriction orders on securities, unlike before.
- Conversion of Public company to Private Company – the Tribunal has a say in the conversion of public companies to private companies. Further, NCLT can impose certain terms and restrictions or grand approval along with certain conditions.
- Tribunal convened General Meetings – Annual general meetings (AGM) or Extraordinary general meetings (EOGM) are to be held to revise the opinions of shareholders and provide a general outline of the company workings. These meetings ought to follow procedures provided under the Companies Act, 2013. If for some extraordinary reasons the AGM or EOGM cannot be called, the Tribunal under the provisions of Sections 97 and 98 is empowered to convene a general meeting.
- Financial Year – NCLT exercises power to change the financial year of companies registered in India. As per the rules laid down by the Tribunal, the companies in existence should have a uniform financial year ending on 31st of March.
What is Insolvency and Bankruptcy Code, 2016?
The Insolvency and Bankruptcy Code, 2016 is a bankruptcy law in India which aims at providing speedy resolution process to the Creditors for recovery of their money due from the debtors.
It was introduced in the Lok Sabha (Lower House of the Indian Parliament) in 2015 and received Presidential assent in 2016.
In layman terms, what happens in an insolvency resolution process is:
- A notice is sent to the debtor mentioning the dues to be recovered him with a period of 10 days to pay the money or agree to a settlement.
- If there is no reply from the debtor, an application is made by the creditor to the tribunal for initiation of insolvency process.
- If the tribunal finds that the dues are legit and the debtor is deferring or not intended to make the payment, then within 14days the matter is admitted by the tribunal and a Insolvency Resolution Professional (IRP) is appointed who takes charge of the Debtor Company Assets, making the company non operational.
- The IRP has to submit a plan to the Tribunal which would lay down a detailed plan to finish the Process within 180days (in case of companies) which can be extended by mutual consent of parties.
- If the resolution plan is accepted by the Creditors and a go ahead is given by the Tribunal, then
- It is worked out by the Debtor Company and the Creditors to try and clear the dues.
- If the resolution plan is not accepted by the parties, the Tribunal may pass and order for Liquidation of the Company and pay off the Creditor Dues.
Authorities/Boards to Monitor functioning of the Insolvency Code
The Code has set up various entities to monitor the smooth functioning of the code. They are as follows:
- Insolvency and Bankruptcy Board of India: Insolvency and Bankruptcy Board of India is set up as a regulator to oversee functioning of entities created under the Code.
- Adjudicating Authorities (Tribunals): The Code proposes two adjudicating authorities:
- National Company Law Tribunal (NCLT): will adjudicate cases for companies and limited liability partnerships with it’s principal bench at New Delhi and other benches present at 10 different places. The NCLT has Appeals against its orders will be heard by the National Company Law Appellate Tribunal which is at New Delhi.
- Debt Recovery Tribunal (DRT): will adjudicate cases for individuals and partnership firms with 38 branches all over India and a new one coming up soon. Appeals against its orders will be heard by the Debt Recovery Appellate Tribunal which has 5 benches.
Background of the case
The Insolvency and Bankruptcy Code (IBC) is a comprehensive bankruptcy law with a specific legislative intent. The amendment brought about by the Ordinance promulgated in June 2018 brought the home buyers within the purview of financial creditors under the IBC (The Insolvency and Bankruptcy Code) and hence necessarily a part of the Council of Creditors (CoC). The case envisages the CIRP (Corporate Insolvency Resolution Process) that is initiated and the procedure of instituting a new resolution plan. The eligibility criteria of bidders and the process of asset disposal in the light of protecting the interests of home buyers are further conferred in the present case.
Facts of the case
The proceedings initiated under Article 32 of the Constitution for protecting the interests of home buyers in projects floated by Jaypee Infratech Limited (JIL). JIL (Jaypee Infratech Limited) is a special purpose vehicle created by its holding company, Jaiprakash Associates Limited (JAL) for the Yamuna Expressway Agreement for which the finance was obtained from a consortium of banks, IDBI Bank being the lead bank, against a partial mortgage of lands acquired in the NOIDA-Agra sector and a pledge of 51% of the shareholding held by JAL (Jaiprakash Associates Limited). A housing plan was envisaged for the construction of real estate projects in two locations of the land acquired. IDBI Bank Limited instituted a petition against JIL (Jaypee Infratech Limited) before the National Company Law Tribunal (NCLT) at its Bench at Allahabad seeking the initiation of a Corporate Insolvency Resolution Process (CIRP). A default of Rs. 526.11 crores in the repayment of dues by JIL (Jaypee Infratech Limited) was claimed by IDBI Bank.
NCLT (National Company Law Tribunal) initiated the CIRP (Corporate Insolvency Resolution Process) in respect of JIL (Jaypee Infratech Limited) and an order of moratorium was issued under Section 14. An (Interim Resolution Professional) IRP (Interim Resolution Professional) was appointed and submissions of claims by creditors were called for. On 16 August 2017, Regulation 9(a) was inserted to include claims by other creditors and a press note was released by the Board clarifying that home buyers could fill in Form-F as they could not be treated at par with financial and operational creditors.
The home buyers invested in residential projects, many by obtaining loans, proposed by JIL (Jaypee Infratech Limited) and JAL (Jaiprakash Associates Limited) Jaiprakash Associates Limited in the National Capital Region which was to be possessed within thirty to thirty-six months of the booking. Due to delay in handing over possession, numerous flat buyers filed consumer complaints before the State and National Consumer Disputes Redressal Commissions. In June 2017, RBI is stated to have published a list of the top 12 defaulters in the country including JIL (Jaypee Infratech Limited) which was declared to be in default of an amount approximately of Rs. 8,000 crores to its lenders.
When the petition was instituted, homebuyers had no locus standi in the CIRP (Corporate Insolvency Resolution Process). Because of liquidation, the disposal of assets would not redress their grievances. The Court issued a notice on 4 September 2017 for the proceedings before the NCLT (National Company Law Tribunal) at Allahabad to remain stayed against which IDBI Bank Limited filed an application for vacation. The Attorney General submitted before this Court that the order of stay would result in a consequence where the control of JIL (Jaypee Infratech Limited) would be restored to the erstwhile management affecting the rights of creditors and consumers as well. In the meantime, the IRP (Interim Resolution Professional) had handed over records to JIL (Jaypee Infratech Limited).
Court modified this order on 11 September 2017 and permitted the IRP (Interim Resolution Professional) to take over management of JIL (Jaypee Infratech Limited) and to proceed to formulate an interim resolution plan within a stipulated period. The IRP (Interim Resolution Professional) was directed to ensure that necessary provisions were made to protect the interests of the home buyer and a senior counsel was nominated by the court to participate in the meetings of CoC (Council of Creditors). JAL (Jaiprakash Associates Limited) as the holding company of JIL (Jaypee Infratech Limited) was directed to deposit a sum of Rs 2,000 crores on or before 27 October 2017. The mechanism evolved by the Court was intended to provide a representation of home buyers and to secure their interest as they were not even regarded as financial creditors in the CoC (Council of Creditors).
JAL (Jaiprakash Associates Limited) sought vacation of the direction for the deposit of Rs 2,000 crores or for a modification that would enable JAL (Jaiprakash Associates Limited) to transfer its rights under a concession agreement in respect of the Yamuna Expressway but the Court declined to modify the direction.
The court appointed amicus curiae who were to open a web portal on which details of the home buyers would be uploaded with a separate portal for home buyers of JAL (Jaiprakash Associates Limited). It was informed to the Court after gathering information from the portal that an amount of Rs 1300 crores was required to be refunded by way of principal alone to the home buyers who were seeking refunds, which according to JAL (Jaiprakash Associates Limited) was 8% of the homebuyers, rest seeking possession of flats.
To redress the grievance of home buyers, a direction was issued by the Court restraining the developer from raising demands towards outstanding or future instalments in respect of those flat buyers who had expressed a desire to obtain refunds.
The Court allowed JAL’s (Jaiprakash Associates Limited) request to submit a representation to the IRP (Interim Resolution Professional) as one of the intending bidders in the resolution plan. JAL (Jaiprakash Associates Limited) also proposed the Court to permit it to alienate specific assets to secure compliance with the interim directions of this Court for the deposit of Rs 2,000 crores which were not met with despite numerous directions; however, it was gravely opposed by the other party.
In the case of JIL (Jaypee Infratech Limited), the period for completing the CIRP (Corporate Insolvency Resolution Process) was extended by 90 days to end on 12 May 2018. During the process, the IRP (Interim Resolution Professional) invited expressions of interest specifying that the IRP (Interim Resolution Professional) must protect the interests of home buyers and provide for expeditious completion of the work of construction. JAL (Jaiprakash Associates Limited) submitted a resolution plan too which was found to be ineligible because of the bar contained in Section 29 A of the IBC (Insolvency and Bankruptcy Code, 2016). Out of rest nine, five were inconsistent and a discussion took place with four resolution applicants. The CoC (Council of Creditors) decided to shortlist the resolution plan of Lakshdeep investments & Finance Pvt. Ltd. along with Sh. Sudhir Valia and relatives (Lakshdeep) for negotiation. Meanwhile, JAL (Jaiprakash Associates Limited) submitted a representation which was rejected as a result of the statutory bar contained in Section 29A and its failure to convince the CoC (Council of Creditors) of its ability to tie up funds for construction. The resolution plan of Lakshdeep was put for voting but only 6 % of the votes cast were in favour of it, as against a three-fourth majority requirement which was then needed under Section 30 (4). Accordingly, the IRP (Interim Resolution Professional) informed the NCLT (National Company Law Tribunal) that no resolution plan was approved by the CoC (Council of Creditors) within a period of 270 days which came to an end on 12 May 2018.
Statute and provisions invoked and/or discussed
Section 21- (Insolvency and Bankruptcy Code, 2016)
Section 29A – (Insolvency and Bankruptcy Code, 2016)
Should the Corporate Insolvency Resolution Process be initiated against the Respondent in the present case in light of protecting the interests of the homebuyers?
CONTENTIONS OF PETITIONER
The homebuyers contended that not being protected by IBC (Insolvency and Bankruptcy Code, 2016), the rights conferred upon them by special enactments including the Consumer Protection Act 1986 and by RERA (Real Estate Regulatory Authority) could not be divested. Suspension of the right to seek redressal before an adjudicatory forum under Section 14(1) (a) would leave the home buyers without a remedy as Section 238 of the IBC (Insolvency and Bankruptcy Code, 2016) gives it an overriding effect over other laws in existence.
CONTENTIONS OF RESPONDENT
On behalf of IRP (Interim Resolution Professional)
When asking for a vacation of direction to deposit Rs. 2,000 crores by JAL (Jaiprakash Associates Limited), the counsel for IRP (Interim Resolution Professional) drew the Court’s attention to the fact that the rights under the concession agreement belong to JIL (Jaypee Infratech Limited) which was subject to proceedings under the IBC (Insolvency and Bankruptcy Code, 2016) as a result of which such a request for alienation could not be permitted.
On behalf of JIL (Jaypee Infratech Limited) /JAL (Jaiprakash Associates Limited)
JAL (Jaiprakash Associates Limited) has sought to assure that it would double the strength of existing workers for the construction of its projects as possession is left to be provided to 21,532 home buyers. JAL (Jaiprakash Associates Limited) sought permission to dispose-off certain assets to deposit post-dated cheques of Rs 600 crores with the Registry of this Court. JAL (Jaiprakash Associates Limited) seeks to continue the stay of liquidation proceedings against this deposit and on the direction of this Court allowing the IRP (Interim Resolution Professional) to remain in management.
The project should not be stopped midway and the role as developers of JAL (Jaiprakash Associates Limited) should not be discounted, to protect the interests of the remaining 21,532 buyers who await possession. Their rights are preserved under the Real Estate (Regulation and Development) Act 2016. It has been submitted that an independent committee of experts should be constituted by this Court to evaluate the financial capability of JAL (Jaiprakash Associates Limited) /JIL (Jaypee Infratech Limited) to continue executing the ongoing projects.
The Corporate Insolvency Resolution Process should be revived and Council of Creditors reconstituted as per the amended provisions to include the home buyers. The IRP (Interim Resolution Professional) is permitted to invite fresh expression of interest for submission of resolution plans and the Court disallowed JIL (Jaypee Infratech Limited) /JAL (Jaiprakash Associates Limited) to participate in the CIRP (Corporate Insolvency Resolution Process). Recourse to the power under Article 142 is allowed at the present stage for the limited purpose of recommencing the resolution process afresh from the stage of appointment of IRP (Interim Resolution Professional) by extending the period which has been prescribed for the completion of the resolution process. The Court held that it would not be appropriate for the Court to appoint a Committee outside the IBC (Insolvency and Bankruptcy Code, 2016) to oversee the CIRP (Corporate Insolvency Resolution Process) and assume the task of supervising the work of the Committee.
This Article is Written by Mr. Keval Tachak, Final Year Student of KES College of Law, Mumbai University.
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