Amending IBC: Need clarity how home buyers will be protected, says expert

Experts share views on legal challenges the recommendations of the Insolvency Law Committee may face

Need clarity how home buyers will be protected

The recommendations of the Insolvency Law Committee appointed by the Ministry of Corporate Affairs if accepted will give a fresh boost to the Insolvency and Bankruptcy Code 2016.  

In many of the companies where the Corporate Insolvency Resolution Process (CIRP) has been initiated, liquidation process has also started. The Code which was brought for the purpose of giving a restructuring option to the debt-ridden companies has instead opened the floodgates of liquidation for one reason or other. The recommendations will give hope to at least those companies which can still manage to survive even if less than 75 per cent members of the committee of creditors (CoC) agree on the resolution process.  

Manoj K Singh. Founding partner, Singh & Associates

 

The committee has recommended that to further the object of the Code, the consent of 66 per cent or more financial creditors would be required for approval of the resolution and other critical decisions, like the extension of the CIRP beyond 180 days, and replacement or appointment of resolution professionals (RPs). For routine decisions, the consent of 51 per cent or more financial creditors would be required.

All eyes are also on the issues as to how the committee will take care of the fate of the home buyers and the extended bar of Section 29A or the strict definition of related parties. The committee has recommended that amount paid by the home buyers to the real estate companies will get covered under the definition of financial debt. Accordingly, home buyers will be part of the CoC. Similarly, they will also be considered during the liquidation waterfall given under Section 53 of the Code. The committee has recommended that as the number of home buyers as a category financial creditor would be large, they would be represented through a nominee or the NCLT could appoint a resolution professional who will represent them in the CoC. One has to wait and watch how the interest of home buyers will be protected even if they are made part of CoC. 

The financial lenders, like banks, may even take the chance of haircut in the total outstanding. But it remains to be seen if the home buyer would pass such resolution plan considering that they have invested their money. 

The recommendations with respect to relaxation of the provisions of Section 29A or the definition of the related party or connected persons are a welcome move. Due to these provisions, several big corporate giants have barred from submitting a resolution plan. In one case a genuine financial creditor was kept out of the CoC as in the past it had taken the equity stake of a corporate debtor under the CIRP under the restructuring plan of the RBI.

Manoj K Singh

Founding partner, Singh & Associates

Monitor abuse of proposed relaxations by promoters

The Insolvency Law Committee has given a comprehensive and holistic report paving the way for important legislative changes in the Insolvency and Bankruptcy Code. However, legal challenges cannot be ruled out even in respect of the changes proposed with the best intentions. 

The committee has recommended that certain provisions of the IBC which prohibit the participation of promoter in the resolution process should not be applicable to micro, small & medium enterprises. Such discrimination or relaxation as proposed may be challenged by large corporates on issues of parity and equity.

A large number of unintended exclusions exist in view of current provisions as contained in Section 29 A, which disqualifies certain category of bidders. The committee has proposed to rationalise the same to encourage and widen the pool of resolution applicants and participation in the resolution process to maximise value. Exemptions are also proposed for financial entities, like banks, that hold the equity of the company under the insolvency process, on account of previous schemes introduced by the regulators. However, the abuse of the relaxations to the existing promoters cannot be ruled out. The situation where promoters are able to bring in white knights to front them and also where vehicles are used by them to control their interest is something which will always be required to be monitored closely.

Rajesh Narain Gupta. Managing partner, SNG & Partners

The committee recommends that home buyers should be treated as financial creditors. It also recommends that the resolution plan must be in compliance with the Real Estate (Regulation and Development) Act, 2016. In view of various alternative remedies available to the home buyer, including approaching the Real Estate Regulatory Authority, it is debatable whether the home buyer should be included in the IBC process. The committee proposes to allow one-year time to obtain necessary statutory clearances from central, state and other authorities or such time as specified in the relevant law. One is not clear what would be the fate if such clearances are not given.

Certain important issues have not been taken up by the committee. As per the current guidelines, only an individual can be appointed as the Insolvency Professional (IP). It is high time, in addition to individual IPs, the IP entities who have qualified professionals and are duly recognised under the Code, are permitted to be appointed to run the mandate. This will check back-door entries and speed up the resolution process.

Further, there is no mechanism to check whether the firms engaged by the IP, with the consent of committee of creditors, have some conflict of interest due to the previous engagement with the promoter or the company. This may lead to potential dispute, subsequently raised by the promoter or the company, before judicial fora.

Rajesh Narain Gupta
Managing partner, SNG & Partners