IBC proceedings: Why homebuyers are in a bind over voting rights

Why is there confusion over voting rights of homebuyers?

While a recent amendment in the Insolvency and Bankruptcy Code gave homebuyers in a real estate project undergoing insolvency proceedings the status of financial creditors, the rules stipulate that only those who file claims have voting power in the Committee of Creditors (CoC). The amendment gave a voice to homebuyers in the CoC through the appointment of insolvency professional (IP) who takes care of their interests. However, the IP representing homebuyers does not have the right to vote on their behalf.

Some legal experts feel that there are contradictions within the circular issued by the regulator, the Insolvency and Bankruptcy Board of India (IBBI). The amendments state that all financial creditors who file claims and who are creditors in the books of the company should be made members of the CoC. But the circular, legal experts point out, says only those creditors who file claims will have voting rights. “This is a contradiction. If the claim of a creditor is admitted in books, then how can it be ignored and the creditor not included in the CoC, and voting share not assigned?,” asks an insolvency expert who closely tracks the IBC proceedings.

According to Alka Kapoor, chief executive officer, ICSI Institute of Insolvency Professionals, the confusion is with respect to voting by a class of creditors, who are in huge numbers. There are questions pertaining to those who have not submitted their claim or have not given voting instruction to their authorised representative, she adds. However, legal experts continue to be divided over the issue. Alok Dhir, managing partner, Dhir & Dhir Associates, says that there is no confusion over voting rights of homebuyers. “A proper procedure has been formulated under the IBC and the regulations framed to regulate the voting by homebuyers,” he says.

Why is it important for homebuyers to file claims to be able to vote?

The regulations require a creditor to submit a claim with proof before the last date mentioned in the public announcement. The creditors committee is constituted based on the claims received and after determination of the financial position of the corporate debtor. “The submission of claims is important for being the member of Committee of Creditors,” says Kapoor. A homebuyer must file his/her claim and it must be admitted by the IP, otherwise, he/she will not be treated as a financial creditor and his/her vote will not count in the CoC when a decision on any relevant issue is taken, says Dhir.

When any homebuyer abstains from voting, it is treated as a negative vote. Why?

Regulations define ‘dissenting financial creditors’ as those who vote against the Resolution Plan or abstain from the voting for the Resolution Plan approved by the committee. As a result, a member who abstains from voting would mean that he/she did not vote in favour of any particular agenda item, say experts. This generally means that the member has not cast a positive vote in favour of the item on the agenda and as such would be treated as a negative vote, says Dhir.

What changes in law are required to sort out the issue?

Dhir is of the view that the only way forward is to follow the procedures laid out in the regulations and there is no need for any change.

But most stakeholders do not agree with this. Many IBC practitioners feel the regulator should make the process of dealing with homebuyers less cumbersome. 

“It is not a practical approach to expect thousands of homebuyers to be aware of the procedure. The regulations should be tweaked to give voting power to the IP representing homebuyers,” said an Insolvency Professional. For instance, Section 30(4) of the Code mandates approval of resolution plan by a vote of note less than 66 per cent of the voting share of financial creditors. “This section needs a re-look,” says Kapoor. The 66 per cent mandate as required in the Code for approval of resolution plan should be of those who have voted for the plan, and not of the entire clan of creditors who have submitted claims, she adds.

Another key demand of many IBC experts is that creditors abstaining from voting should not be treated as negative votes. However, till the time the regulator clears the air, confusion is expected to prevail over the issue of voting rights of homebuyers under the IBC.