Govt plans changes to insolvency law; homebuyers likely to benefit

The central government plans changes to the insolvency law by promulgation of an ordinance, say sources. A draft note circulated to various stakeholders says it is looking at making homebuyers akin to financial creditors in legal rights. Business Standard has reviewed the note. A draft Cabinet note to that effect has been issued for ministerial consultation. Earlier, this was a recommendation of the insolvency law committee. It had also suggested, and sources say the government is now considering whether to make the Section 29A clause in the insolvency law less stringent; it lists entities barred from bidding for companies under insolvency.

The idea is to limit the prohibition to those directly involved with the company. Financial firms will not be treated as a related party. Earlier, via ordinance, the government had barred promoters with non-performing assets of more than a year, wilful defaulters and anyone associated with them from presenting a resolution plan during insolvency proceedings. This was to ensure promoters of companies undergoing insolvency resolution did not regain control. The planned ordinance is also, it appears, to add a separate framework for micro, small and medium sized enterprises (MSMEs). Estimates suggest around around 70 per cent of all companies are in these categories.

A suggestion of the committee set up to consider changes in the Insolvency and Bankruptcy Code (the government is currently not considering this) was to withdraw the Fast Track Insolvency provision in the Act. It had said this did not serve the purpose of simplification of the process for small debtors. The provisions in this regard were notified with the intention of helping start-ups find a smooth exit. Fast-track resolution reduces by half the number of days allowed for a resolution plan. 

Also, the panel had recommended that the committee of creditors of a company decide whether an application for insolvency resolution can be withdrawn after being admitted by the National Company Law Tribunal.