IBC amendment: Buyers may get limited rights to file insolvency against builders

Noida: After the Union Cabinet approved certain amendments to the Insolvency and Bankruptcy Code (IBC) 2016 on Wednesday, the Bill has been introduced in the Parliament for discussion to resolve and clarify certain issues which have arisen and further strengthen the prospect of an amendment (second amendment).

The insolvency law committee under the Ministry of Corporate Affairs, as had been reported earlier, made thorough analysis in the Bill from all parts, keeping in mind the interest of homebuyers, real estate developers, firms coming forward to acquire insolvent projects and also other stake holders’ interest.

The timely resolution of corporate insolvency under IBC has been a challenge. It has led to rising number of insovency cases.  

According to the Insolvency and Bankruptcy Board of India (IBBI), between December 2016 and September 2019, 2,542 corporate insolvency resolution processes (CIRPs) had commenced. Out of these, 186 have been closed on appeal or review; 116 withdrawn; 587 ended in order for liquidation - the next stage of the resolution process - and 156 ended in approval for resolution plans.

In its proposed changes in the Bill (second amendment), the IBC law committee began with financial creditors and has proposed to increase the threshold for filing insolvency plea against the real estate developers. 

If the Parliament passes the Bill with proposed changes in terms of financial creditors, the homebuyers, whose interest was secured by granting them status of financial creditors may find some limitation. Undoubtedly, their status as financial creditors will not change at this stage, but they may not be able to file plea for insolvency against the project developers in the future.

With amended IBC - 2019, the homebuyers, willing to take the developer to an insolvency court, will now have to ensure that a minimum of 100 homebuyers or 10 per cent of the total homebuyers file the bankruptcy against the developer.

Particularly, accrediting homebuyers with status as a financial creditors have been in floor of debate since beginning and the fact that developers lobby ferociously have been alleging the homebuyers of using the power as recovery tools. 

“An application for initiating corporate insolvency resolution process shall be filed jointly by not less than 100 of such creditors in the same class or not less than 10 per cent of the total number of such creditors in the same class, whichever is less,” the bill said, referring to the class of home buyers.

Not all but some homebuyers in Noida and Greater Noida too have partially agreed with developers’ view. Also, many section of homebuyers have been in favour of existing rule on this particular point and if the Bill gets approved from the Parliament with same changes, they are likely to challenge this particular change in the Supreme Court.

Mihir Kumar, advocate who represent a section of Amrapali Group homebuyers in the Supreme Court, talking to CitySpidey accepted that, earlier there was fight to give recognition to homebuyers and they were accorded the status of financial creditors, however, gradually it was observed that IBC is being used as tool of recovery process at some level which is derailing its real purpose. Therefore, bringing some changes has become necessary to restrict those misusing the law.

Kumar, however, disagreed on putting the condition of minimum 100 or 10 per cent homebuyers of a project for filing insolvency case against the developer. “To be realistic, minimum threshold of 100 homebuyers may be applicable in big projects but it may be difficult for those who have invested in small projects. It would be better if the government increases amount from Rs one Lakh to Rs one crore. This much of threshold may discourage homebuyers from using their power even for real purpose because convincing 100 homebuyers and then giving so much required details including bank details and others may not be as much easy as it seems. If the homebuyers secure their right to vote in insolvency proceedings, their rights must be protected under the IBC law. It would be too early to say if the Bill will be cleared with same proposed changes but if it comes, it would undoubtedly discourage the homebuyers at some points.”

In another interesting development, the insolvent companies will now be allowed to file for insolvency against another corporate debtor. This will enable promoters of companies facing insolvency to initiate similar proceedings against any entity that may have been responsible for its current state or otherwise.

Another significant move is the protection against criminal proceedings against the eventual buyers of a bankrupt company under investigation. “If a prosecution had been instituted during the corporate insolvency resolution process against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan subject to requirements of this sub-section having been fulfilled,” the bill said.

Also, the government’s decision to provide immunity to successful bidders removes the threat of attachment of assets due to sins of previous promoters. To strengthen the IBC Act, the government is moving ahead by ring-fencing the corporate debtor from attachment/criminal proceedings against offences committed by previous managements.

Many reports suggested that there have been cases in the recent past where assets have been included in the information memorandum available to the potential buyers and bids have been made and won on that basis, but before it comes to execution of that plan, the Enforcement Directorate (ED) comes in and attaches the property, upsetting the bargain. This has far reaching implications for the bidder and the company alike.