At least 100 buyers or 10% allottees needed to start insolvency proceedings: SC

[ecis2016.org] The Supreme Court has upheld the amendments to the Insolvency and Bankruptcy Code, through which additional conditions were inserted, for home buyers to initiate insolvency proceedings against erring builders

The Supreme Court, on January 19, 2021, said that at least 10% of the total buyers in a housing project were needed, to initiate insolvency proceedings against a defaulting developer. The SC’s order upheld the Constitutional validity of the amendments made to the Insolvency and Bankruptcy Code (IBC), 2020.

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The amendment to Section 7 provided that that financial creditors (home buyers enjoy that position under the code) can file the application for initiating corporate insolvency resolution process against the corporate debtor ‘jointly by not less than 100 of such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project’. The amendment also made the applicability of Section 3 retrospective, affecting pending applications.

Following the amendments, a group of home buyers moved the top court, challenging the additions made to Section 7, stating that the number requirement was against the ‘fundamental rights guaranteed in the Constitution’ and the very objective of the law itself. Before the amendment, even a single buyer could start insolvency proceedings against a developer.

“If a single allottee, as a financial creditor, is allowed to move an application, the interests of all the other allottees may be put in peril. Some of them may approach the authority under the RERA. Others may, instead, resort to the fora under the Consumer Protection Act, though, the remedy of a civil suit is, no doubt, not ruled out,” the apex court said in its order. The SC, on January 13, 2020, had agreed to hear the home buyers’ plea against the amendment.

In its 465-page judgement, the bench upheld the amendments made in Sections 3, 4 and 10 of the IBC (Amendment) Act 2020, through which additional conditions were inserted in the code, for home buyers to initiate insolvency proceedings against erring builders. With the SC upholding the validity of the amendments vis-à-vis home buyer’s freedom to initiate insolvency proceedings in the National Company Law Tribunal (NCLT), the number of such cases is likely to fall significantly.

“As far as availability of information is concerned, be it the mechanism of an association of allottees contemplated under the RERA or the requirement under the said Act, to post details of the allotment, at least, in law, the legislature was not making a capricious command. So is the case with the creditors covered by the first proviso, having regard to the clear requirement of Section 88 of the Companies Act, 2013. There are registers, which can be perused and information gathered,” the order read.

Government extends suspension of IBC till December 2020

In a move that could bring relief for real estate developers in India, the government has extended the suspension of the Insolvency and Bankruptcy Code, till December 2020

September 25, 2020: In a move that would offer some respite to liquidity-starved companies in India, including real estate developers, the government has extended the suspension of insolvency proceedings against firms by another three months. In a notification issued on September 24, 2020, the Corporate Affairs Ministry has extended the suspension period till December 24, 2020.

In view of the Coronavirus-induced economic impact, the ministry had, in June 2020, introduced the measure through an ordinance for a period of six months starting from March. However, this suspension is not applicable on defaults committed prior to March 25, 2020.

The government has also amended the Insolvency and Bankruptcy Code (IBC) to include this provision in the original law, which allows the centre to extend suspension of insolvency proceedings against defaulting firms for a period of up to one year. To effect this, the government has suspended Section 7, Section 9 and Section 10 from the Code, while inserting a new Section 10A.

The government’s move is aimed at offering partial relief to companies that have been unable to meet their debt obligations, because of the economic slowdown caused by the Coronavirus pandemic. The number of cases with the Insolvency and Bankruptcy Board of India (IBBI) would rise dramatically, if the measure to suspend insolvency proceedings against defaulting firms was not introduced. Since the inception of the Code in 2016, the IBBI has admitted as many as 3,911 pleas, of which only 380 cases have been appealed or settled.

The measure comes as a huge relief for real estate developers in India, whose liquidity woes have been aggravated by the COVID-19 fallout. Amid housing sales touching record low levels, developers, who are sitting on huge debt liabilities, would find it impossible to honour their loan commitments. Data available with ecis2016.org show that builders in India’s eight prime residential markets had an unsold housing stock consisting of over 7.38 lakh housing units, as on June, 30, 2020.  Once the suspension is withdrawn, the number of insolvency cases pertaining to real estate builders could spike significantly. As it is, high-profile cases involving builders such as Amrapali, Jaypee, Unitech, HDIL, 3C Company, etc., are pending with the insolvency courts while these cases are also being tried in various other courts in India.

Insolvency and Bankruptcy Code amendment: SC to hear pleas against 10% threshold

The SC has agreed to hear pleas challenging an amendment to the IBC that required the participation of at least 10% of home buyers or 100 of the total allottees, for initiating insolvency proceedings against a realtor

January 14, 2020: The Supreme Court, on January 13, 2020, agreed to examine the validity of the centre’s decision to amend an Insolvency and Bankruptcy Code (IBC) provision, which introduced a threshold of at least 10% of home buyers in a project or 100 of the total allottees, for initiating corporate insolvency resolution process (IRP) against the realtor. A batch of petitions challenging a provision of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2019, which was promulgated on December 28, 2019, came up for hearing before a bench comprising justices RF Nariman and S Ravindra Bhat. The bench issued notice to the centre, seeking its response on the pleas.

The Ordinance had introduced a minimum threshold of at least 100 allottees of the same real estate project or 10% of total allottees under that project, whichever is less, for moving a joint plea seeking initiation of corporate IRP against the realtor. The petitioners, most of whom are home buyers, have challenged Section 3 of the Ordinance, claiming it has rendered the buyers, who are financial creditors, remediless and they have been subjected to discrimination by putting a pre-condition in the form of minimum number of allottees of a particular project required for filing an application under Section 7 of the IBC, for initiation of the IRP. They claimed that the Ordinance was in violation of Articles 14 (equality before law) and 21 (protection of life and personal liberty) of the constitution. The petitioners have also challenged the retrospective application of the Ordinance, with respect to the home buyers’ plea before the tribunals.

 (With inputs from PTI)

Government clears more amendments to IBC, to ring-fence successful bidders from risks

Seeking to remove bottlenecks and streamline resolution process, the union cabinet has approved further amendments to the Insolvency and Bankruptcy Code (IBC)

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December 12, 2019: The cabinet, on December 11, 2019, approved further amendments to the more than three-year-old insolvency law, wherein successful bidders will be ring-fenced from any risk of criminal proceedings, for offences committed by the previous promoters of companies concerned. The IBC (Second Amendment) Bill, 2019, is likely to be introduced in the current session of the Parliament, according to a senior official.

In a significant move, there would be ring-fencing of corporate debtor resolved under the IBC in favour of a successful resolution applicant from criminal proceedings against offences committed by previous management/ promoters. It assumes significance against the backdrop of instances of enforcement agencies taking action in case of companies where the resolution process has already been completed. The successful bidder should not have the risk of a corporate debtor being made an accused by any enforcement agency, the official said.

According to a release, the amendments would remove bottlenecks, streamline the corporate insolvency resolution process and that protection of last-mile funding, would boost investment in financially-distressed sectors. The amended Act would also ensure that the substratum of the business of corporate debtor is not lost. It can continue as a going concern by clarifying that the licences, permits, concessions, clearances, etc., cannot be terminated or suspended or not renewed during the moratorium period, the release said.

Law firm Cyril Amarchand Mangaldas’ managing partner Cyril Shroff said the proposed changes, especially those related to ring-fencing, should help restore investors and bankers’ confidence in the IBC process. “The government has rightly enhanced the focus on ensuring sustenance and recovery of businesses from bankruptcy, which is essential to sustain the economy and drive growth. Additional focus is now needed on boosting IBC-related infrastructure, to hasten the recovery process,” he noted.

 (With inputs from PTI)

Government notifies rules under insolvency law for resolution of financial service providers

The government has notified the rules under the insolvency law, to deal with the resolution of financial service providers, excluding banks

November 15, 2019: The Corporate Affairs Ministry, on November 15, 2019, notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. It will provide a generic framework for insolvency and liquidation proceedings of systemically important financial service providers (FSPs) other than banks, an official statement said.

“The special framework provided under Section 227 of the Code, for financial service providers, is essentially aimed at serving as an interim mechanism to deal with any exigency, pending the introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers,” it said. The move also comes against the backdrop of instances of various FSPs facing problems.

 (With inputs from PTI)

Government mulling special window for NBFCs under insolvency law

The government is mulling setting up a mechanism to enable the resolution of stressed NBFCs under the Insolvency and Bankruptcy Code, an official has revealed

November 7, 2019: The government is mulling a special window, for the resolution of stressed non-banking finance companies (NBFCs) under the Insolvency and Bankruptcy Code (IBC), a senior government official has said. The effort is to come up with some mechanism to deal with financial service providers, which require some resolution under an alternative framework, pending the Financial Resolution and Deposit Insurance (FRDI) Bill or some specific provision coming in place, the official said. A notification in this regard will be issued soon, the official added. Currently, resolution of stressed financial institutions cannot take place under the IBC.

The move comes against the backdrop of financial sector players like Dewan Housing Finance Corporation Ltd (DHFL) facing troubles. Punjab and Maharashtra Co-operative (PMC) Bank is also grappling with financial woes. According to the official, the government is working out a way to ensure that the new promoter is not liable for criminal liability of previous management, while buying stressed assets through the Insolvency and Bankruptcy Code (IBC) process.

 (With inputs from PTI)

SC upholds amendments to Insolvency Code that allow home buyers to be treated as financial creditors

In a major relief for aggrieved home buyers, the Supreme Court has upheld amendments to the Insolvency and Bankruptcy Code that allowed home buyers to be treated as financial creditors

August 9, 2019: The Supreme Court, on August 9, 2019, upheld amendments to the Insolvency and Bankruptcy Code (IBC), giving the status of financial creditors to home buyers. A bench headed by justice RF Nariman, which disposed of a batch of over 180 petitions filed by various builders, said that the Real Estate (Regulation and Development) Act (RERA), which regulates the real estate sector, should be read harmoniously with the amendments made in the IBC and in case of conflict, the Code will prevail.

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The bench said only genuine home buyers can invoke insolvency proceedings against the builder and asked the centre to file an affidavit, taking corrective measures. The judgement came on a batch of pleas filed by builders, who have argued that remedies to home buyers were available under the RERA and the amendments to IBC only enables duplication.

 (With inputs from PTI)

Parliament approves amendments to Insolvency and Bankruptcy Code

In a bid to bring greater clarity on various provisions, including distribution of auctioned proceeds of defaulting companies, the Parliament has passed amendments to the Insolvency and Bankruptcy Code

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August 2, 2019: The Indian Parliament, on August 1, 2019, approved changes in the three-year old Insolvency and Bankruptcy Code (IBC), with the Lok Sabha passing the Bill by a voice vote. The bill was passed by the Rajya Sabha on July 29, 2019. Piloted by finance minister Nirmala Sitharaman, the Insolvency and Bankruptcy Code (Amendment) Bill 2019, gives the committee of creditors of a loan defaulting company explicit authority, over the distribution of proceeds in the resolution process and fixes a firm timeline of 330 days, for resolving cases referred to the IBC. The amendments, she added, would also bring in more clarity on various provisions, including time-bound disposal at the application stage for resolution plan and treatment of financial creditors.

As many as seven sections of the Code are being amended. Once the Corporate Insolvency Resolution Process (CIRP) begins, it has to be completed in 330 days, including litigation stages and judicial process, the minister said, citing the proposed amendments. Among others, the approved resolution plan would be binding on central and state governments, as well as various statutory authorities. She stressed that the intent of IBC amendments is not to liquidate a stressed company but find ways to make it a going concern.

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Sitharaman said the proposed amendments also responds to issues pertaining to financial creditors, in the wake of a recent ruling with respect to financial and operational creditors. Recently, the National Company Law Appellate Tribunal (NCLAT) had ruled in the Essar Steel Ltd’s case that the Committee of Creditors (CoC) had no role, in distribution of claims and brought lenders (financial creditors) and vendors (operational creditors) on par.

Referring to the issue of home buyers raised by some opposition members, the minister said the provisions of the bill strengthen the hands of home buyers and the government would endeavour to do full justice to them. The government, she added, was also looking at ways to resolve the issue concerning buyers of flat from JP Group companies. Earlier, participating in the debate, Gaurav Gogoi (Congress) said the performance of the IBC had been a mixed bag. Gogoi also raised concern about liquidation of companies, especially the ones in the real estate sector that also puts home buyers’ life savings at risk.

 (With inputs from PTI)

Parliament passes insolvency bill, allowing home buyers to be treated as financial creditors

A bill to amend the Insolvency and Bankruptcy Code, allowing home buyers to be treated as financial creditors and seeking to set up a special dispensation for small sector enterprises, has been passed by the parliament

August 13, 2018: A bill to amend the Insolvency and Bankruptcy Code 2016, which was passed in the Lok Sabha on July 31, 2018, was approved in the Rajya Sabha by a voice vote, on August 10, 2018. The bill allows home buyers to be treated as financial creditors. The legislation seeks to replace the June 6, 2018 ordinance that sought to put these amendments into force, to aid quick resolution of several bankrupt firms.

Replying to the debate on the Insolvency and Bankruptcy Code (Second Amendment) 2018, in the upper house, finance minister Piyush Goyal said its objective was to provide resolution to small bankrupt firms and at the same time, take stringent action against big bankrupt businesses. He said the bill aims to ensure that all cases are led to resolution, instead of liquidation. “We want faster resolution of cases. We do not want liquidation. Insolvency will not help the country. Assets worth crores should put to use,” he said. The minister said the Insolvency Law Committee, which was set up in November 2017, had submitted the report on May 26, 2018 and every recommendation of the panel had been accepted and incorporated in the amendments.

On the approval of a resolution plan, the minister said, the report should be approved by a panel of creditors, by a vote of not less than 66 per cent of the voting share of financial creditors. For routine decisions, it should be a 51 per cent vote requirement. Goyal said the government is trying to increase the strength of NCLAT, to address the pendency of cases. “The number of courts, judicial members and technical members are being increased,” he said. Besides, a group has been set up to see speedy resolution of about 40,000 cases in NCLAT that are simple in nature and can be resolved, by imposing non-discretionary penalty, he added.

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On a member’s query regarding less recovery of assets through the resolution process, Goyal said “There is a good recovery. If you look at the cases so far, 32 cases have been resolved through resolution and up to 55 per cent have been recovered.” Earlier, it used to take an average of three years to resolve a matter, which has now come down to one year. Earlier, the cost of resolution used be higher at nine per cent and now, it has come down to one per cent, he said. He also stated that the NCLAT was an independent body and the government does not interfere in its functioning.

The minister said it is not that in all cases that the promoters are willful defaulters. Wherever promoters are willful defaulters, the action should be taken strictly. “Now, there is fear among big borrowers that they have to repay their loans. Earlier, there was a responsibility to repay loans on small borrowers. Big players used think it is not our problem, banks have to recover the loan. This equation has changed today,” he noted. Earlier, minister of state for finance PP Chaudhary, termed the bill as a game-changer for the economy.

Opposing the bill, D Raja (CPI) said that frequent changes to the law, were being done to help defaulters and the government wanted to bail out the defaulters. In the Bhushan Steel case, he alleged that the banks lost Rs 21,000 crores but a corporate house gained this amount. He sought to know why the government had a ‘soft corner towards the corporates’. “The government should bail out the poor and not the corporates. The voting requirement is reduced to 66 per cent from 75 per cent, to help one corporate,” he alleged. Neeraj Shekhar (SP), SR Balasubramaniyan (AIADMK), Kahkashan Perween (JD-U) and P Battacharya (Congress), were among others who supported the bill but expressed concern over the government taking the ordinance route to amend various laws.

Supporting the bill, Jairam Ramesh (Congress) said that in the last two years, out of 700 cases admitted under the Insolvency and Bankruptcy code, only three per cent had been resolved, 12 per cent had gone into liquidation and 10 per cent had been closed. “In other words out of 700 cases, over 500 cases are active. Now, the court says within 270 days the process must be complete. So, my first question to the minister is the high proportion of cases which are ongoing,” Ramesh said. He said “We have passed a law, which says that the whole process should be completed in 270 days. However, over 75 per cent of the cases are going through some process or the other. I would urge the minister, to pay close attention to it.”

Ramesh said the recovery rate for banks stood at about 40 per cent. “Now this 40 per cent is also an optimistic figure, as this includes recovery in the steel industry, which is now on the recovery path.” He said he suspected that the recovery through this code would not be more than 30 per cent. “This is not a very healthy figure and I urge the finance minister to pay close attention to the fact that the recovery is good in the steel sector. If you leave that aside, the recovery rates are not very encouraging,” Ramesh said.

Ramesh also pointed out that on February 12, 201, the RBI had issued a circular on stressed assets and that the Finance Ministry had challenged it in the Allahabad High Court and sought to know the government’s position regarding the circular. “This is an extraordinary situation. RBI issuing a circular, which is being challenged by the Finance Ministry. I would like the government to clarify the exact position on this circular,” the Congress leader said, stressing that the willful defaulters should not go scot-free.

 (With inputs from PTI)

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