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

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.


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

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.


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.

See also: New IBC ordinance dilutes RERA’s powers: MahaRERA

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.


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