Insolvency and Bankruptcy Code amended

Home buyers will now be recognised as financial creditors under the insolvency law, with the government promulgating an ordinance

President Ram Nath Kovind has given his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, according to an official release. “The ordinance provides significant relief to home buyers, by recognising their status as financial creditors. This would give them due representation in the Committee of Creditors (CoC) and make them an integral part of the decision-making process,” the release said. Further, home buyers would be able to invoke Section 7 of the IBC against errant developers. Section 7 allows financial creditors to file applications, seeking insolvency resolution process.

The move also comes at a time, when many home buyers are facing hardships on account of delayed and incomplete real estate projects. According to the release, another major beneficiary would be the micro, small and medium enterprises (MSME) sector, as it would get a special dispensation under the Code.

“The immediate benefit it provides is that, it does not disqualify the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP), provided he is not a wilful defaulter and does not attract other disqualifications not related to default. It also empowers the central government to allow further exemptions or modifications, with respect to MSME sector, if required, in public interest,” it noted.

On May 23, 2018, the cabinet had cleared the promulgation of an ordinance to amend the IBC. The ordinance also lays down a strict procedure for withdrawal of a case by an applicant, after admission under the Code. “Such withdrawal would be permissible, only with the approval of the CoC with 90 per cent of the voting share. Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI),” the release said.

According to the release, the regulations would bring in further clarity, by laying down mandatory timelines, processes and procedures for resolution process. “Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximising value of assets,” the release said.

In efforts to encourage resolution rather than liquidation, the voting threshold for approval has been reduced to 66 per cent from 75 per cent for all major decisions, such as approval of the resolution plan and extension of CIRP period, among others. To facilitate the corporate debtor to continue as a going concern during CIRP, the voting threshold for routine decisions has been reduced to 51 per cent.

Besides, the ordinance provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors beyond a certain number, to attend the CoC meetings through authorised representations. “Taking into account the wide range of disqualifications contained in Section 29(A) of the Code, the ordinance provides that the resolution applicant shall submit an affidavit certifying its eligibility to bid. This places the primary onus on the resolution applicant, to certify its eligibility,” the release said.

With the amendments, pure play financial entities would be exempt under the provision from being disqualified on account of non-performing assets (NPA). “Similarly, a resolution applicant holding an NPA by virtue of acquiring it in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition. In other words, such NPA shall not disqualify the resolution application during the three-year grace period,” it added.

Among others, the successful resolution applicant would have at least one-year grace period, to fulfill various statutory obligations required under different laws. Other changes in the Code include non-applicability of moratorium period to enforcement of guarantee and liberalising conditions of interim finance for corporate debtors, during resolution period. Further, the requirement of special resolution for corporate debtors to trigger insolvency resolution on their own has been introduced, as per the release. The Insolvency and Bankruptcy Board of India (IBBI) would have a specific development role along with powers, to levy fee in respect of services rendered, the release said.