The Insolvency and Bankruptcy Board of India (IBBI) has looked upon and notified changes to the Insolvency and Bankruptcy Code, under which a person, who is not eligible under the Code to submit a resolution plan, will not be a party to a compromise in the process. The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 has been cleared by the lower house of Parliament, and now the Rajya Sabha has also cleared the bill with the majority. It was introduced in the Lok Sabha on the 12th of December 2019, before the promulgation of a similar ordinance called The Insolvency and Bankruptcy Code (Second Amendment) Ordinance on the 28th of December, 2020. It was then that the Union Cabinet agreed to propagate an ordinance for amending the IBC.
The amendments are made and incorporated to make the process of resolution more effective and to promote the ease of doing business. It is made to protect bidders in IBC cases against the reopening of claims and threats to assets acquired by them. A creditor is not supposed to sell or transfer an asset. This may be a subject of a security interest to any person who is not eligible under the Insolvency and Bankruptcy Board of India’s Liquidation Process Amendment Regulations, 2020, to submit a resolution plan for insolvency process as per the amendment. Moreover, the new notification states that the creditor, who proceeds to realise its security interest, will contribute its share of the insolvency resolution process cost, liquidation process cost and workmen's dues in 90 days of the start of the process and will also pay the excess of realised value of the asset over the claims admitted in 180 days of the liquidation. If the concerned creditor fails to pay this amount to the liquidator within 90 to 180 days, the assets will become part of the liquidation estate. Furthermore, the new change also states that a liquidator will deposit the number of unclaimed dividends and undistributed proceeds along with any income earned thereon into the Corporate Liquidation Account before he submits an application for dissolution of the corporate debtor.
The Issues Raised
The rule of 10% of 100 homebuyers was quite unclear. Creditors may or may not know the details of each other.
The provision regarding the regular providing of supplies was inaccurate for many.
This led to negotiations between the creditor and the company.
The creditor did not trust companies with supplies because the companies were already in default regarding the payments for the same.
The provision of providing the supplies, even if the current dues are paid by the company, is weak and void.
It is unfair that the creditors have to supply goods only on the bases of payments of current dues.
The question was raised regarding the previous payments. The creditors did not find it viable to supply goods anymore while in other countries, strong provisions and amendments are made for such cases.
Liabilities of Previous Offenses – The company will not be held liable for the failure in payments prior to the commencement of insolvency procedures. Previous liabilities will be ceased and will further be operated on the directions of NCLT. Companies will be enjoying immunity from such offences but immunity will only be provided if the management of the company changes because of insolvency resolutions. The code has now given the upper hand to creditors where they can initiate an insolvency resolution if companies fail to make payments to them.
Continuous Supply of Critical Goods – This code states that a creditor can not stop the supplies of critical goods listed by the IPR during the moratorium period for which the NCLT ceases all legal actions against the debtor. This is done to make sure the debtor can continue his daily business and the ongoings easily. The creditors can stop supplies under special cases and circumstances which are listed under the code but the creditors cannot initiate the process if they have failed to provide the necessary and needed supplies to the company even if the company has paid the current dues during the moratorium period.
The threshold of Creditors – The Bill authorizes and allows creditors to initiate and go for insolvency resolution processes if the total amount of default exceeds INR 1,00,000. The condition is that the application should be filed by 10% of the creditors or 100 individuals amongst such creditors, whichever is less. Cases involving real-estate companies can start and initiate the process with a minimum of 10% of homebuyers or 100 such individuals, whichever is less.
Not leading to termination of Licenses and Permits – The code states that present licenses, permits and registrations can not be terminated or cancelled because of insolvency. The company can hold on to the documents as long as it pays current dues regularly during the process. If the management of the company is altered or changed prior to the process then the company will not be held liable for any offence.
IRP Appointments – The Insolvency Resolution Professional should be appointed within 14 days from the application to the NCLT. The commencement date of the IR process will be the same as the date of the appointment of IRP.
The Challenged Grounds and the Positive Approaches
The Amendment was challenged on grounds that the treatment of home buyers as financial creditors violates and affects two facets of Article 14. First, the code is discriminatory in as much as it treats unequals equally, and equals unequally, Moreover, it does not have intelligible differentia; and the second, there is no nexus with the objects that are to be achieved by the Code.
The statement of reasons and objects behind the bill states the need to give the highest priority in repayment to last-mile funding and to corporate debtors to prevent insolvency, in case the company does land in situations to prevent potential abuse of the Code by certain classes of financial creditors.
The purpose of the IBC is to give a mechanism to work in a less timely way so that the value of the assets can be protected, safeguarded and made to maximize and protect the stakeholders.
The law must be meaningfully applied before it is too late to recover public money from defaulters.
Negative Impacts on the Rights of Home Buyers
The One Without a Court Order
This class of home buyers have been hugely impacted by this ordinance. Until now, the fastest and most time-bound solution to the problem of extraordinary delay in possession was approaching NCLT under section 7 of the IBC. Currently, the law of the latest decree is applicable to ongoing petitions. Homebuyers are supposed to file an application for amendment who are already in before the NCLT. The application must then be filled within a span of 30 days fulfilling the latest threshold or else such cases shall be deemed as withdrawn.
The One With Rera and other Court Orders and Possessions As per the best of understanding, this class of buyers have 2 parts (i) homebuyers for the principal amount (ii) financial debt covered under section 5(8) of IBC, for the interest which has been ordered by such order. For the default of (ii) part, such buyers can approach NCLT under IBC. However, for (i) part, the new threshold of homebuyers shall be applicable to the approach to NCLT.
The One With A Refund Certificate (RC) from Rera or Other Courts These are not exactly homebuyers. When a refund is ordered to be given, the contract of the builder buyer has been ended or terminated. These buyers are well within their rights to approach the NCLT under the IBC Code, 2016 as decree-holders and such debt is covered under the 1st part of the definition under section 5 (8) of IBC. Therefore, one can approach the NCLT as decree-holders for financial debt which has accrued through that decree or Recovery Certificate.
As stated above, the status of all the homebuyers is unique. Individuals with RERA or court requests can legitimately document appeals under section 7 of IBC before NCLT. However, others should, instead of sleeping on their rights, approach the concerned RERA authorities as soon as possible and get an order which can further be put before the NCLT for non-execution as decree-holder.