It has been almost a year and half that the Insolvency & Bankruptcy Code ('Code') aimed at solving and easing out insolvency process was enacted. An unprecedented framework was established with this as the board of directors of the company was dissolved, a moratorium was effected, Committee of Creditors was made in-charge of the day-to-day affairs of the company and a new institution / profession of Resolution Professionals was established. The Code had strictly mandated that within 180 days (90 days as extension from the NCLT) the resolution process of an insolvent company had to be completed.
Since then, issues regarding the interpretations of the Code have kept the NCLT, the NCLAT and the Supreme Court busy as even the judiciary endeavoured to not disturb the pace of ongoing proceedings. The matters which came up extended from determining the meaning of term ‘dispute’ to disqualification of Resolution Applicants.
In wake of this, the first amendment to the Code was given effect in 2017 which introduced Section 29A prohibiting certain persons from submitting resolution plans. With rising complexities in the Code, the recommendations of the fourteen-member committee were considered for easing out the complexities. On 6th June 2018, giving effect to the recommendations, a second ordinance has been promulgated by the Union government for balancing the interests of various stakeholders, promoting resolution of corporate debtor and clarifying the provisions relating to eligibility of resolution applicants.
Key Amendments and Analysis
1. Homebuyers and Financial Creditors
The question regarding the status of home buyers was looming large since the time associations of home buyers made an application to stay insolvency resolution process of Jaypee Infratech before the Hon’ble Supreme Court. Their foremost grievance was related to their treatment as unsecured creditors of the company, as a result of which they were to be at great loss by incurring substantial haircuts on their amount to real estate companies coupled with the risk of losing their future homes. The Insolvency and Bankruptcy Board of India, in the meanwhile, had introduced Form F for home buyers to register their claims with the appointed resolution professional. The Supreme Court had taken a considerate stand for these home buyers in the cases regarding these real estate companies viz. Jaypee, Amrapali and Unitech.
This amendment was heavily critiqued earlier, however, has paved its way into the law of the land.
The amendment would be welcomed by homebuyers who were stranded in middle as they were also not able to pursue their remedies under the Consumer Protection Act, 1986 because of the moratorium imposed on the legal proceedings against the developer companies. As a result of the amendment, they will be treated at par with the lending institutions and their rights would be guaranteed before the operational creditors. This would make sure that the money deposited with the developer companies is substantially received back by them in case of insolvency.
On the other hand, this might be worrying for the banks and other lenders who form the Committee of Creditors. As, in the case of insolvency process, the Committee of Creditors is at the helm of affairs of the company and is constituted by the financial creditors, as an effect of the Ordinance the home buyers too will be part of this very Committee. Moreover, the homebuyers will also be holding voting power in proportion of the overall credit. Although, on an individual level the voting power would be negligible, the associations of such homebuyers would be having substantial voting power. Thus, it can be a cause of fear among lenders that during the resolution they might lose control of the process.
Earlier, the homebuyers had also their rights secured in the Consumer Protection Act, 1986 and the newly enacted Real Estate (Regulation and Development) Act, 2016. While under the former legislation the redressal forum was State Commission or National Commission, the latter authorised Adjudicating Officer under the RERA.
2. Relief for MSMEs
The amendment has removed the restriction of promoter not being eligible to participate in the bidding process with respect to the MSMEs. This measure was taken in the light of the fact that resolution process of such MSMEs did not attract others outside the scope of promoters. This would ensure that a resolution plan is made for these entities and are not just liquidated because of no bidders.
3. Reduction in voting threshold
As the intent behind the Code was always to revive the company and not to liquidate it, there were issues with regard to the higher voting requirement in the Committee of Creditors for passing resolutions. The amendment thus, has reduced the voting threshold from 75 per cent to 66 per cent for instances such as passing the resolution plan. Also, for regular functioning too 51 per cent is now the threshold.
4. Extended period for resolution applicant
The amendment has also relieved the successful resolution applicant by granting a period of 1 year to pass all the legal hurdles and gain necessary approvals in accordance with the resolution plan. Earlier, there was no statutory period of fulfil the legal obligations.
The amendment would provide relief to many stakeholders of the Code - most importantly, the homebuyers of the real estate companies undergoing insolvency resolution process. These amendments will certainly result in increasing confidence of the lenders in the insolvency process and result in promoting resolution over liquidation of the companies.
Research and inputs by Pradyumna Kibe