Bankruptcy code must include buyers6 min read . Updated: 21 May 2018, 12:59 PM IST
The Insolvency and Bankruptcy Code, 2016 is open for comments till December; the amendments will get enforced from 1 April 2019. Ashwini Kumar Sharma asked experts on what should be changed
On 1 May 2018, Insolvency and bankruptcy board of India stated that they seek comments from public on the rules and regulations notified under the Insolvency and Bankruptcy Code, 2016. The aim is to take views of various stakeholders and make the necessary changes in the Act. The window to share the views will remain open from 30 April to 31 December 2018.
Based on the inputs received, changes will be made in the Act, which will get implemented from 1 April 2019. We asked experts what needs to be amended in the Act.
Punit Dutt Tyagi, Executive Partner , Lakshmikumaran & Sridharan Attorneys
At the time of its original enactment, the Insolvency and Bankruptcy Code (IBC) was plagued by several issues. Since the time the Act came into force, the legislature has taken note of some of these issues and amended the statute to address the practical difficulties faced in the course of its implementation. Despite this corrective legislative action, there remain certain areas that would require urgent attention.
The ambit of who constituted financial and operational creditors under the IBC was originally considered to be all-encompassing at the time of its enactment. But now it is becoming increasingly clear that there are several categories of creditors who cannot be classified in the straight-jacket formula envisaged under the original IBC. Such creditors include holders of deposits, home-buyers and customers who had paid advances for goods and services, among others. On account of there being no clear and obvious answer, Courts of law have been grappling with the classification of such creditors for a considerable period of time. This problem is easily remediable, should the legislature introduce the necessary amendments in this regard.
Another area of concern is the scope and applicability of the moratorium envisaged under the IBC. There is still a significant degree of uncertainty regarding the implication of such a moratorium on Letters of Credit and other such commonly accepted modes of commercial security. The increased uncertainty in terms of honouring of secure modes of payments, especially in the context of international trade, is a major cause for concern. With the Courts/Tribunals across India expressing contradictory opinions on this issue, some of the issues are now pending final adjudication before the Hon’ble Supreme Court. Personal guarantees are another area of concern.
Monish Panda, Founder, Monish Panda & Associates
Suggestion: Qualification for interim resolution professional (IRP) needs to be re-casted to include professionals having relevant previous management experience in running a company. In fact it would be prudent to appoint a team of professionals with relevant management experience in diverse verticals.
Rationale: Such professionals are better equipped in managing the Corporate Debtor as a going concern and undertake other steps required for reviving the Corporate Debtor during the Corporate Insolvency Resolution Process (CIRP), rather than appointing an IRP who may or may not have any prior management experience.
Suggestion: Customers who have made deposits with the corporate debtor should be treated as financial creditors.
Rationale: Such deposits are financial debt, so such customers or depositors should be treated as financial creditors. The issue that will arise is appointment of a representative to committee of creditors (CoC). Considering the peculiarity of this situation and as number of such creditors will be large, it will be practical and prudent that the IBBI should be given the responsibility to appoint such Representative on behalf of the customers/depositors for representing their interest in the CoC.
Suggestion: National Company Law Tribunal (NCLT) should have the discretion to extend the CIRP period beyond 270 days if there are one or more Resolution Applicants who have bid higher than the liquidation value and for some reason the CoC could not complete the process.
Rationale: There could be various reasons for the CoC not finalising the Resolution Plan within 270 days. However, if there is a Resolution Applicant who wants to take over the Corporate Debtor as a going concern, then NCLT should be given discretion to extend the CIRP period rather than directing for liquidation.
Gurpreet Chhatwal, president, CRISIL Ratings
To extend the code to other sectors, and to mid- and small-sized NPAs, five changes or tweaks are necessary:
1. Differentiated rights for priority funding
Clearer rights to priority funding can help contain NPAs. First, enabling access to timely funding would keep an asset from coming under IBC. Second, if an asset does come under the National Company Law Tribunal (NCLT), access to priority funding at reasonable rates can preserve asset values, attract more bidders and help in faster resolution.
2. Rethink on Section 29A
There is a need to differentiate between genuine hardship or distress, and mismanagement. Independent firms such as rating agencies can play a role in developing frameworks to distinguish between the two.
Further, bidding norms for small and medium enterprises can be relaxed as a large number of cases are going towards liquidation for want of bidders.
Differentiate financial investors from existing promoters, to ensure that they don’t become ineligible in case of unsuccessful turnarounds.
3. Relax minimum consent required
Reduce this threshold from 75% of creditors to 51% for taking ahead proposals when voting at the committee of creditors to streamline the process and reduce inter-creditor conflicts. The Reserve Bank of India had allowed this for the erstwhile Joint Lenders’ Forum.
4. Team of resolution professionals
Resolution processes for large and complex assets can benefit if there is a team of resolution professionals with the requisite financial, technical and asset-sale experience, instead of just one such professional.
5. Strengthening the NCLT ecosystem
There is a need to increase NCLT benches, and supporting infrastructure such as insolvency professionals, and information utilities. IBC is new and incorporating learnings from cases at the Supreme/High Courts on an ongoing basis will further strengthen it. Further, preparation of detailed information memorandum with audio-visual features will get more bidders and result in better price discovery.
Harsh Pathak, Real Estate Law Counsel, LexMine
IBC is a major legislation in the recent past . It aims to consolidate the insolvency and bankruptcy proceedings in an effective and efficacious manner. The IBC aims to first restructure the debt of a company, failing which, it goes into liquidation. The Code has made provisions for the appointment of insolvency resolution professional after the company fails to pay the debt of its creditors. This is the basic scheme under the act . The moot question which remains is that is the act provides safeguards and benefits to all creditors. Here, as per the code IBC in appropriate proceedings gives representation to all types of creditors in the resolution proceedings of a company, it doesn’t recognise homebuyers’ as creditors nor has it any provision to represent them in resolution proceedings initiated under this act.
The apex court order in the Jaypee insolvency case is a clear indication that the Insolvency and Bankruptcy Code (IBC) is silent on this issue and if give adequate representation to homebuyers’ interest in such proceedings , it will be a great relief to so many home buyers those who are remedy less at the moment under proceedings initiated against the defaulters in IBS Code.
This non inclusion of homebuyers in cases of a real estate company, the insolvency code seems to obstruct the interests and remedy available to the homebuyers. The Home buyers non representation in the Insolvency Resolution Process (IRP) and moratorium under Section 14 of the Code on institution of fresh suits, pending suits, recoveries, etc., left homebuyers neither properly represented in the IRP nor can they go for any other legal remedy. Therefore , inclusion of homebuyers in creditors and right to participate in proceedings initiated under IBC code will be a big relief to a large section of the society who are homebuyers and failed to get the property and also lost hard earned money paid to buy home. Government is conscious of this fact and their initiative to safeguards the homebuyers interest through adequate amendment in the IBC will do complete justice for all concern.