Home / Opinion / Columns /  Opinion | The country’s bankruptcy code awaits another churn

The cabinet, in its meeting on 17 July, took some key decisions to ringfence the insolvency process in the wake of the recent order of the National Company Law Appellate Tribunal (NCLAT) that compromised the very objective of India’s Insolvency and Bankruptcy Code (IBC), which was designed to provide temporal certainty in resolution processes under a hierarchy laid down of the rights of different stakeholders.

A time-bound process for completion, as contemplated in the code, is its hallmark and biggest selling point. The National Company Law Tribunal (NCLT) and NCLAT, being children of this statute and not courts of equity, should not wield any power to dilute it. Among other things, the cabinet decision provided for a 330-day guillotine period for a resolution process; the inclusion of corporate restructuring programmes such as mergers, demergers and amalgamations as part a resolution plan; and an affirmation of the superiority of secured creditors’ claims vis-à-vis the unsecured. All this is welcome and much needed. The suggested amendments are likely to be placed before Parliament in the current session and may become law soon.

Having said that, the IBC and the Companies Act should witness some more changes for the consistent and equitable treatment of different stakeholders.

The terms “financial creditors" and “operational creditors" should be replaced by “secured" and “unsecured" creditors. All financial creditors are not secured, and many a times, suppliers of goods and services do secure their payments by obtaining some security over the corporate debtor’s assets. This leaves a clear dichotomy in the hierarchy of treatment in the liquidation and insolvency resolution processes. The use of “secured" and “unsecured" as descriptors of creditors will align both.

The situation of homebuyers vis-a-vis project developers and large lenders is akin to that of retail shareholders in a publicly listed company. Both lack the opportunity and wherewithal to conduct due diligence and negotiate contracts with developers/ banks and promoters, as the case may be. To ensure a level playing field to retail shareholders, the Securities and Exchange Board of India (Sebi) provided them statutory security by issuing its Takeover Regulations, under which, in case of a change in control, public shareholders get an exit window as would be available to a large investor in a private transaction by using what we call a “tag-along right" enshrined in a definitive Merger & Acquisition agreement.

A homebuyer needs statutory protection like a small shareholder; in fact, even more so, considering that a significant portion of his or her life-long savings and aspirations are invested in the purchase of his or her own dwelling unit. As many real estate projects are facing insolvency and even potential liquidation of the developers behind them, homebuyers stare at the possible evaporation of their hard earned money, especially if the company is liquidated.

A key attribute of the current government, in its first tenure and now, has been its responsiveness to emergent situations. It has brought in the requisite changes in law with utmost celerity, be it in the Goods and Services Tax or the IBC after their roll-outs. Seeing homebuyers possibly being left in the lurch, the IBC was effectively amended to include them in the “financial creditors" category. Now, the cabinet’s decision to acknowledge 100% representation by homebuyers, if a majority of those voting decide in favour of a resolution, comes as a big reprieve. It will make their voice effective in deliberations of the Committee of Creditors.

Yet, further statutory changes still need to be made. Here are some suggestions:

First, poor homebuyers have to pay hefty repayments to banks, even though they have not got possession of their units and so have to pay rent as well. The IBC should be amended to provide for a moratorium on accrual and payment of interest by homebuyers in case of insolvency till possession, and the bankers ought to take the hit due to their position of dominance in contract making (similar changes may be made in the real estate regulation law as well). Banks, before they lend to project companies and homebuyers, get to appraise project credentials based on a detailed project report, conduct due diligence to identify risk factors, thrash out complex loan agreements that cover financial, security creation and enforcement aspects and also mitigate the identified risk factors, and disburse loans only subject to “condition precedents". Banks have close project monitoring rights, and usually ensure (as they should) that cash flows in and out of the project are routed through a special escrow account; they also insist on a set arrangement that prioritizes the use of loan money and project earnings in a pre-defined manner. If the project proceeds are siphoned off, resulting in projects being stranded before completion, banks ought to bear the brunt.

Two, the definition of a “default" under the IBC should also include non-delivery of home possession by the promised time, and a homebuyer should also get to initiate insolvency.

Last but not least, homebuyers should get priority in distribution of liquidated assets under the IBC, alongside the project company’s employees, but before other secured creditors. Similarly, winding-up provisions should be amended to this effect.

Considering the dire straits that thousands of homebuyers are in, it would help if the government makes these amendments in the current parliament session.

Jagvir Singh is founding partner, Jupiter Law Partners, Delhi

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout