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Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 3

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As we discussed in the conclusion part of our 2nd Article on the subject matter, We concluded that the Amendment would cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

Image result for ibc amendment 2019However, there was one part which largely became the bone of contention amongst the property buyers. The amended Amended Subsection (1) of Section 7of the Insolvency and Bankruptcy Code (IBC) 2016 set the threshold of minimum 100 or 10% of allottees in a project or class of investors, for them to approach the NCLT in order to initiate the Insolvency Process against the defaulting developer.

The provision as amended read as follows:

Provided

that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first or second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, such application shall be modified to comply with the requirements of the first or second provisos as the case may be within thirty days of the commencement of the said Ordinance, failing which the application shall be deemed to be withdrawn before its admission..

The Property buyers aggrieved by the aforesaid amendment approached the Supreme Court and Hon’ble the Supreme Court provided partial relief to home buyers:

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers as the constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers.

 

The Supreme Court has issued a notice to the Government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. 

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. 

The Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a home buyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

The Supreme Court has granted a partial stay on the 3rd provision of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.

There are further changes to the IBC, which are enumerated below:

Amended Provisions of the CodeLegal position prevailing before OrdinanceNew legal position
1.Section 5 -DefinitionsSection 5(12) defines “insolvency commencement date” as the date of admission of application for initiating the Corporate Insolvency Resolution Process (“CIRP”) by the National Company Law Tribunal (“Adjudicating Authority”) under Sections 7, 9 or 10, as the case may be.

The proviso thereafter to Section 5(12) (which was inserted in the Code with effect from June 6, 2018) states that where the interim resolution professional (“IRP”) is not appointed in the admission order, the insolvency commencement date shall be the date on which such IRP is appointed by the Adjudicating Authority.

The proviso to Section 5(12) has been omitted.
Section 5(15) defines “interim finance” to mean any financial debt raised by the Resolution Professional (“RP”) during the CIRP period.The words “and such other debt as may be notified” has been inserted within the definition of “interim finance”
2.Section 7 – Initiation of CIRP by financial creditor.Section 7(1) states that a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor (as may be notified by the Central Government) may file an application before the Adjudicating Authority for initiating CIRP against a corporate debtor when a default has occurred.

An Explanation is also given to the said section to clarify the meaning of default.

After Section 7(1), the provisos being inserted before the Explanation through the Ordinance provide for: –

Proviso 1– For financial creditors referred to in Section 21(6A) (a) and (b), the Section 7 application is required to be filed jointly by at least 100 creditors in the same class or 10% of the total number of such creditors in the same class, whichever is less;

Proviso 2– For homebuyers, the Section 7 application is required to be filed jointly by at least 100 allottees under the same real estate project or 10% of the total number of such allottees, whichever is less.

Proviso 3– The Section 7 applications filed by the financial creditors mentioned in the aforesaid provisos, which are presently pending before the Adjudicating Authorities, have to be modified within 30 days of the date of ordinance, failing which the application will be deemed to be withdrawn.

3.Section 11 – Persons not entitled to make applicationSection 11 states that certain persons, such as a corporate debtor undergoing CIRP, cannot file an application to initiate CIRP. An Explanation to the Section provides that ‘corporate debtor’ includes a corporate applicant in respect of such corporate debtor, for the purposes of this Section.Explanation-II has been inserted to provide an important clarification that the corporate debtor mentioned in the Section is not barred from initiating CIRP against another corporate debtor.
4.Section 14 – MoratoriumSection 14(1) provides that the Adjudicating Authority, on the insolvency commencement date, shall declare moratorium prohibiting certain actions.An Explanation has now been inserted after Section 14(1), clarifying that a license, permit, registration, quota, concession, clearances, or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other existing legal authority shall not be suspended or terminated on the grounds of insolvency. However, there should be no default in payment of dues arising during the moratorium period.
Section 14(2) states that the supply of essential goods or services to the corporate debtor shall not be terminated or interrupted during moratorium period.Sub-section (2A) has been inserted which states that where the IRP/RP considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated or interrupted during the moratorium period, except where such corporate debtor has not paid dues arising from supply during the moratorium period or in such circumstances as may be specified.
Section 14(3)(a) states that the provisions of moratorium will not apply to such transactions as may be notified by the Central Government in consultation with any financial regulator.Section 14(3)(a) has now been substituted to provide that the provisions of moratorium will not apply to such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
5.Section 16 – Appointment and tenure of IRPSection 16(1) states that the Adjudicating Authority will appoint the IRP within 14 days from insolvency commencement date.The amended Section 16(1) provides for the appointment of IRP on the insolvency commencement date itself.
6.Section 21 – Committee of Creditors (“CoC”)Section 21(2) states that the CoC will comprise all financial creditors of the corporate debtor. The second proviso to Section 21(2) states that that the first proviso (related party of the corporate debtor not to be a part of CoC) will not apply to a financial creditor, regulated by a financial sector regulator, if it becomes a related party of the corporate debtor solely on account of conversion or substitution of debt into equity shares or instruments convertible into equity shares, prior to the insolvency commencement date.The second proviso to Section 21(2) has been further amended to include “or completion of such transactions as may be prescribed” before the words “prior to the insolvency commencement date”.
7.Section 23 – RP to conduct CIRPSection 23(1) states that the RP shall conduct the entire CIRP and manage the operations of the corporate debtor during the CIRP period. The proviso to Section 23(1) (which was inserted in the Code with effect from June 6, 2018) states that where the resolution plan has been submitted to the Adjudicating Authority for approval, the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period until an order of approval of resolution plan is passed by Adjudicating Authority.The existing proviso to Section 23(1) now stands substituted with a new proviso which states that the RP shall continue to manage the operations of the corporate debtor after the expiry of the CIRP period, until an order of approval of resolution plan (u/s 31(1) of the Code) or appointment of liquidator (u/s 34) is passed by the Adjudicating Authority.
8.Section 29A – Persons not eligible to be resolution applicantSection 29A provides a list of persons who are not eligible to submit a resolution plan.The Ordinance seeks to amend the meaning of “related party” provided in Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j). This amendment, which is on the lines of amendment to second proviso to Section 21(2) (as aforesaid), states that the expression “related party” shall not include a financial entity which has become a related party, inter alia, “on completion of such transactions as may be prescribed“.
9.Section 32A- Liability for prior offences, etc.

(NEW PROVISION)

Section 32A has been inserted after Section 32 in the Code to clarify the legal position on the liability for offences of the corporate debtor committed prior to commencement of CIRP.

  • Section 32A(1), incorporating the notwithstanding provision, states that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP shall cease and the corporate debtor shall not be prosecuted for such an offence from the date of approval of resolution plan by the Adjudicating Authority, if the said resolution plan results in a change in the management or control of the corporate debtor to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence committed by the corporate debtor.
  • The first proviso to Section 32A(1) provides that any prosecution instituted against the corporate debtor during the CIRP will stand discharged from the date of approval of the resolution plan, subject to the fulfilment of requirement of this sub-section.
  • However, every person who was an “officer who is in default” (as defined in Section 2(60) of Companies Act, 2013) or a “designated partner” (as defined in Section 2(j) of LLP Act, 2008) or in any manner responsible for the conduct of the business of the corporate debtor, being directly or indirectly involved in the commission of the offence, shall continue to be prosecuted and punished for such offence committed by the corporate debtor (2nd proviso to Section 32A(1)).
  • Section 32A(2) states that no action shall be taken against the property of the corporate debtor in relation to the offence committed prior to the commencement of its CIRP, where such property is covered under the resolution plan approved by the Adjudicating Authority. However, the approved resolution plan should result in a change in the management or control of the corporate debtor or sale of liquidation assets under Chapter III of the Code to a person who is neither the erstwhile promoter or related party thereof nor an abettor or conspirator in the offence so committed by the corporate debtor.
  • The Explanation to Section 32A(2) clarifies the meaning of “an action against the property of the corporate debtor” to include attachment, seizure, retention or confiscation of such property. The Explanation further provides that Section 32A(2) will not bar any action against the property of any person, other than the corporate debtor or a person who has acquired such property through CIRP or liquidation process under the Code and fulfils the requirements specified in this section.
  • Section 32A(3) states that notwithstanding the immunity provided in this section, the corporate debtor and any other person (as may be required) shall extend all assistance and cooperation to any authority investigating an offence committed prior to the commencement of the CIRP.
10Section 227 – Power of Central Government to notify financial sector providers etc.Section 227 gives power to the Central Government to notify financial service providers or categories of financial service providers, in consultation with the appropriate financial sector regulators, for the purpose of their insolvency and liquidation proceedings, notwithstanding anything to the contrary examined in this Code or any other law for the time being in force.The Ordinance substitutes the words “examined in this Code” contained in Section 227 with “contained in this Code“. Further, an Explanation has been inserted to clarify that the insolvency resolution and liquidation proceedings for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.
11Section 239 – Power to make rulesSection 239 empowers the Central Government to make rules for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 239(2), from (a) to (zn).The Ordinance inserts clauses (fa) to (fc) after Section 239(2)(f) to empower the Central Government to make rules on transactions inserted vide this Ordinance in second proviso to Section 21(2), Explanation I to the second proviso in Section 29A(c) and second proviso to Explanation I in Section 29A(j) (such transactions which would not make the financial creditor a related party of the corporate debtor).
12Section 240 – Power to make regulationsSection 240 empowers IBBI to make regulations consistent with the Code and the rules thereunder, for carrying out the provisions of this Code on, inter alia, the matters mentioned in Section 240(2), from (a) to (zzzc).The Ordinance inserts clause (ia) after Section 240(2)(i) to empower the IBBI to make regulations on circumstances in which supply of critical goods or services may be terminated or interrupted during moratorium under Section 14(2A)

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 2

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Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court. Therefore, it becomes interesting to watch how does CIRP would be like after the amendment. Read Part 1

home buyers nclt ibc ordinance

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Important amendments to the code:

The most pivoting amendment is the amendment to Section 25A of the Code. One of the drawbacks of the earlier scheme of the Code was the requirement of the vote of each home buyer being calculated individually in proportion to the individual debt owed to him and not as a class of financial creditors. This used to lead situations where none of the agendas put forth before the Committee of Creditors (“CoC”) could be approved, mainly due to many home buyers failing to exercise their votes and thus, the remaining financial creditors (including home buyers who did cast their vote) were not able to form the requisite majority (calculated on total debt share).

In such a scenario, if no Resolution Plan is approved, the corporate debtor was necessarily required to be liquidated. And on liquidation, home buyers being unsecured creditors would stand to lose priority to secured financial creditors such as financial institutions.

  • That the amendment sought to be moved through Ordinance, is set to benefit classes of creditors such as home buyers, the Amendment now rectifies this issue by empowering the authorized representative to cast the vote of the entire class of creditors represented by him in accordance with the decision approved by more than 50% of such class of creditors on a present and voting basis.

The Scenario of Typical CIRP before the Amendment for the Home Buyers would be like this:

  • if there are 1000 property buyers, in a real estate company undergoing CIRP, where the collective debt of the 1000 home buyers forms 70% of the total debt of all financial creditors. 
  • Out of these, 300 home buyers attend a meeting of the CoC and 270 of such home buyers, vote in favor of a particular agenda.
  • That before Amendment, the vote of the 270 home buyers who voted in favor of the agenda would only count to the extent of their respective individual debt share. 
  • Thus, although in the present example, almost all home buyers who were present had voted in favor of a particular agenda, the fact that a large number of home buyers abstained from voting would lead to failure to garner the minimum required percentage for approving that particular agenda. 

This might not present itself as an issue when minor decisions of the CoC are affected; however in a vote for the approval of a Resolution Plan, such a mechanism for calculating the vote would undoubtedly hinder the effectual resolution of any company undergoing CIRP.

The Scenario of CIRP after the Amendment would be like this:

  • Because the majority of the home buyers, i.e., 270 home buyers out of the 300 present and voting have voted in favor of the agenda, the vote of the entire class of financial creditors i.e. of 1000 home buyers forming 70% of total debt share would be cast by the authorized representative in favor of the agenda. 
  • Thus, now the authorized representative is required to extrapolate the vote of the 270 home buyers, to all the 1000 home buyers being a class of creditors, and backed by the entire voting share of this class, the vote of the collective class of creditors being home buyers would undoubtedly carry more weight and actually lend meaning to home buyers becoming part of the CoC.

Therefore, this Amendment would undoubtedly cause resolution applicants to ensure that the interests of this unique class of creditors is protected and will also encourage all home buyers to exercise their rights responsibly and actively participate in the CoC meetings.

IBC amendment: Supreme Court provides partial relief to home buyers

  • The NCLT will have to maintain status quo with respect to the applications already filed by home buyers, investors against defaulting developers, said Aditya Parolia
  • The constitutional validity of the IBC amendment will be tested by the SC after hearing the govt and the home buyers

Providing partial relief to home buyers, the Supreme Court has issued a notice to the government of India on the petition filed by home buyers against the amendment of the Insolvency and Bankruptcy Code (IBC) 2016 which introduced a minimum threshold for filing an application with the National Company Law Tribunal (NCLT) against a defaulting developer. “This basically means that the NCLT will have to maintain status quo with respect to the applications already filed by home buyers and investors against defaulting developers,” said Aditya Parolia of PSP Legal, Advocates & Solicitors.

However, the legality and constitutional validity of the amendment will be tested by the Supreme Court after hearing the government and the home buyers, he added. The government recently amended the Insolvency and Bankruptcy Code (IBC) 2016 through an ordinance introducing a threshold of minimum 100 or 10%of allottees in a project or class of investors required that can approach the NCLT in order to start the liquidation process against the defaulting developer.

The Supreme Court after hearing the petition said that till further hearing the NCLT can’t reject the applications of the home buyers or investors for non-compliance of the new amendment brought in by the government introducing a minimum threshold for filing application under the Insolvency and Bankruptcy Code (2016).

The amendment required the existing applications which are yet to be accepted by NCLT to comply with the new regulations within 30 days of the passing of the ordinance. “This is certainly good news for home buyers as under the ordinance there was a clause which says all matter will be dismissed automatically within 30 days if they don’t meet the criteria. So, that has also been put on hold ,” said Aditya Parolia of PSP Legal, Advocates and Solicitors. The Home buyers were represented by the Advocate Piyush Singh and Advocate Aditya Parolia of PSP Legal, Advocates and Solicitors before the Supreme Court.

“However, there is no clarity on the threshold limit as of now as the bench didn’t comment on the same,” said Parolia. Challenging the ordinance, group of home buyers and investors had filed multiple writ petition with the Supreme Court challenging the amendment. Home buyers have argued that the amendment is arbitrary and discriminatory. Prior to this amendment even a single financial creditor, including a homebuyer, with claims of at least ₹1 lakh could move NCLT against the defaulting developer.

Clients of Karvy Private Wealth who saw defaults on their loans to builders introduced by Karvy have also challenged recent amendments to the Insolvency and Bankruptcy Code (IBC). “The Supreme Court has granted a partial stay on the 3rd provison of Section 3 today and issued a notice to the Union of India. This means that all the petitions that were filed before the amendment shall not be bound by the 30 day period given to satisfy the amendment.,” said Advocate Srijan Sinha, a lawyer practicing in the Supreme Court.

 

Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Part 1

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Home Buyers and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was promulgated on December 28, 2019. The government had passed an ordinance to amend the code, with the result that a threshold of minimum 100 home buyers or 10% of total home buyers in a project, whichever is less, is required to take the builder to an insolvency court.

  

Home Buyers NCLT IBC Oridnance

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

Background:

The Ordinance amends the Insolvency and Bankruptcy Code, 2016. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.  The Code provides a time-bound process for resolving insolvency.

“This is against the interest of home buyers as it puts unreasonable conditions on them, destroys level playing field which currently exists and makes the law lopsided in favour of real estate developers. The amendment being brought under influence of builders is not only illogical, illegal but also regressive to say the least,” said FPCE (The Forum for People’s Collective Efforts)’s letter to the standing committee chairman.

Minimum threshold for initiating the resolution process:

  • Under the Code, a financial creditor (either by itself or jointly with other financial creditors) may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process.  The Ordinance amends this to provide minimum thresholds for certain classes of financial creditors for initiating the insolvency resolution process. In case of real estate projects, if an allottee (person to whom a plot, apartment, or builder has allotted or sold the building) wants to initiate the resolution process, the home buyers should file an application jointly by at least 100 allottees of the same real estate project, or 10% of the total allottees under that project, whichever is less.
     

For other financial creditors, where the debt owed is either:

  1. in the form of securities or deposits, or
  2. to a class of creditors, the application should be filed jointly by at least 100 creditors in the same class, or 10% of the total number of such creditors in the same class, whichever is less.
     

Restriction on persons allowed to make applications:

The Code restricts certain corporate debtors from making an application to initiate the insolvency resolution process. These include, corporate debtors :

  1. undergoing an insolvency resolution process,
  2. who have completed the resolution process 12 months before making the application,
  3. or financial creditors who have violated terms of the resolution plan, or
  4. in respect of whom a liquidation order has been passed. 

The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, clarifies that such corporate debtors will be allowed to initiate the resolution process against other corporate debtors.
 

Permits, licenses and registrations not to be terminated on the ground of insolvency:

The Ordinance states that any existing license, permit, registration, quota, concession, or clearance, given by the government or local authority, will not be suspended or terminated on the grounds of insolvency.  However, there should be no default in payment of current dues for the use or continuation of such grants.
 

Supply of critical goods and services not to be discontinued:

  • The The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 states that the resolution professional may order that the supply of certain goods and services which are critical for the corporate debtor’s operations cannot be discontinued during the moratorium period.  The moratorium period refers to the time period during which the NCLT may prohibit persons from taking certain actions against the corporate debtors, such as filing of recovery suits. This provision will not apply if the debtor has unpaid dues to the suppliers or in certain other specified circumstances.
     

Liability for prior offences: 

  • The resolution plan under the Code may result in change in the management or control of a corporate debtor to other persons.   The Ordinance states that in such cases, the corporate debtor will not be liable for any offences committed prior to the commencement of the insolvency resolution process.  The liability will cease from the date the plan is approved by the NCLT. The Ordinance also provides immunity to the corporate debtor from actions against their property, such as attachment, confiscation or liquidation of property, in such cases.
     

Immunity to apply in certain cases: 

The immunity against prior offences will be available if such other person

  1. was not a promoter or in the management or control of the corporate debtor, or a related party of such a person,
  2. was not a person against whom investigating authorities have submitted or filed a complaint, or have reasons to believe that the person abetted or conspired to commit the offence.

To read part 2 click here.

Original Text :

Source Credit: Prs Legislative Research