Home buyers would be able to invoke Section 7 of the IBC against errant developers.
Illustration: Uttam Ghosh/Rediff.com
Home buyers will now be recognised as financial creditors under the insolvency law bringing "significant relief" to people facing hardships on account of delayed residential projects, with the government promulgating an ordinance.
Coming out with the second ordinance this year to amend the Insolvency and Bankruptcy Code (IBC), the government on Wednesday said micro, small and medium enterprises (MSMEs) would get a special dispensation under this law wherein certain disqualification requirements have been relaxed.
A slew of other changes, including permitting withdrawal of cases and reducing voting threshold for approvals, have been made in the Code.
President Ram Nath Kovind has given his assent to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, according to an official release.
The ordinance was approved by the Cabinet on May 23.
"The ordinance provides significant relief to home buyers by recognising their status as financial creditors. This would give them due representation in the Committee of Creditors (CoC) and make them an integral part of the decision-making process," the release said.
Further, home buyers would be able to invoke Section 7 of the IBC against errant developers. Section 7 allows financial creditors to file application seeking insolvency resolution process.
The move assumes significance amid hundreds of home buyer facing difficulties due to delayed and incomplete real estate projects while quite a number of realty firms coming under insolvency proceedings.
About home buyers, corporate affairs secretary Injeti Srinivas said the ministry has totally relied on RERA (Real Estate Regulatory Authority) Act.
"Home buyers issues are not being addressed for perpetuity. It is being addressed for pre-RERA people who are suffering today," he noted.
According to him, there would be a "mechanism for representation of home buyers in the CoC".
Citing an example, he said that in accounting standard, if the real estate developer has recognised revenue based on percentage completion means he has passed on control to the extent of recognition to the home buyer concerned.
So it is a secured financial creditor, he added.
With respect to MSMEs, the government said a promoter of such an entity would not be disqualified from bidding under the insolvency law provided it is not a wilful defaulter and does not attract other disqualifications not related to default.
Financial Services Secretary Rajiv Kumar said the ordinance would allow MSME promoters to bid for their own unit as an exception to related party under Section 29 (A), which pertains to disqualifications of bidders.
The ordinance also lays down a strict procedure for withdrawal of a case by an applicant after admission under the Code.
"Such withdrawal would be permissible only with the approval of the CoC with 90 per cent of the voting share. Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI)," the release said.
In efforts to encourage resolution rather than liquidation, the voting threshold for approval has been reduced to 66 per cent from 75 per cent for all major decisions such as approval of resolution plan and extension of CIRP period, among others.
To facilitate the corporate debtor to continue as a going concern during CIRP, the voting threshold for routine decisions has been reduced to 51 per cent.
Besides, the ordinance provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors beyond a certain number to attend the CoC meetings through authorised representations.
"Taking into account the wide range of disqualifications contained in Section 29(A) of the Code, the ordinance provides that the resolution applicant shall submit an affidavit certifying its eligibility to bid. This places the primary onus on the resolution applicant to certify its eligibility," the release said.
With the amendments, pure play financial entities would be exempt under the provision from being disqualified on account of non-performing assets (NPAs).
"Similarly, a resolution applicant holding an NPA by virtue of acquiring it in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition. In other words, such NPA shall not disqualify the resolution application during...the three-year grace period," it added.
Among others, the successful resolution applicant would have at least one-year grace period to fulfill various statutory obligations required under different laws.
The government has also introduced a schedule in the code where different Acts that would be relevant for disqualification of a bidder are mentioned.
After a conviction, the entity concerned would have to undergo a two-year cooling-off period before becoming eligible for bidding under the insolvency law.
Other changes in the Code include non-applicability of moratorium period to enforcement of guarantee and liberalising conditions of interim finance for corporate debtor during resolution period.
Further, the requirement of special resolution for corporate debtors to trigger insolvency resolution on their own has been introduced, as per the release.
The Insolvency and Bankruptcy Board of India (IBBI) would have a specific development role along with powers to levy fee in respect of services rendered, the release said.