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Treat homebuyers as financial creditors, says panel on bankruptcy code

Home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and their treatment by the Supreme Court in ongoing cases, says panel examining the Insolvency and Bankruptcy Code

business Updated: Apr 03, 2018 20:10 IST
Press Trust of India
Press Trust of India
Press Trust of India
bankruptcy code,home buyers,corporate affairs ministry
Against the backdrop of the rising number of cases coming up under the code, the committee has recommended certain measures to prevent possible misuse.(HT File Photo)

Home buyers should be treated as financial creditors which will allow them to equitably participate in an insolvency resolution process, a high-level panel examining the Insolvency and Bankruptcy Code (IBC) has recommended to the government.

The 14-member panel, headed by the corporate affairs ministry, has also suggested relaxations for micro, small and medium enterprises (MSMEs) under the Insolvency and Bankruptcy Code.

A slew of other changes to the code, which came into force in December 2016, has also been suggested by the panel.

Constituted by the Corporate Affairs Ministry, the committee had the mandate to identify and suggest ways to address issues faced in the implementation of the code.

In a detailed report, the panel has recommended that home buyers should be treated as financial creditors owing to the unique nature of financing in real estate projects and the treatment of home buyers by the Supreme Court in ongoing cases.

“Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the code,” it added.

The recommendation, once implemented, would provide relief for home buyers facing hardships due to incomplete real estate projects. Some realty firms are facing insolvency proceedings.

Under the IBC, financial creditor implies any person to whom a financial debt is owed. The financial debt can include money borrowed for interest.

According to the report made public by the ministry, the government should exempt MSMEs from certain provisions of the code. “Illustratively, since usually only promoters of an MSME are likely to be interested in acquiring it, applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs,” it noted.

Section 29A of the IBC pertains to the ineligibility criteria for bidders of bankrupt firms.

Besides, the panel has suggested that only those who contributed to defaults of the company or are otherwise undesirable should be ineligible from bidding for stressed assets under the code.

“Moreover, being mindful of the Non-Performing Assets (NPA) crisis in the country, the need to encourage the market for NPAs was felt and accordingly several carve-outs from section 29A have been recommended for pure play financial entities.

“In order to prevent retrospective application of any proposed change, it has been recommended to add a provision that the amendments shall be applicable to resolution applicants that have not submitted resolution plans as on date of coming into force of the said amendment,” the report said.

Against the backdrop of the rising number of cases coming up under the code, the committee has recommended certain measures to prevent possible misuse.

In this regard, the provision to provide for a special resolution passed by the corporate debtor’s shareholders or a resolution cleared by at least three-fourth of the total number of partners of the corporate debtor has been recommended.

To provide for the withdrawal of the resolution application in exception circumstances, the panel has suggested that in such cases, there should be approval from the Committee of Creditors (CoC) with ninety per cent of voting share.

“In order to facilitate successful implementation of the resolution plan by the successful bidder, it has been proposed to allow one year time to obtain necessary statutory clearances from central, state and other authorities or such time as specified in the relevant law, whichever is later,” the committee said.

In January, the code was amended to prevent unscrupulous persons from misusing the law. Wilful defaulters and those whose accounts have been classified as non-performing assets, among others, are barred from bidding for stressed assets.

The code provides for a market-determined and time-bound insolvency resolution process.

First Published: Apr 03, 2018 19:45 IST