Ring-fencing bidders: Ordinance to amend insolvency law soon

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December 25, 2019 2:46 AM

Cabinet okays proposal to promulgate Ordinance; Speaker sends IBC Amendment Bill to House panel on finance.

insolvency, insolvency lawIt’s unclear if the Ordinance would contain the proposal to bar a single homebuyer from initiating insolvency proceedings against a real estate firm.

The Cabinet on Tuesday cleared a proposal to promulgate an Ordinance to amend the Insolvency and Bankruptcy Code (IBC) to “ring-fence” successful new bidders of stressed assets from criminal proceedings against offences committed by previous management/promoters.

However, it’s immediately not clear if the Ordinance would also contain the proposal to bar a single homebuyer from initiating insolvency proceedings against their real estate firm. These amendments were cleared by the Cabinet earlier this month and a Bill to this effect was introduced in the Lok Sabha as well. However, it was yet to get parliamentary clearance, hence the need for the Ordinance.

Meanwhile, the Lok Sabha secretariat on Tuesday said Speaker Om Birla has referred the IBC Amendment Bill to a Parliamentary Standing Committee on finance, chaired by former minister of state for finance Jayant Sinha. This means earlier proposals that are not part of the planned IBC Ordinance will go through an enhanced scrutiny before being presented in Parliament for clearance.

The move to insulate third-party winning bidders from the sins of earlier management will avoid a repeat of cases like Bhushan Power & Steel (BPSL). Recently, the Enforcement Directorate (ED) had seized a portion of BPSL’s assets in a money laundering case against its former promoters. Though NCLAT subsequently asked ED to release the attached properties, it had also put the Rs 19,700-crore payout by JSW Steel for the debt-ridden company on hold until further orders.

As for insolvency proceedings against real estate players, though an official statement on Tuesday remained silent on the issue, according to the proposal cleared by the Cabinet earlier this month, the number of homebuyers required to file a case against a developer at NCLT must be at least 100 or they must account for 10% of the total number of such creditors, whichever is lower. At present, a homebuyer — just like any financial or operational creditor — can file an insolvency case against the realty developer if the default amount involved is Rs 1 lakh or more.

The latest plan is aimed at preventing a few potentially unscrupulous elements within the homebuyer community from abusing the spirit of IBC by unsettling real estate companies at the behest of or in connivance with rival firms. However, homebuyers will continue to be treated as financial creditors.

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