The committee is also working on a formula to distribute resolution proceeds between financial and operational creditors and squeeze the scope for different interpretations of the same law by different authorities.
Soon, a single homebuyer or just a few of them won’t be able to file insolvency application against their real estate developer. In a significant move, the government is planning to amend the Insolvency and Bankruptcy Code (IBC) to stipulate that the number of homebuyers required to file an insolvency case must be at least 100 or they must collectively account for a minimum of 5% of the outstanding debt of the realty developer, whichever is lower, sources told FE. However, they will continue to enjoy the status of financial creditors.
At present, a homebuyer — just like any financial or operational creditor — can file an insolvency case against their 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 the IBC by unsettling real estate companies at the behest of or in connivance with rival firms.
However, the planned amendment will be applicable only prospectively and have no bearing on those real estate cases that have already been admitted by the National Company Law Tribunal (NCLT) or for which applications have been filed with the adjudicating authority, according to one of the sources.
Similarly, to help unclog the NCLT and expedite the resolution process, the insolvency law committee under corporate affairs secretary Injeti Srinivas is studying the bad loan amounts involved in various cases and will soon raise the default threshold for any creditor to trigger insolvency against a stressed company from the current Rs 1 lakh. An industry source said the government could raise the default limit to at least Rs 10 lakh.
The committee is also working on a formula to distribute resolution proceeds between financial and operational creditors and squeeze the scope for different interpretations of the same law by different authorities. The distribution of proceeds was a major issue in the Essar Steel case, where the NCLAT trimmed lenders’ share of recovery from 90% of their admitted claims to 60% and held operational creditors on a par with financial creditors. It has been challenged by banks at the Supreme Court, as they feel the NCLAT ruling is against the extant IBC provisions that clearly suggest financial creditors are superior to operational ones.
All these changes, and the cross-border insolvency norms, will be part of the upcoming amendment to the IBC, which will then be introduced in the next session of Parliament for clearance, one of the sources said.
On Monday, Srinivas had said the government was considering introducing changes to further bolster the IBC but refrained from spelling out specific details, saying final decisions were yet to be made.
According to Manoj Kumar, head (M&A, transactions and insolvency) at consultancy firm Corporate Professionals Capital, homebuyers are included as a special class of financial creditors in the IBC through “deeming provision”. Although the Supreme Court has built in certain safeguards, still there is a high possibility of the abuse of the law. “The government wants the IBC not to be a recovery tool rather than a mechanism for resolution of actual insolvency. Thus, the proposal to bring a new threshold to initiate insolvency proceedings is a good thought that would help weed out cases being filed for just recovery. It will also allow IBC focus to remain on actually-distressed realty companies like Jaypee Infra, SRS, Amrapali, etc,” Kumar said.
While the planned IBC amendment on homebuyers seems to have drawn elements from the class action suit provision of the Section 245 of the Companies Act, it is also different from it. This is because the Companies Act prescribes different rules for initiating class action suits against listed and unlisted companies.
While insolvency proceedings against key real estate players such as Amrapali and Jaypee have been invoked by lenders, in the first case after the IBC was amended last year to give financial creditor status to homebuyers and later upheld by the Supreme Court, a homebuyer couple dragged Delhi-based Umang Real Tech to NCLT in August 2019. Similarly, insolvency process against Today Homes Noida was initiated in August on an application by a small group of homebuyers.
Commenting on the plan to raise threshold for triggering insolvency against any corporate debtor from Rs 1 lakh, an industry source said: “It’s a good idea but the government also has to keep in mind that if the threshold is raised very sharply, say to Rs 50 lakh or Rs 1 crore, it will cease to be a tool that evokes fears among small and mid-level defaulters, many of whom are currently settling dues just after the creditor files a case at the NCLT,” he said.