The Insolvency and Bankruptcy Code (IBC), an essential financial legislation in India, recently made headlines as the Supreme Court upheld its constitutional validity. An amendment to this code in 2020 has sparked considerable discussion among various stakeholders, particularly home-buyers.
The Background of IBC
The IBC, enacted in 2016, was designed to streamline and expedite the resolution process for failed businesses. It consolidated existing legislative provisions into a common forum where debtors and creditors could resolve insolvency issues. The proceedings under this code are adjudicated by the National Company Law Tribunal (NCLT) for companies and the Debt Recovery Tribunal (DRT) for individuals.
Role of Financial Creditors in IBC
In an important order in August 2019, the Supreme Court granted homebuyers the status of ‘financial creditors’. A financial creditor, as per the IBC, is any person owed a ‘financial debt’, including any person to whom such debt has been legally assigned or transferred.
Amendment to IBC in 2020
The government introduced an amendment to the IBC in 2020, mandating a threshold for initiating insolvency proceedings against real estate developers. This stipulates that at least 10% of homebuyers or 100 of the total allottees in a project must support the initiation of these proceedings. Effectively, this bars a single homebuyer from approaching the NCLT under Section 7 of the IBC to initiate insolvency proceedings against a real estate developer or builder.
Section 3 of the Amendment Act
Section 3 of the Amendment Act allows homebuyers to seek the Corporate Insolvency Resolution Process (CIRP) against builders only when there is a joint application by at least 100 allottees or 10% of the total allottees from the same real estate project. This prevents homebuyers from different projects of the same developer from forming a collective of 100.
Supreme Court’s Ruling on the IBC Amendment
The Supreme Court agreed that such a threshold for creditors would prevent indiscriminate litigation and avoid stalling real estate projects by a few disappointed homebuyers or investors. The court ruled that a single allottee approaching the tribunal could risk disrupting the plans of other allottees who may still retain faith in the existing developer or might be pursuing other legal remedies.
The IBC Amendment and Consensus of Creditors
The amendment to the IBC is expected to ensure that filing an application is preceded by a consensus among a minuscule percentage of similarly situated creditors. Whether an individual has one or more allotments, all independent allotments made to him or his family members will qualify as separate allottees.
Enactment and Objective of IBC
The IBC was implemented with the primary goal of accelerating the resolution process of failed businesses. It also established a unified framework for debtors and creditors to resolve insolvency issues. A stressed company’s resolution process is required to be completed within a maximum of 270 days under this code.
Threshold Amount for Invoking Insolvency
In March 2020, the government raised the threshold for invoking insolvency under the IBC to Rs. 1 crore from Rs. 1 lakh. This move aimed to safeguard small and medium enterprises (SMEs) affected by the Covid-19 pandemic from triggering insolvency proceedings.
Key Institutions to Facilitate Resolution of Insolvency
Under the IBC, several key institutions facilitate the resolution of insolvency, including Insolvency Professionals, Insolvency Professional Agencies, Information Utilities and the Insolvency and Bankruptcy Board. These bodies play a significant role in managing the resolution process, providing necessary information to creditors, and regulating insolvency professionals and agencies.
Understanding Insolvency and Bankruptcy
Insolvency refers to a situation where individuals or companies are unable to repay their outstanding debt. On the other hand, bankruptcy is a legal declaration of one’s inability to repay debts, issued by a court of competent jurisdiction. It also involves passing appropriate orders to resolve it and safeguard the rights of the creditors.