The Government of India, in order to iron out the issues plaguing the Insolvency and Bankruptcy Code, 2016 ("IBC Code") has been making amendments at a rapid pace. The Cabinet had approved the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 ("Ordinance") on 23 May 2018 and thereafter, the President of India, on 6 June 2018 has given his assent.

The Ordinance amongst other changes now provides that homebuyers are 'financial creditors'. This amendment is likely to have serious implications for construction companies exposing them to proceedings under the IBC Code. The important changes brought about by the Ordinance are highlighted below:

  1. Homebuyers as Financial Creditors: Owing to the unique nature of financing in real estate projects, homebuyers have now been recognized as "financial creditors" under the IBC. This amendment has been carried out keeping in mind the peculiarity of under construction apartments in India where almost 25% to 30% of the projects face various delays causing suffering to home buyers. Since the monies raised by home buyers are a means of raising finance for construction, and on failure of the project the monies are require to be returned based on the time value of money, it has been decided to treat homebuyers as financial creditors. Accordingly §5(8) of the IBC Code, has been amended to clarify that homebuyers are financial creditors and can initiate corporate insolvency resolution process ("CIRP") against defaulting developers under §7 of the IBC code. This also gives them the opportunity to be a part of the Committee of Creditors ("CoC") and contribute to the decision-making during the CIRP.
  2. Withdrawal of CIRP: The IBC Code does not provide for withdrawal of proceedings once the CIRP was initiated. However, there were certain instances where on account of settlement between the applicant creditor and the corporate debtor, judicial permission for withdrawal of CIRP had been granted by judicial forums. The CIRP once initiated converts in to a proceeding between the corporate debtor and all its creditors, therefore settlement of debt of the applicant creditor cannot amount to a negotiated settlement of all debts. To ensure that rights of the other debtors are not prejudiced, the IBC has been amended to state that the applicant creditor can withdraw the CIRP provided it has the the approval of the CoC with 90 percent voting shares.
  3. Voting Threshold: In order to encourage speedy resolution and keeping in mind the global voting thresholds under bankruptcy laws, the voting threshold for all major decisions such as approval of resolution plan, extension of CIRP period, and such other important decisions has been brought down to 66 percent from 75 percent. This change has been carried out as it was being seen that insolvency resolution plans could not go through as 75% approval of the CoC was not available. In order to remedy the position and ensure that insolvencies can be resolved, the voting percentage has been reduced to 66%. In addition, for approval of the other routine decisions, the voting threshold has been reduced to 51%.
  4. Applicability of IBC to Micro, Small and Medium Enterprises (MSMEs): MSMEs will be exempted from application of certain provisions of the IBC. The most important exemption being that a promoter of an MSME is not disqualified to bid for his enterprise undergoing CIRP as long as he is not a wilful defaulter. The Central Government has been empowered to allow further exemptions or modifications with respect to the MSME Sector in the future, as and when the need arises.
  5. Amendments to §29A:

    5.1 §29A of the IBC Code, unintentionally disqualified certain financial entities (such as venture capital investors) that have an Non-Performing Asset (NPA) Account or control or are promoters or in the management of a corporate debtor that is classified as an NPA account from being a resolution applicant. Such pure play financial entities are now excluded by providing an explanation to the provision.

    5.2 In light of the wide array of disqualification criteria stated in §29A that bars an individual/entity from submitting a resolution plan along with the tests for "connected persons", it was becoming increasingly difficult for the Resolution Professionals to check each and every compliance. Therefore, in the interest of timely resolution, the Ordinance now lays down that every resolution applicant will now have to give an affidavit stating that it is eligible to submit a resolution plan under §29A, along with the resolution plan.
  6. Assets of a guarantor not included in moratorium: In order to clear the confusion regarding treatment of assets of guarantors of the corporate debtor vis-à-vis the moratorium on the assets of the corporate debtor, now all assets of such guarantors to the corporate debtor are outside scope of moratorium imposed under the IBC.

The changes introduced by the Ordinance are expected to improve the mechanism of recovering debts as well as ensuring positive outcomes after the conclusion of the CIRP.

The Ordinance will be placed in the monsoon session of Parliament and if approved will be converted in to an Act. Ordinarily the Ordinance will remain in force for a period of 6 weeks from the day the monsoon session of Parliament commences. If the Ordinance is not approved by the Parliament, the Government can re-promulgate it till such time that the consent of the Parliament is obtained.

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