A sigh of relief for homebuyers, Union Cabinet approves ordinance to amend Insolvency and Bankruptcy Code
The Union Government had earlier formed a 14-member Insolvency Law Committee (ILC) headed by corporate affairs secretary Injeti Srinivas to recommend amendments to the Insolvency and Bankruptcy Code, 2016.
The Union Cabinet on May 23, 2018 approved the ordinance to amend the Insolvency and Bankruptcy Code, 2016 (IBC), heaving a sigh of relief to homebuyers who have invested in housing projects of real estate companies that have gone bankrupt.
Now, the ordinance awaits the President’s nod.
What’s in the bucket for Homebuyers?
Once the ordinance gets the President’s approval and the proposed changes are incorporated in the Insolvency and Bankruptcy Code, 2016, homebuyers will be treated on par with financial creditors in terms of their legal rights.
Homebuyers will have the right to initiate a resolution process against the bankrupt real estate companies and get their money back.
The biggest beneficiaries of this ordinance will be homebuyers as the present version of the IBC does not consider homebuyers as secured creditors; they have no right to initiate a resolution process if a real estate company goes bankrupt.
Amendments to the Insolvency and Bankruptcy Code, 2016
• The committee of creditors’s voting rights of resolution plans will be limited to 66 percent from earlier threshold of 75 percent, a move that will help speed up the resolution process.
• Withdrawal of an insolvency application will be allowed, if 90 percent of the creditors agree.
• The ordinance also exempts MSMEs from disqualification under Section 29 of the IBC. The Micro Small and Medium Enterprises (MSMEs) will now be exempted from all conditions. As per Section 29 of the IBC Act, a person or a company suffering disqualification, can't participate in the resolution process.
• Promoters of companies with turnover of up to Rs 250 crore will be allowed to bid. Earlier, they were barred from bidding as the government feared that they will walk away with the stressed assets at a discount.
• The ordinance proposes to facilitate implementation of the resolution plan by the successful bidder. It provides a year time to obtain necessary statutory clearances from central, state and other authorities.
What led to the amendment of IBC, 2016
The government brought the ordinance after the Union Ministry of Corporate Affairs received complaints against bankrupt real estate companies from homebuyers.
Despite paying full amount for their properties, people were not handed over the homes as these companies were facing financial troubles.
Recommendations of the 14-member Insolvency Law Committee (ILC)
• The Union Government had earlier formed a 14-member Insolvency Law Committee (ILC) headed by corporate affairs secretary Injeti Srinivas to recommend amendments to the Insolvency and Bankruptcy Code, 2016.
• The committee brought out ordinance suggesting changes in a few provisions of the Bankruptcy Code and the Real Estate (Regulation and Development) Act, 2016 (RERA) and making the process easier for potential bidders.
• The committee also proposed to make the recovery process for lenders easier and speed up the decision-making process by creditors.
• It recommended the government to treat homebuyers as financial creditors and allow them to equitably participate in the insolvency resolution process.
First high-profile case under IBC: Tata Steel acquires 72% stake in Bhushan Steel
Tata Steel acquires Bhushan Steel
The ordinance has been pending with the Union Cabinet for several weeks. However, the cabinet decided to quickly move the ordinance after Tata Steel announced to acquire Bhushan Steel, the first high-profile case to be resolved under IBC.
Tata Steel, through its wholly-owned subsidiary Bamnipal Steel Ltd (BNPL), acquired 72.65 percent controlling stake in Bhushan Steel Ltd (BSL) for around Rs 36400 crore.
The lenders (banks) recovered almost the entire principal loan of Bhushan Steel through Rs 36400 crore transparent bid by Tata Steel and also got 12 percent stake in the company.
For the first time, such a large loan resolution was achieved through upfront payment received by banks through the sale of a company.
Bhushan Steel was one of the 12 companies identified by Reserve Bank of India for bankruptcy proceedings in 2017.