November 26, 2019

IBC: Government for buyer protection, stricter norms for homebuyers

[ By Kavita Krishnan ]


The Insolvency and Bankruptcy Code, 2016 (IBC) is likely to undergo further changes, as sources say the Ministry of Corporate Affairs (MCA) would soon move amendments to the IBC, including protection for new buyers and tighter norms for home buyers in terms of taking developers to the National Company Law Tribunal (NCLT).

One of the amendments, that is likely to go to the Cabinet soon, would provide protection to new buyers of an insolvent company against frauds committed by its previous owners.

This would address cases such as Bhushan Power and Steel where the process has stopped abruptly after Enforcement Directorate (ED) attached some of the assets of the insolvent company post approval of a resolution plan.

The cabinet is also likely to announce stricter norms for homebuyers taking developers for insolvency proceedings under IBC. Sources say the MCA may set a threshold for home buyers to start insolvency proceedings through the next amendment, in a bid to limit abuse of the IBC.

In October, Corporate Affair Secretary Injeti Srinivas said the Ministry is mulling setting up of a threshold for home buyers for starting insolvency proceedings against real estate developers.

Srinivas had said the Ministry is also looking at a distribution formula for financial and operational creditors to create a hybrid system of auction of properties with a rigorous examination of resolution applicants to make the system more transparent and legal hassle free.

According to Srinivas, there is a feedback from Housing and Urban Affairs Ministry and other quarters such as real estate industry that this has to be looked at, and some threshold approach has to be followed. In the last three years 21,000 cases came to IBC, out of which nearly 10,000 have been settled. As many as 8,500 cases prior to admission and about 1,500 cases were resolved and over 1,500 cases are ongoing.

Home buyers, however, have not been pleased with the idea and Forum for People’s Collective Efforts (FPCE), a home buyers’ association, also sought Prime Minister Narendra Modi’s intervention to stop any move to restrict home buyers from moving the NCLT.

In the next amendment, the Ministry may also bring in the much-anticipated cross-border insolvency norms under the IBC. Once approved by the Cabinet, the amendments are likely to be passed by Parliament in the ongoing winter session.

If approved, these amendments would be the latest to join a number of changes and additions to the three-year-old IBC, after MCA earlier this month notified the rules for resolution of systemically important Financial Services Providers (FSPs) under the bankruptcy law.

The addition had almost an immediate impact as the Reserve Bank of India (RBI) last week announced the replacement of the defaulting lender Dewan Housing Finance Corporation Ltd (DHFL) and said that it would soon initiate insolvency proceedings against the company.

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