IBC 2016–Tangled web – Business Line–14.06.2018

The recent changes to bankruptcy laws have mixed implications for speedy resolution

The journey for the large corporate insolvency cases queued up before the National Company Law Tribunal (NCLT) for resolution, is getting more labyrinthine by the day. The latest twist in the tale is the ruling by the Mumbai bench of the NCLT that section 29A, a key clause in the November 2017 ordinance amending the bankruptcy law, must be applied only with prospective effect. This ruling may have the effect of allowing errant promoter-related entities in older NCLT references such as Essar Steel and Bhushan Steel to jump back into the bidding race. While the Mumbai bench has taken the correct legal position in holding that a law that came into effect on a specific date cannot be applied retrospectively, allowing the promoters of defaulting firms to get back into the driving seat would go against the very spirit of the Bankruptcy Code. Therefore, the Centre should consider giving retrospective effect to the key disqualification criteria in section 29A so that older cases don’t slip through the gaps.

There has also been a fresh set of amendments to the Code based on its review by an expert committee. Some of them should help expedite the resolution process. The decision to exempt ‘pure financial entities’ from some of the disqualifications under section 29A may help financial institutions or reconstruction companies bid for stressed assets. Lowered voting thresholds for key decisions by the Committee of Creditors, at 51 per cent or 66 per cent instead of 75 per cent, may greatly speed up decisions given that creditors’ skirmishes often hold up cases. But one significant change ushered in by the new ordinance which may actually elongate the resolution process is the decision to treat allottees in real estate projects as ‘financial creditors’. Home-buyers who have advanced funds to real estate projects can now initiate insolvency proceedings against developers, participate in creditors’ meetings and apply for refunds through the bankruptcy process. While this move is well-intended, and has been welcomed as a big relief for home-buyers, the truth is that their status as secured or unsecured creditors is still a grey area. There’s also worry that the resolution process may stretch on because individuals may be both unable and unwilling to take the haircuts that institutional creditors go with. In such cases, the Bankruptcy Board may need to take a pragmatic view on the apportionment of voting rights between institutional and individual creditors to ensure decisions don’t get deadlocked.

For home-buyers, the RERA (Real Estate Development and Regulation Act) offers far more potent tools to protect their interests than the IBC, with its provisions to demarcate funds, curb diversion and levy stiff penalties from builders for delays. Unfortunately, State governments have been quite tardy in the enactment of RERA, either dragging their feet on it or watering down its provisions. Wearing down political opposition to this reformist law is the best thing that the Centre can do, to truly protect consumer interests.

Published on June 13, 2018

via Tangled web – Business Line

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