Need clarity on how home buyers will be protected

The recommendations of the Insolvency Law Committee appointed by the Ministry of Corporate Affairs if accepted will give a fresh boost to the Insolvency and Bankruptcy Code 2016.

In many of the companies where the Corporate Insolvency Resolution Process (CIRP) has been initiated, liquidation process has also started. The Code which was brought for the purpose of giving a restructuring option to the debt-ridden companies has instead opened the floodgates of liquidation for one reason or other. The recommendations will give hope to at least those companies which can still manage to survive even if less than 75 per cent members of the committee of creditors (CoC) agree on the resolution process.

The committee has recommended that to further the object of the Code, the consent of 66 per cent or more financial creditors would be required for approval of the resolution and other critical decisions, like the extension of the CIRP beyond 180 days, and replacement or appointment of resolution professionals (RPs). For routine decisions, the consent of 51 per cent or more financial creditors would be required.

All eyes are also on the issues as to how the committee will take care of the fate of the home buyers and the extended bar of Section 29A or the strict definition of related parties. The committee has recommended that amount paid by the home buyers to the real estate companies will get covered under the definition of financial debt. Accordingly, home buyers will be part of the CoC. Similarly, they will also be considered during the liquidation waterfall given under Section 53 of the Code. The committee has recommended that as the number of home buyers as a category financial creditor would be large, they would be represented through a nominee or the NCLT could appoint a resolution professional who will represent them in the CoC. One has to wait and watch how the interest of home buyers will be protected even if they are made part of CoC.

The financial lenders, like banks, may even take the chance of haircut in the total outstanding. But it remains to be seen if the home buyer would pass such resolution plan considering that they have invested their money.

The recommendations with respect to relaxation of the provisions of Section 29A or the definition of the related party or connected persons are a welcome move. Due to these provisions, several big corporate giants have barred from submitting a resolution plan. In one case a genuine financial creditor was kept out of the CoC as in the past it had taken the equity stake of a corporate debtor under the CIRP under the restructuring plan of the RBI.