Author: Khushi Aswal, Student at Maharashtra National Law University, Nagpur.
The paper is based on the recent amendments of the Insolvency and Bankruptcy Code, 2016. The main object of the Insolvency and Bankruptcy Code,2016 is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. To fix time periods for execution of the law in a time-bound settlement of insolvency which is generally 180 days. But the paper will be mainly focusing on the amendments which were made prior and during the COVID-19 pandemic. The paper emphasis on majorly on two amendments which has a profound impact not only in the Insolvency and Bankruptcy Code,2016 but also in the society. The First amendment discussed in the paper is related to the amendment regarding the homebuyers being the creditors and the second amendment is related to the amendment regarding the invocation of insolvency proceedings against defaulting corporates. Prior the Amendments the earlier Insolvency and Bankruptcy Code,2016 was concerned with people involved in the processes like liquidation, “reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons. The UNCITRAL Legislative Guide contends that if the homebuyers are involved within the ambit of secured financial creditor, then by involving such persons in the negotiation process by putting them on the Committee of Creditors would infract the principle that, given their number and the diverse interests that they have, coupled with no knowledge or any commercial expertise of the corporate debtor, they should not and ought not to be allowed to participate in the Committee of Creditors.
Keywords: Financial Creditors, Homebuyers, NCLT, Insolvency Resolution Process for Corporate Persons.
The paper is based on the recent amendments in The Insolvency and Bankruptcy Code,2016 (hereinafter referred to as IBC,2016) which was enacted in the year 2016 with prime focus on “Insolvency Resolution” of Corporate Persons, Partnership Firms, and Individuals to maximization of Value of Asset of such persons. Prior to the enactment of the IBC,2016. India had a very complicated insolvency system regulated by different statutes, such as the 1956 Companies Act, the 1985 Sick Manufacturing Companies Act, etc., none of which in itself offered a complete remedy. The key goals of this new Code were to consolidate insolvency rules to make insolvency a time-bound procedure and optimize the valuation of properties for the creditors’ mutual satisfaction. In order to stop corporate deaths and encourage development, it is necessary to support settlement over liquidation.
The legislator of the IBC,2016 did not intend it to be an alternate for the creditor to recover their debts but a medium to ensure the interest of all which also includes the Corporate Debtor by giving the resolution. Also, Section 2(a) of the IBC,2016 mentions that all the Companies incorporated under the Companies Act,2013, or any other Act or legislation prior to the Companies Act,2013 regarding the incorporation and functioning of the IBC, 2016.
When the IBC,2016 was enacted then the rights and liabilities of the Homebuyers were not included within the ambit of the definition of “Financial Creditor” as defined in Section 5 (7) and as “Operational Creditor” as defined under Section 5 (20) of the IBC,2016.
The second amendment deals with the economic hardship caused by the continuing COVID-19 pandemic, the latest reform has been triggered. The Code scheme allows for the invoking of insolvency proceedings against defaulting companies. The government felt that the service of IBC Sections 7, 9 and 10 needed to be suspended for some time in order to avoid the insolvency of defaulting businesses suffering from distress due to an unforeseen condition. It was also argued that it would be impossible to locate a sufficient number of disposal candidates for these insolvent firms during this period of distress.
This paper would be dealing with the recent amendment in the IBC,2016 (prior and during the COVID-19). The key amendments in the IBC,2016 will be discussed throughout the paper. The key amendments that will be discussed in-depth are: firstly, the amendment regarding the homebuyers being the creditors and secondly, the amendment regarding the invocation of insolvency proceedings against defaulting corporates.
The paper will be mainly discussing the two major amendments in the IBC, 2016.
It should be noted that since the course of the IBC,2016 many key amendments have taken place in the IBC, 2016 to consolidate and amend the laws of re-organization and insolvency resolution issues.To trigger the Insolvency process it is pertinent to file an application invoking Section 7 of the IBC,2016, which was also before the NCLT, Principle Bench of Delhi. It should be noted that prior these cases the IBC,2016 did not safeguard homebuyers and were covered by the courts under the shield of Articles 32 and 142 of the Constitution.
In the Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructure Ltd.wherein the NCLT decided on the fact that whether applicants who, vide an written MOU in which it was agreed by the parties to but a residential flat, shop and office and with an assured “Committed Return” from the period of execution of the agreement till the actual physical possession of the assets. The case was filed under Section 5(7) of the IBC,2016 which defines “Financial Creditor”. In this case, the NCLT had replied to the issue in negative and maintained that the MOU was a pure and simple deal to sell or buy certain assets and that such a contract would not acquire the status of “Financial Obligation” merely because of a violation of “Committed Return” and has little regard for the time value of assets. Also, an appeal was filed in the same case in which NCLAT hold appellants as “Financial Creditor” within ambit of Section 5(7) of the IBC,2016, it further held that the amount disbursed by the appellants was contrary to the corporate debtor’s “consideration of the time worth of capital” and transaction by increasing the amount by way of a selling purchasing arrangement that had a commercial borrowing effect.
In the context of amendment on homebuyers, the issue came into light through several cases and the one of the pertinent cases is Chitra Sharma & Ors Vs. Union of India & Ors. the court showed grave and serious concern was shown for protection of Home buyers.
Another prominent case regarding the homebuyer’s amendment is the Bikram Chatterji & Ors Vs. UOI & Ors, which is known as the “Amrapali Company Group,”. In this case, the Court had passed different orders, which also includes the cancellation of RERA’s Amrapali Group of Companies registration.
LEGISLATURE ON THE HOMEBUYER’S ISSUE
The paper not merely discusses the amendment made in the legislation regarding the homebuyers but also the legislative perspective regarding this amendment regarding the homebuyer’s amendment. It is very intriguing to observe that within 9 days i.e. on 17th August, 2018 from the date of Supreme Court’s orders in Chitra Sharma Case, The Insolvency and Bankruptcy (Amendment) Act, 2018 was passed and published in Gazette of India.
The Legislation by means of a constitutional amendment. This means that any homebuyer may now cause IBC regulations in case of delay in possession or reluctance by Developer / Builder to return capital, making them more cautious and cautious towards homebuyers which made them at par with the other financial creditors. The amendment was made in the light of the Pioneer Urban Land and Infrastructure Limited Vs Union of India & Ors.The Hon’ble Supreme Court upheld the amendment brought in the IBC,2016 and declared it not violative of Article 14, 19 (1) (g) and 300-A of the Constitution of India.
EFFECTS AND AFTERMATHS OF AMENDMENT
A financial creditor with claim of Rs. 1 Crore can approach NCLT but if a Homebuyers claims is above this value or at par still, they cannot approach the NCLT. No individual claim shall be entertained by NCLT. Because retrospective effect has been granted to the amendment, it would be more prejudicial to pending petitions where petitioners must instantly put in a minimum of 100 individual numbers or 10 % of the total allottee in the same real estate scheme. In the event that they refuse to satisfy the provision, their appeal is rejected. Practically, NCLT cannot be contacted by homebuyers since there is no system In practicality, there are less likelihood of settlement with developer as developer steps out of the box in several individual cases to settle to resolve a dispute, and it does not match them in class action. From the perspective of the Homebuyers if an individual defaults in making the payment installment which could be a “Pre-Existing Conflict” then the petition is likely to be dismissed by the authorities concerned.
Individuals or homebuyers who do not meet the criteria for minimum numbers will again be at the mercy of the Committee of Creditors as they will not be included in the decision-making phase. Other remedies such as Customer Appeal, RERA, Civil Court shall be useless as soon as any other petition before NCLT has been given a moratorium, of which they are not members.
The dissemination of the COVID-19 pandemic across the globe, followed by a corresponding lockout, has adversely affected commercial practices worldwide. The strain on the troubled Indian markets, MSMEs and other small-scale business operations has thus further increased. As a consequence, the government is taking numerous steps in the form of support packages and regulatory reforms to deal with the already troubled economy and to further improve the mechanism of debt resolution and ease of doing business. The latest amendment being the Insolvency and Bankruptcy Code Amendment Ordinance, 2020. The amendment to IBC, 2016 is the combination of various reforms in light of the pandemic.
Since, the year when IBC,2016 came into effect which was 2016, it has been subject to many amendments. But one of the key amendments that should be discussed is the amendment in the time of COVID-19 crisis. The pandemic which has affected the population in the social, psychological and especially economically severely is creating many hurdles in an individual’s life which also resulted in nationwide lockdown in India by the Hon’ble Prime Minister. In the light of the COVID-19 crisis a new amendment was passed and made in the IBC,2016 which is related to steps to suspend filing of applications filed by creditors or companies under Section 7, Section 9 and Section10 of the IBC, 2016 for six months in order to stop companies into being forced into insolvency during such trying times faced worldwide. The Government of India, however, instructed the Ministry of Corporate Affairs, the Stock Exchange Board of India, the Department of Income Tax and the regulatory authorities to include various relaxations and extensions for corporate entities in relation to conformity and deadlines that would otherwise be compulsory.
It should be observed that in the light of the “COVID-19 crisis the Insolvency and Bankruptcy Board of India has amended the IBC,2016 by acquaint with Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020 which was in effect on 29th March,2020, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020. To the extent of time lines for any action relating to the corporate insolvency resolution process which could not have been carried out by any person or agency due to the lockdown, the period from the date of the announcement of the national lockdown by the Hon’ble Prime Minister until that lockdown is in force by the Central Government shall not be taken into account.”
Also, the Central Government and the Ministry of Corporate Affairs had issued a notice dated 24th March,2020. In this notification, the amount of default for launching insolvency and restructuring proceedings against a corporate debtor has been increased to a hundred times, i.e. the threshold has been increased from Rs.1,00,000 to Rs.1,00,00,000. With immediate effect, this provision entered into law. This was achieved in the exercise of the Central Government’s powers bestowed on them by the proviso of the IBC, 2016, section 4. It is observed that the amendment is a big step in the reduction unnecessary lawsuits.
Another critical problem confronted by the claimants under IBC,2016 was the commitment to the rigid deadlines of the phase of corporate insolvency resolution that were impossible to meet since the nationwide lockdown was there. There were several clarifications as to the actions of the resolution specialist and the execution of his tasks under the time limits, the actions of the meeting of the members of committee of creditor. During the corporate insolvency resolution process, the bankruptcy claimants along with the submission of resolution plans and the responsibilities and actions of the corporate debtor itself were sought.
With addition of the timelines for CIRP, IBBI has also brought in the Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020 which came into effect on 15th April,2020. The said Amended Liquidation Regulations, 2020 has excluded the period of lockdown for counting the time-lines for any activity in relation to liquidation process, which could not have been fulfilled by any persons or entities because of the lockdown.
Under Section 7, 9 and 10 of the IBC, the latest Section 10A provides for a comprehensive suspension of the commencement of the Corporate Insolvency Resolution Process (‘CIRP’) for a period of six months. It specifies that no new proposals for the initiation of a CIRP shall be made for a period of six months starting on 25 March 2020. It can also be expanded to provide corporate debtors with a safe refuge for a term of one year. The clarification by way of explanation excludes the application for initiation of CIRP filed before 25th March, 2020.
In addition, under Section 66 of the IBC, the recently added sub-section (3) forbids the submission of applications by Settlement Practitioners under sub-section (2) for a default on which Section 10A suspends the commencement of a corporate insolvency resolution procedure. Also, Section 66(2) of IBC,2016 imposes a duty on the director or associate of the corporate debtor to add to the debtor’s assets on a settlement professional transaction whether they were engaging in business with the willful purpose of defrauding creditors or did not exercise the required due diligence prior to the start of CIRP. In the event of such a default, the incorporation of subsection (3) prevents the management or associate from prosecution when CIRP is suspended under Section 10A. In addition, as per the Ministry of Corporate Affairs notification dated 24 March 2020, the minimum default requirement was raised from rupees one lakh to rupees one crore.
In periods when debt volumes were ever increasing, prior to the IBC period, IBC,2016 had accomplished to preserve some form of equilibrium with absurdity of debt prevalent in different industries. But the confusion with the numerous lenders which has risen up with the sword of suspension of invocation of any new cases under the terms of the IBC,2016 has led to a chaotic situation in relation to the effect of the aforementioned imminent ordinance. While the suspension will certainly have an enormous sigh of relief in these difficult times for the already strained firms, it will also have a huge effect on the companies and moneylenders, including banking and financial institutions. The effect of the aforementioned ordinance on the pending cases (which have been submitted but are not accepted by the Adjudicating Authority) is anticipated to be obvious, as the applicants may feel bigoted even though they have been victimized by the atmosphere of the pandemic. While the imminent order may provide the creditors with a brief sigh of relief, it would dramatically alter the mood of the moneylenders compelling them to follow prior long-drawn procedures that might not revive the corporate debtor and that, in fact, such as imposing arbitration or SARFAESI, are more time consuming.
This paper mainly deals with the key amendments of the IBC,2016 which came into effect on 1st December,2016. While discussing the key amendments, the two major amendments which is regarding the homebuyer’s amendment and the amendment made in the COVID-19 crisis are only discussed. In the first amendment which is regarding the homebuyer initially discusses the term Financial Creditor through certain case laws and then discussing the term Financial Creditor in the context of homebuyers and the giving homebuyers the status of Financial Creditor through various case laws like Chitra Sharma Case and the Amrapali Group Case. Whereas, in the second amendment, it deals with the latest amendment being the Insolvency and Bankruptcy Code Amendment Ordinance, 2020. The amendment is regarding to the steps taken to suspend filing of applications filed by creditors or companies under Section 7, Section 9 and Section10 of the IBC, 2016 for six months in order to stop companies into being forced into insolvency. Also, the amount of default for launching insolvency and restructuring proceedings against a corporate debtor has been increased to a hundred times. In addition, under Section 66 of the IBC, the recently added sub-section (3) forbids the submission of applications by Settlement Practitioners under sub-section (2) for a default on which Section 10A suspends the commencement of a corporate insolvency resolution procedure. The question might arise that why only these two amendments were discussed in the research paper? For this, it should be noted that since the inception of IBC,2016, it has been subject to many amendments and if the IBC,2016 is studied then there are some amendments which have created a major impact on the society. So, these two amendments have created a major or one could say a long-lasting impact on the society. Through these amendments, the society will be affected at large through it does not mean that the rest of the amendments are not as necessary as these two amendments. But it should be noted that these two amendments have also impacted and involved the common masses who are not generally involved in any sort of corporate affairs under the ambit of the IBC,2016. Whereas, earlier IBC,2016 was concerned with people involved in the processes like liquidation, “reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons.” Also, the paper not merely discusses the amendment but also the legislative purpose and the effect of the amendment.
 Preamble of THE INSOLVENCY AND BANKRUPTCY CODE, 2016
 Preamble of THE INSOLVENCY AND BANKRUPTCY CODE, 2016
 CP No- (ISB)-03 (PB)/2017
 Nikhil Mehta & Sons (HUF) & Ors Vs M/s AMR Infrastructure Ltd in Company Appeal (AT) (Insolvency) No- 07 of 2017 decided on 21.07.2017
 Writ Petition (Civil) No- 744 of 2017; VII (2018) SLT 37
 Writ Petition(s) (Civil) No(s).940/2017
 The Insolvency and Bankruptcy (Second Amendment) Act, 2018; (No- 26 of 2018)
 VII (2019) SLT 345; Writ Petition (Civil) No- 43 of 2019
 KR Srivats, Insolvency ordinance: Home buyers get some reprieve as SC orders status quo on pending cases, The Hindu Business line (13th January, 2020), www.thehindubusinessline.com/economy/insolvency-ordinance-home-buyers-get-some-reprieve-as-sc-orders-status-quo-on-pending-cases/article30558758.ece
 Preamble of THE INSOLVENCY AND BANKRUPTCY CODE, 2016