9 facts you did not know about insolvency

NEW DELHI: Discrepancies in the insolvency and the bankruptcy code was one of the missing links in the debt recovery regime of our country. After much deliberation, the Insolvency and Banking Code, 2016, was introduced to create a balance in the rights between creditors and borrowers and strengthen the position of creditors, as it appeared that the legal regime was supportive of defaulters by giving them a long rope in the recovery process.
The unintended consequence of this has been for special cases like real estate where it is not only the debtor who is affected by a creditor’s actions but it is also a third party -- homebuyers - who's interest is also affected.
Magicbricks held a webinar with senior lawyer and Partner, Khaitan and Co, Sudip Mullick and Kumar Saurabh, a partner in the banking and finance team of the company, to find out ways in dealing with a developer’s insolvency. Here are the key takeaways of the discussion.
1. Insolvency can be invoked either by the company itself or the creditors (financial creditors or operational creditors) but financial creditors will be in control when the committee of creditors will be formed.
2. As homebuyers fall neither under the category of financial creditors or operational creditors, a third category was introduced – homebuyers.
3. Insolvency regime tries to address the temporary debt problems of the company and take over the control of the affairs of the company from its management and owners.
4. Homebuyers are not recognised as creditors. Therefore, the government came up with Form 'F', which is to be filled by them. However, an appellate tribunal decision in the Emaar Infrastructure Limited had concluded that when property buyers have been promised of assured return then they will be treated as financial creditors. “If they are deemed to be financial creditors, they will therefore be entitled to invoke or start insolvency proceedings,” says Sudip Mullick.
5. “Now, where there is no assured return but interest has been created, that also needs to be protected. So homebuyers will ultimately be protected or possibly courts will give an extended meaning to the definition of financial debt and financial creditors,” says Mullick.
6. Although insolvency regime prescribes for all creditors to file their claims within a specified time, the law does not penalise creditors for delayed filing. “So even if homebuyers have missed the deadline, they can clearly file their claims at a later stage and the insolvency professional who is appointed by the tribunal will be required to accept all these claims up to a period of 30 days before the insolvency resolution process ends,” says Kumar Saurabh. Even if a buyer does not file his claim at all during this period, his claim is not extinguished under the civil law.
7. In infrastructure and manufacturing sectors, end consumers of these companies are either corporates or government. But in the real estate sector, retail buyers are affected by insolvency of a developer. “It’s a new law and unintended consequence of homebuyers’ interest getting affected needs to be addressed and that can be done by way of an amendment to bring home buyers on par with financial creditors or ahead of financial creditors from a public interest prospective,” says Kumar.
8. RERA would still apply if insolvency proceedings have been initiated against a developer. If a firm is declared insolvent, it goes into liquidation. “There is a moratorium of 270 days where no proceedings can be instituted but that doesn’t mean that they will not have to comply with other laws. RERA is a compliance requirement and a developer will have to comply with the requirement of that law,” says Mullick. “The protection which is offered to homebuyers through RERA needs to override the provisions of insolvency law which can be addressed either through amendment or ordinance to begin with,” advises Kumar.
9. Recently, the Insolvency & Bankruptcy Board of India amended rules to state that any resolution plan for a company has to explicitly state how it has dealt with the interest of all stakeholders, including homebuyers. The move will ensure that banks and other creditors do not get away by protecting their own interests.
Insolvency proceedings against a firm:
Step 1: An application may be made either by the company or creditors of the company before the National Company Law Tribunal (NCLT).
Step 2: A professional is appointed, who has 180 plus 90 days to come up with a scheme and also create a body of creditors.
Step 3: If insolvency professional fails to come up with a plan then the company goes into liquidation. The board of directors is also suspended.
Step 4: The professional will run the company. A panel of (financial) creditors will be formed who will try to revive the company.
Step 5: If all the efforts fail then the assets of the company will be dealt with as provided in the Act.