The 14-member committee headed by corporate affairs secretary Injeti Srinivas, asked to review the Insolvency and Bankruptcy Code (IBC) has completed its task, and submitted a 90-page report to the finance minister Arun Jaitley. Taking into consideration the concerns of homebuyers as well as small and medium enterprises, the review panel has called for extensive changes in the law around insolvency.
Key Recommendations of the Review Committee-
• Homebuyers should be treated as financial creditors at par with the banks.
• All money raised under a real estate project is financial debt.
• Promoters of micro, small and medium enterprises (MSMEs) who are not willful defaulters should be allowed to bid for their companies.
• Scope of moratorium restricted to the asset of corporate debtor and not the guarantor.
• Trading of security should not be suspended during CIRP as it can give better price discovery.
• Voting share for approval of resolution should be reduced from 75% to 66%.
• Financial creditors won’t become related party for conversion of debt into equity prior to insolvency commencement date.
The committee believes that MSMEs are the bedrock of the Indian economy and the government should make exemptions and modifications in the IBC for MSMEs. It has suggested that operational creditors of important MSMEs should get paid more than the liquidation value due to their indispensability.
The high-level committee has proposed an addition to Section 29A(c) to the effect that “if an NPA (non-performing asset) account is held only because of acquisition of a corporate debtor then disqualification will not be applicable for a period of three years from the date of approval of the prior resolution plan by the NCLT.” This means anyone saddled with an NPA through acquisition shouldn’t be shut out of the insolvency process for three years.
The committee has also proposed that complete exclusion from the insolvency process under Section 29A (d) for being convicted of certain crimes as stipulated in the IBC be pegged instead at six years from the date of release from imprisonment.
The committee also suggested providing for an adequate period of time for obtaining necessary clearances after the approval of resolution plans by the National Company Law Tribunal (NCLT). It said timelines should be specified, with a maximum of one year to obtain approvals. Currently, lenders have 270 days to get a resolution plan approved, after which a company goes into liquidation.
The committee said banks have a more favourable position under the code now since they are financial creditors and that home buyers should have the same status. It said developers structure contracts unilaterally with home buyers having little say in them, hence the need for them to be protected. The committee also said that resolution plans have to comply with all provisions of the Real Estate Regulation and Development Act, 2016 (RERA).
In order to make the IBC process more robust, the committee has suggested barring persons who enter into any backdoor arrangement with corporate debtors formally or informally, directly or indirectly, from bidding for insolvent company by bringing them within the scope of the definition for connected persons. This reinforces the law’s provisions aimed at keeping out willful defaulters from bidding unless they have paid their dues.
The committee also addressed the issue of representation of a large number of lenders in the committee of creditors and suggested an amendment to allow voting by email to speed up the process.
On the matter of exemptions from the IBC moratorium, its scope may be restricted to the assets of the corporate debtor only. “Section 14 does not intend to bar actions against assets of guarantors to the debts of corporate debtor,” which could mean any personal guarantees furnished can be invoked during the moratorium period.
The committee felt that since many guarantees for loans of corporates are given by promoters, any stay on the actions against their assets can lead to the filing of frivolous applications intended at creating delays and protecting their assets.
The government is expecting to get the amendments based on the report’s recommendations passed by Parliament in the current session.