Business Laws

SC has made noteworthy pronouncements on the Insolvency Code

Jyoti Srivastava | Updated on February 07, 2021

These go to strengthen the Code, which an important measure, meant to prevent insolvency by reviving ailing businesses. The Code however, is not a recovery tool for creditors but a resolution mechanism to breathe life into stressed assets of the corporate debtor

There have been a couple of noteworthy pronouncements by the Supreme Court relating to the Insolvency and Bankruptcy Code 2016. These go to strengthen the Code, which an important measure, meant to prevent insolvency by reviving ailing businesses. The Code however, is not a recovery tool for creditors but a resolution mechanism to breathe life into stressed assets of the corporate debtor.

Collective 100

Financially bleeding allotees in the real estate sector got respite when the three-judge bench of the Supreme Court in 2019 ruled that the home buyer’s rights would remain at par with the lenders. They upheld their ability to take up bankruptcy proceedings against the real estate developers. Home buyers thereafter got classified as ‘financial creditors’ under the Code.

But in 2021, another pronouncement by a three-judge bench of the Supreme Court upheld a new amendment that modified the right of an individual home buyer to a collective action right. According to it, only when 100 real estate allottees under the same real estate project or 10 percent of the total allottees of such project of the same class come together, a proceeding could be initiated now.

If an applicant is able to gather 100 aggrieved allottees, then he can present the application under Section 7 of the Code. The further requirement of one-tenth of total number of allottees is meant to apply in a situation only if one-tenth of the total number of allottees is less than 100. Another observation is that no threshold limit has been declared in any other cases.

The plea was that un-amended Act was perceived as a source of indiscriminate litigation. On the other hand, the litigants were of the view, that law is discriminating real estate developers as a special class of the corporate debtors. Below the threshold, the concerns of allotees would be routed to the alternative RERA forums etc. Previously, the government had also taken steps to strengthen the NCLT in terms of the number of benches, courts, and members, to reduce the burden of the cases filed.

The amendment requiring the threshold for home buyers had a retrospective effect, meaning, all applications that weren’t yet admitted by the tribunal will have to satisfy this threshold with a window of 30 days to comply.

Section 32A of the IBC now provides immunity to the corporate debtor and its property when there is an approval of the resolution plan resulting in the change of management. The distinction is for corporate debtor who may have committed offenses prior to the Corporate Insolvency Resolution Process (CIRP), and the corporate debtor that is resolved, and taken over by an unconnected resolution applicant.

Liability of this corporate debtor for an offense committed prior to the CIRP shall cease.

The real estate allottees are affected severely by cash crisis due to the project being at stake. With the Supreme Court approving the ‘intelligible differentia’ of the legislature for real estate to define threshold and observing availability of alternative fora for below threshold, the concern of their court filing gap gets addressed. Nonetheless, it cannot be ruled out that these forums were in existence even before but NCLT undoubtedly was a popular choice.

The real estate being in gloomy state for quite a while, the effective resolution at alternative forums definitely needs attention for the hard earned investor.

(The author is an advocate and CEO of Indian Law Watch)

Published on February 07, 2021

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