Amendment To Insolvency Law

BE/RBI/32/2017

Jaypee Infratech insolvency: There’s a viable solution to home buyers’ troubles and it’s built in bankruptcy code – IIT PROFESSIONAL VIEWS

Recent issue related to Insolvency Law, involved Jaypee Infratech and its flat buyers.  Now, after a deliberation there are possibilities of an amendment  to the Insolvency and Bankruptcy Colde (IBC). Issues discussed are hereunder:

• The IBC is not a sectoral law which means that it does not cater to the demands and needs of a specific industry.
• The Real estate business has like other industries is bestowed with its own business models and structures.
• The Project of Jaypee Infratech which is now under a possible liquidation threat on account of the IBC.
• This project like others involves huge amount of hard earned public money invested in these projects.
• The IBC specifies the priority order through settlement of company’s debts against its creditors.
• This inturn means the amount after liquidation will be distributed within the stakeholders inview of their holding a priority over the realized means.
• However, the banks who have lent money are supposed to be the secured creditors and have a better priority than unsecured creditors.
• This precisely decides that the amount after realization would only be settled with the banks and nothing possibly would be left for the flat buyers.
• Hence lot of debates were held for amendment of the IBC in respect of real estate business and thus provide them an exception. This in fact is also under active consideration of the Government.

ISSUES FACED WITH AMENDMENT:

• The nature of code itself is a hindrance of the amendment.
• Infact as stated above it is not a sectoral law and exceptions if created for a particular sector like Real estate, would affect the interest of healthy development of insolvency rules.
• This in turn is felt, would mean that insolvency regime is taken for a ride.

RESOLUTION:

• With the recent Supreme Court order for take over management company by an Interim Resolution Professional (IRP), the IBC administration would remain untouched.
• The Supreme court through its another order also has given relief to flat buyers, through an assurance that their money would duly be returned to them.
• The reason quoted here is “ The flat buyers do not become creditors of any sort of a real estate company in view of the fact that they buy flats in the form of consumers and thus utilize the company’s services. This inturn defines them as Secured Creditors”.
• If this is agreed upon, the cause of contention would subside.
• However, though they would be treated as Secured Creditors, there is an element of risk like that of the banks.

CONCLUSION:

1. Section 36 of IBC talks about third party assets held in the form of trust by a company which goes for liquidation.
2. The company has sold the flats to individuals, who become partial owners of the flats, sold to them, however, the company holds the property in trust.
3. Thus according to section 36, all properties held in trust for third parties will not become part of the liquidation estate which is nothing but the sum of assets used to repay the creditors.
4. Since the debt of the company owed to the flat buyers will not be included, in the amount, and thus, no amendment in law is required.
5. Amendment of law should be sparingly used by the parliament, in line with the legal systems being followed. It is quite natural that doubts would naturally arise, which should be handled by the Judiciary without any amendment by the Parliament.
6. Further amendement would make other sectors bring up their issue, let apart, the amendment part would be a lengthy and time consuming and should be avoided.
7. Also IBC would not be involved in the RBI’s plan to handle the NPA positions.
8. Hence an amendment to the Law would mean putting RBI’s plan in jeopardy, which otherwise, have a very adverse effect on the Indian economy.
9. Hence suggested that amendment to IBC be avoided and look for alternate remedies available in the code of law.