The government, on September 24, decided to provide some "breathing time" for companies to recover from coronavirus pandemic-induced financial stress and extended the suspension of fresh insolvency proceedings under the insolvency law by three months until December 25.
This, say some legal experts, will adversely affect homebuyers’ interests as delivery of homes may get delayed and they may not be able to initiate the corporate insolvency resolution process (CIRP).
“The will provide a window to the errant builders to take the homebuyer for granted. The homebuyer who was earlier categorised as a financial creditor and could have initiated corporate insolvency under section 7 of IBC 2016, was earlier hit by an amendment wherein 10 percent of the total allottees or 100 allottees (whichever was less) were required to initiate the CIRP against the builder,” Sumit Batra, Partner at India Law Alliance, a law firm told Moneycontrol.
“With extensions as are being provided now, the homebuyer will suffer the maximum as neither he would be able to get his dream home nor he would be able to initiate CIRP,” he said.
“The reason behind large-scale malpractices and frauds prevalent in the real estate sector is the never-ending legal proceedings resulting in delayed justice. Such an extension will further delay legal proceedings and give space to builders to continue with further manipulation especially with regard to stripping off assets since they know their company is under NCLT proceedings,” said Abhay Upadhyay, president, Forum For People's Collective Efforts.
“Without any safeguard in place to protect the interests of homebuyers, such extensions will only embolden and encourage builders to continue their unscrupulous activities and harass homebuyers. Steps should have been taken to ensure speedy justice for homebuyers instead of further delaying delivery of homes. Don’t forget there are buyers waiting for possession for over 10 years,” he adds.
Builders say that the extension gives the much-needed immunity or exemption to stressed companies from being pushed into insolvency.
"This will provide a much-needed breather to the industry," said Niranjan Hiranandani, the National president of apex industry body, ASSOCHAM.
Section 10 of the IBC should have been excluded, say experts
Legal experts also said that while the logic of suspension for not being able to initiate proceedings under Section 7 (financial creditor) and 9 (operational creditor) of IBC, seems justified to an extent that lockdown triggered due to widespread outbreak of Covid-19 affected the paying capacity of the corporate debtors, suspension imposed for applications under section 10 (insolvency by corporate entity themselves) seems illogical.
It is a settled legal position that IBC is an effective framework for the resolution of stress of a corporate debtor, said a legal expert.
While IBC is now needed more than ever in light of the economic hardships endured by businesses on account of Covid-19, the ministry of finance saw it fit to restrain the creditors from taking recourse to IBC during Covid-19 on the principle that the lenders should not be allowed to initiate a resolution process which invariably wrests the control of the corporate debtor away from its management pursuant to defaults which occurred during the COVID 19 period.
“However, this rationale in my view may not hold water in case of applications under Section 10 of the IBC. There is no gainsaying that IBC is among the most effective mechanisms for the resolution of stressed assets. If the management of the Corporate Debtor, in their wisdom, decided to resolve the stress in the corporate debtor under the provisions of IBC, it may have been more feasible to allow them to do so,” said Ravitej Chilumuri, Partner, Khaitan & Co.
Extension unlikely to impact ongoing cases
However, there are some legal experts who are of the view that it is unlikely that the extension would have an adverse impact on rights of the homebuyers looking to initiate insolvency proceedings against builders.
“The extension of suspension period of IBC by another three months would mean that no creditor or corporate debtor would be able to initiate IBC proceedings in respect of defaults committed between March 25, 2020 to December 25, 2020. This is not an ideal scenario as corporate debtors would also not be able to initiate the process of insolvency for resolution of stress being faced by them on account of Covid-19,” said Ramakant Rai, Partner, Trilegal.
The extension would not impact the ongoing cases before NCLTs in respect of defaults committed prior to March 25, 2020. As far as homebuyers are concerned, their right to file insolvency proceedings would be impacted only if a homebuyer is looking to file insolvency for a default after March 25, 2020, he said.
Considering that most defaults by builders primarily relate to the period prior to enforcement of RERA (i.e. years 2017/2018), it is expected that the extension would unlikely have adverse impact on rights of the homebuyers looking to initiate insolvency proceedings against builders, he added.
The six-month period of suspension for IBC was effective from March 25. It was to end on September 24.
As per the notification issued by the corporate affairs ministry, the suspension of fresh proceedings under the Insolvency and Bankruptcy Code (IBC) has been extended for a "period of three months from the 25th September, 2020".
Finance Minister Nirmala Sitharaman's office had tweeted that the extension gives companies "breathing time" to recover from financial stress.
"Extension of suspension of sections 7, 9, 10 of the IBC reinforces the Government's commitment to protecting businesses," the tweet said.
In June an ordinance was promulgated for suspension of fresh insolvency proceedings and that came into effect from March 25, the day the lockdown was imposed.
A bill to replace the ordinance that had amended the IBC was cleared by Parliament last week. The finance ministry, which is implementing the IBC, has suspended Section 7, 9 and 10 to provide relief for companies reeling under the impact of the pandemic.