Insolvency panel for treating home buyers as financial creditors

Last Updated: Wed, Apr 04, 2018 13:56 hrs
Real Estate (PTI photo)

New Delhi: The Insolvency Law Committee, of the Corporate Affairs Ministry, has suggested that home buyers be treated as financial creditors to enable them to participate equitably in an insolvency resolution process.

The report of the 14-member committee headed by Corporate Affairs Secretary Injeti Srinivas, that was made public on Tuesday, has also suggested relaxations for micro, small and medium Enterprises (MSMEs) under the Insolvency and Bankruptcy Code (IBC) which came into force in December 2016.

Recommending relief for home buyers stranded due real estate projects left incomplete by promoters facing insolvency proceedings, the panel suggested home buyers be treated as financial creditors owing to the unique nature of real estate financing and their treatment by the Supreme Court in ongoing cases.

"Notably, classification as financial creditors would enable home buyers to participate equitably in the insolvency resolution process under the Code," the report said.

Under the IBC, 'financial creditor' refers to any person to whom a financial debt is owed.

The report also suggested that the government exempt MSMEs from application of certain provisions of the Bankruptcy Code.

"Illustratively, since usually only promoters of an MSME are likely to be interested in acquiring it, applicability of section 29A has been restricted only to disqualify wilful defaulters from bidding for MSMEs," it noted.

Section 29A of the IBC sets out the ineligibility criteria for bidders.

In this connection, the committee has suggested that only those who contributed to the default of the company, or are otherwise undesirable, should be ineligible from bidding for the stressed assets.

"Moreover, being mindful of the non-performing assets (NPA) crisis in the country, the need to encourage the market for NPAs was felt and accordingly several carve-outs from section 29A have been recommended for pure play financial entities.

"In order to prevent retrospective application of any proposed change, it has been recommended to add a provision that the amendments shall be applicable to resolution applicants that have not submitted resolution plans as on date of coming into force of the said amendment," the report said.

Regarding withdrawal of the resolution application in exceptional circumstances, the panel has suggested that there should be approval from the Committee of Creditors (CoC) with 90 per cent of share of the vote.

The IBC was amended in January to prevent, among others, wilful defaulters and those whose accounts have been classified as NPAs, or bad loans, from bidding for acquiring stressed assets.

The gross NPAs in the Indian banking system have reached the staggering level of nearly Rs 9 lakh crore.

The government has embarked on a two-pronged strategy on bad loans.

On the one hand, it has brought in the IBC which provides for a six-month time-bound insolvency resolution process. On the other hand, it has approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks.

In June last year, the RBI referred 12 accounts, totalling about 25 per cent of the gross NPAs, for resolution under the IBC.