Only Lenders Should Initiate Bankruptcy

Only Lenders Should Initiate Bankruptcy

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The Insolvency and Bankruptcy Code (IBC) should be amended to permit only financial creditors (read banks) to initiate bankruptcy proceedings against corporate debtors.

Neither an individual homeowner, who has been given the status of a financial creditor when the debtor is a real estate developer, nor a vendor with an outstanding payment should be able to initiate bankruptcy proceedings. What is at stake is the totality of the resources at the command of the company in distress and redeploying them in an optimal fashion, not piecemeal resolution.

The big picture would be kept in mind by stakeholders whose interests are tied up with the totality of resources. These are the major lenders to the company. Surely, vendors, who include small and medium firms, are not to blame for taking recourse to IBC that overrides other laws.

The fault lies with the country’s legal system in terms of its ability (or the lack of it) to enforce contracts. India comes at the bottom of the heap in enforcing contracts (163) in the World Bank’s Ease of Doing Business. Cutting judicial delays will enable vendors to file civil suits to recover their dues, rather than initiate bankruptcy proceedings.

Bankruptcy cannot be used as a substitute for dysfunctional working of normal contact laws. That might help recover some small amounts but endanger efficient redeployment, should that be necessary, of the totality of resources encased within the company.

The Real Estate Development and Regulation Act is up and running in states. The law allows a buyer to claim refund of the amount paid along with interest compensation from a developer who defaults and delays the possession of property.

The buyer has the right to refund even if the promoter’s registration is cancelled. And, in case the buyer wants the home, not a refund, the promoter has to pay interest for every month of delay, till the buyer gets the possession. Robust enforcement of RERA will prevent homebuyers from moving bankruptcy courts. Initiation of bankruptcy apart, homeowners should be like other financial creditors.

Source- Economic Times.