Last month, while announcing relief packages for covid-19 pandemic, finance minister Nirmala Sitharaman also announced that the threshold for defaulting companies under the Insolvency and Bankruptcy Code (IBC) has been raised, with immediate effect, to ₹1 crore from ₹1 lakh earlier. Earlier, creditors had the right to file a case under IBC if a company defaulted on payment of ₹1 lakh or above, now this limit has been raised to ₹1 crore
A few months ago, the government made another amendment under IBC introducing a minimum threshold of 100 or 10% of the homebuyers, whichever is lower, to take a defaulting developer to the National Company Law Tribunal (NCLT). We asked experts how these amendments will impact the rights of homebuyers, who are considered as financial creditors under IBC.
Nimish Gupta, managing director, RICS South Asia
The recent amendments will surely impact homebuyer rights and the customer sentiment, leading to further erosion of demand. We believe that the new directives may be restricted to new defaults, which are specific to the impact of covid-19, and may be a temporary measure for a period of six to 12 months, depending upon the period till which the crisis lasts.
However, in current times of severe market downturn and liquidity concerns, it might be prudent to give some space and flexibility to developers for deployment of funds available with them. It needs to be acknowledged that due to the lockdown, developers are shelling out funds from their own reserves for the upkeep of the labour without getting any productive work done.
It is a great decision to temporarily increase the threshold from ₹1 lakh to ₹1 crore for real estate specifically. However, to ensure the industries, especially MSMEs, are protected, the levels may have to be decided on the merit of each sector. For the real estate sector, it’s very important that the NCLT processes should be stalled for the next six months for any new defaults due to covid-19, given that we might see a spate of issues arising through NCLT itself.
S. Saroja, director, consumer advisory and outreach, Citizen Consumer and Civic Action Group
On the one hand, the government gives homebuyers the status of financial creditors under IBC and on the other hand, it keeps withdrawing their rights by amending the IBC.
It first made it mandatory that a minimum number of homebuyers need to get together to register a complaint against a defaulting promoter before NCLT and now it has increased the threshold for default from ₹1 lakh to ₹1 crore, which is unfair.
In my opinion, both the amendments are uncalled for, as they limit the avenues for redress available to aggrieved consumers and defeat the purpose of including homebuyers as financial creditors under IBC.
I can vouch that no consumer will want to approach NCLT at the first instance itself. After several years of failed attempts to get possession of his apartment only does one consider this option.
Giving homebuyers the status of financial creditors was positive. But the present amendments to the IBC make it similar to dangling the carrot in front of a horse. It is like showing a highly frustrated homebuyer one more avenue available for redress and as he nears it, it is taken farther away, beyond his immediate reach.
Prem Rajani, managing partner, Rajani Associates
After the homebuyers were given the status of “financial creditors” under the IBC, there were a flurry of filings before the NCLT by individual homebuyers. However, now homebuyers can approach the NCLT against a real estate company only by a joint application, in line with the Companies Act, where certain actions against a company can be activated only by members representing not less than 100 member or members holding not less than 10% of the share capital.
The amendment was passed after considering the genuine pleas of real estate developers, who were saddled by IBC action led by a handful of homebuyers, who were basically mere speculative investors and would sometimes initiate such resolution process with malafide intent.
The amendment has now increased the difficulties of genuine homebuyers.
However, increasing the default threshold limit to ₹1 crore for initiating action against a corporate debtor was to salvage the already deteriorating situation of the borrower company. The original threshold of ₹1 lakh was indeed too low to declare a company insolvent.
Homebuyers who are unable to garner adequate numbers can always seek necessary recourse under the Real Estate (Regulation and Development) Act, 2016.
Jehangir Gai, Mumbai-based consumer activist
The purpose of IBC is to provide a mechanism which acts in a timely manner so that the value of the assets can be safeguarded and maximized to protect the stakeholders. So the law must be meaningfully applied before it is too late to recover public money from defaulters.
The notification dated 24 March does not give any reason why the limit has been increased by a huge 10,000%. If the justification given is that it is by way of relief due to the covid-19 pandemic, then the limit ought to have been retained at the original amount of ₹1 lakh for defaults upto 20 March 2020, and the change or increase in amount ought to have been made applicable subsequently, with effect from the date of the lockdown.
The excuse put forth that the amendment is by way of a relief package is unacceptable. It will allow defaulters to get away with a fraud at the cost of citizens and public money.