A To Z Of The Insolvency And Bankruptcy Code | A Beginner's Guide

Given the raised threshold to initiate insolvency and the proposed suspension of provisions which empower creditors and the corporate debtor (CD) to do so, it is likely that IBC is going to be on hiatus with no new insolvency resolutions to facilitate and with the pending ones on the back-burner. This gives us the perfect opportunity to take a step back to the basics and analyse the IBC as it was, as it is and as it is likely to be. In trying to do so much in a short series, we are mindful that we will be attracting the wrath of IBC enthusiasts who would complain that we are totally missing nuance and that our analysis is too basic, reductive and simplistic and it does not have enough academic rigor; we'd equally be trashed by those just starting out with IBC of being too convoluted.

Totally mindful of this risk, we march on—trying to unravel the IBC and bring about some method to all this madness, with so much happening with IBC, all the time, and on multiple fronts— legislative, National Company Law Tribunal's (NCLT) and the Courts.

Through this column, which is the first in a three-part series, we will try to give a brief overview of the primary features and actors in the IBC game and a sneak peek into the new and latest in IBC and the challenges that lie ahead. Since we all love lists, we walk you through these concepts alphabetically. But before we dive deep, here are a few words in the nature of a general preface to this path-breaking piece of legislation called the IBC:

Preface

The Indian Economy over the past few decades, to borrow the expression of Arvind Subramanium (the former Chief Economic Advisor), has journeyed "from socialism with limited entry to capitalism without exit." Over the last few decades, governments have not exactly rolled out red carpets for the setting up of new businesses and industry, and an exit from the Chakravyuha of corporate existence was also ridden with a massive amount of red tape. The legal regime governing winding up prior to the IBC, was, to put it brusquely, as sick as the companies it sought to cure.

The IBC sets out to change all of that. It endeavours to make exit easy and to preserve maximum value for all the stakeholders involved in the winding up of a company. Despite inheriting some very very sick zombie firms from the earlier legal regime, IBC, in a very short span, has shown great results. Debtor's paradise is now lost, as Justice Nariman beautifully puts it, and decisions in relation to a company under insolvency are taken by expert Resolution Professionals (RP) and Committee of Creditors (CoC), whose primacy has been established recently by way of amendments and progressive judicial decision making.

The shift from 'debtors in possession' to 'creditors in possession' helps safeguard and preserve a company's value and prevents mismanagement and asset dissipation, both of which have been endemic in the Indian scenario, especially as a company goes into the twilight zone. We have also witnessed great interest in revival of insolvent companies, and liquidation is gradually being seen, and rightly so, as the very last resort. All in all, the law proves that destruction can be creative and for the larger good. With this general philosophy of this law in mind, let's get cracking on the specifics:

A - Adjudicating Authority (AA)

This refers to the NCLTs which have replaced Company Law Boards, as the principal adjudication forum for all matters corporate. An NCLT, as the AA, admits and sets the ball rolling on a Corporate Insolvency Resolution Process (CIRP) by appointment of an Interim Resolution Professional and announcing a moratorium, which, for those who arrived late, is an embargo against institution of any suits/proceedings against the CD undergoing a CIRP.

An AA also reviews and approves the decisions taken by the CoC in relation to the revival of the company, acceptance of resolution plans, etc. Currently, there are 16 NCLTs operating as AAs and two National Company Law Appellate Tribunals (NCLAT), one at New Delhi and the other one recently constituted at Chennai. The newly-constituted NCLAT at Chennai will hear appeals from NCLTs which have jurisdiction over Karnataka, Tamil Nadu, Kerala, Andhra Pradesh, Telangana, Lakshadweep and Puducherry. The New Delhi Bench will continue to hear appeals from NCLTs of other remaining jurisdictions. Further appeals from the NCLATs lie to the Supreme Court, provided they involve a question of law.

Generally, on the working of the AAs, as someone wise said, IBC has in a lot of ways been a victim of its own success, due to which NCLTs are extremely overburdened and almost bursting at the seams; we certainly need more of them. In this context, the constitution of a new NCLAT bench at Chennai should go a long way in helping ease the burden on the docket of the NCLAT at New Delhi and further the IBC's objective of speedy recovery.

B - Bankruptcy

Simply speaking, insolvency is a financial state of being—one that is reached when one is unable to pay off his/her debts on time. Following this is bankruptcy, which, on the other hand, refers to the legal process that serves the purpose of resolving the issue of insolvency. IBC deals with both.

C - Committee of Creditors

The most significant change brought about by the IBC and its central philosophy, is the shift from 'debtors in possession' to 'creditors in control' in relation to an insolvent company. In other words, when a company defaults on its debt, control of the company shifts from the erstwhile management (who have led the company to where it is) to a CoC. This is for good reason, as creditors have the maximum amount of skin in the game and are the most vital stakeholders in the process. A CoC, therefore, is the primary decision maker of the fate of the company.

Amongst the many functions of CoC, the primary are:

• Approving the appointment of a RP;
• Approving a Resolution Plan (more on resolution plans a little later);
• Approving interim finance for the company, to ensure that its basic needs are met during the process of insolvency and the functioning of the company does not come to a grinding halt.

The question of primacy of CoC's decisions has been a source of great controversy. This controversy is the most heated in situations where the CoC decides to approve one resolution plan over the other, and especially when it caters to various creditors and stakeholders of the company. Under the scheme of IBC, it is essentially left to the wisdom of the CoC to decide as to which plan best serves the interests of the company. Though it is also correct that eventually it is the AA/NCLT which finally "approves" or "rejects" a resolution plan. This apparent dichotomy has led to a fight for primacy between CoC and NCLT and great controversy on the extent to which the AA/NCLT can second guess the CoC's decision; a decision which is essentially commercial in nature and not a legal one. We grapple with this question later in the article.

Also, C - Cross Border Insolvency

Picture this, 'X' company goes into insolvency with assets spread across the world and pending claims from various lenders. On the company becoming unable to pay off its debts, lenders in country 'A' initiate an insolvency process where the Court appoints an administrator to deal with the company's assets. Simultaneously, lenders of the company in country 'B', let's say India, also initiate an insolvency process where the Court kickstarts the CIRP and appoints an Interim Resolution Professional to begin the process.

This kind of situation gives rise to many questions, none of which are too easy to answer:

• Can these two insolvency processes proceed simultaneously?
• Which administrator/RP is to take the lead, constitute the CoC and take control of the assets of the CD?
• Which law will govern the distribution of the proceeds of a resolution plan?
• Is there a way to consolidate these proceedings for an effective and complete resolution?

The IBC, prima facie, does not address these questions comprehensively but instead seeks to promote an ad-hoc framework of cross-border insolvency through Sections 234 and 235, possibly to retain flexibility and since there's no one size fits all approach possible in such circumstances. These provisions envisage a system to be created through bilateral agreements with foreign countries and provides for an option of sending letters of request to foreign courts for information on the CD's assets which are located abroad.

The problem with the current position is that it involves lengthy negotiations with individual countries to conclude treaties/agreements which will, more often than not, have different terms and procedures. This position is far from ideal and renders cross-border insolvency processes- agreement-dependent, which comes at the cost of consistency and certainty. It was precisely this position that prompted the Insolvency Law Committee in 2018 to recommend the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997 as a separate part in the IBC.^[1] Adoption of the Model Law will enable India to align its insolvency laws with the internationally accepted standards.

Presently, the Government is still considering amendments to the IBC to provide for cross-border insolvency but this gap in the law has not prevented the NCLAT from allowing a cross-border insolvency process for Jet Airways. In an order given in September, 2019, the NCLAT approved a 'Cross Border Insolvency Protocol' entered into between the Dutch Administrator of the company and its RP in India.^[2] The Protocol aims to promote a coordinated insolvency process for Jet Airways by enabling coordination, communication, information sharing between the CoC, RP and the Dutch Administrator. This makes Jet Airways the first Indian company to undergo a cross-border insolvency treatment. In another decision, NCLT, Mumbai has allowed the inclusion of Videocon's foreign assets and properties in its CIRP in India, also illustrating the fact that the lack of a legal framework on cross-border insolvency is not deterring the Tribunals from endorsing its principles.^[3]

With everyone still celebrating this progressive decision by the NCLAT, a decision of the US Bankruptcy Court for the Delaware District has provided another shot in the arm for the cross-border insolvency regime for Indian companies. On November 4, 2019, a Delaware Court recognised the insolvency case of SBI v. SEL Manufacturing Company Limited as 'foreign main proceeding.' As per the UNCITRAL Model Law, on which the US insolvency law is modeled, a 'foreign main proceeding' is a proceeding which takes place in the centre of main interest of the debtor which is the place of registration or primary operations of the debtor.

The recognition will result in an automatic stay of any proceedings against the CD in US and bar any transfer of its assets. It will also empower the RP to undertake discovery into the CD's assets and to manage its estate, including the sale of any assets. This decision, coupled with the recommendations of the Insolvency Law Committee, should prompt the Government of India to move swiftly in introducing a cross-border insolvency legislative framework.

However, it appears that the Government is not rushing into a legal framework without adequately studying the issues involved. In January this year, the Ministry of Corporate Affairs constituted a new committee to study and analyse the recommendations of the Insolvency Law Committee and submit a report within three months. And in February, it expanded the terms of reference for the Committee to include the study of the UNCITRAL Model Law for Enterprise Group Insolvency and to make recommendations for the IBC. Hopefully, such thorough exercises will yield a robust legal framework which is able to cater to all situations which arise in a cross-border insolvency process.

D - Default

A 'default' with respect to a debt owed by the CD is a trigger for the initiation of CIRP. The IBC defines 'default' in rather uncontroversial terms as : the non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the corporate debtor. The IBC does, however, distinguish between the 'default' in respect of the debt owed to financial creditors and operational creditors. The Supreme Court analysed this distinction in Innoventive Industries Limited v. ICICI Bank^[4] (Innoventive Industries) based on Section 7 (initiation of CIRP by financial creditor) and Section 8 (initiation of CIRP by operational creditor) of the IBC. The Court noted that scope of determining a default of a financial debt is limited to the records of the information utility and evidence supplied by the financial creditor. The fact that such a debt is disputed by the CD is inconsequential as long as the debt is due and payable, meaning that it is not interdicted by a law or is payable at a future debt. The CD would be entitled to object to the claim of non-payment on these grounds at the stage of inquiry into the occurrence of 'default' under Section 7(5). With the definition of 'default' as the only guide for the AA, it has no option but to admit the application filed by a financial creditor if it comes to the conclusion that the debt is due and payable.

In contrast to this, the CD had considerable leeway in disputing the debt owed to an operational creditor, who does not have the luxury of applying directly to the AA without giving notice of the unpaid debt to CD. The CD is then given ten days, from the receipt of such notice, to claim the existence of a dispute on the payment of the debt with the operational creditor. For instance, a defect in and rejection of goods and consequent lack of liability to pay may be a good dispute. The existence of a dispute with respect to a debt can, therefore, prevent the initiation of CIRP.

The reason for allowing the CD to dispute only operational debts is two-fold: first, the debts owed to operational creditors are usually small amounts and a CIRP cannot be allowed to be initiated for paltry amounts, especially when there is room for negotiation with the creditor with regard to the payment of the debt and the capacity of the company to continue as a going concern is not under serious question; second, the chances of raising a dispute with regard to a debt owed to financial creditors is significantly lesser because such debts are generally well-documented and relatively more unimpeachable, especially when registered in information utilities. This leaves very little scope for the CD to dispute its liability and for the AA, which has to only ascertain whether the debt is due and payable.

Also, D - Dispute

The language of the provisions and the Supreme Court's decision in Innoventive Industries clarifies the distinction between the position of financial and operational creditors and also underlines the fact that the CD may claim the existence of a dispute in respect of an operational debt and avoid a company going under CIRP.

But the question that arises is—what qualifies as a dispute?

Section 8(2)(a) allowed the CD to bring to the notice of the operational creditor - the existence of a dispute and record of the pendency of the suit or arbitration proceedings filed before the invoice was raised by the operational creditor. This could be used to avoid the company going into insolvency. The use of the word 'and' ostensibly appeared to suggest that pendency of a suit or arbitration proceeding with respect to a debt was the only indicia of existence of a dispute, and it was only in cases of pendency of a suit or other arbitration proceeding that a CIRP could be avoided. This was problematic for many reasons. This meant that any non-payment (which may be for good reason) and perceived default rendered an entity at the risk of being taken to CIRP. It is only in those cases where a CD was either already defending the demand in a court/arbitration or where it had proactively initiated litigation/arbitration to contest a possible future demand, that it could avoid the CIRP by bringing forth the existence of that suit/arbitration proceeding as evidence of existence of a dispute. This was absurd as it left a CD with no option but to initiate litigation/arbitration against all those who may have an interest in initiating the CIRP against it. Not having done this, the CD had practically no defence and risked being thrown into the CIRP oblivion.

Fortunately, the Supreme Court has cleared the airs on this issue in Mobilox Innovations Private Limited v. Kirusa Software Private Limited,^[5] where it has held that the pendency of suit/proceeding is not the only evidence of existence of a valid dispute; in other words, a demand can be considered disputed even without there being a suit/proceeding already pending in a Court or Tribunal. The Court has achieved this by reading the word 'and' as 'or' in Section 8(2)(a), in line with the objective of the IBC to discourage a full-fledged CIRP based on insignificant amounts owed to operational creditors. In order to avoid the risk of opening the floodgates for blanket denials of liability by the CD, the Supreme Court has given the AA some discretion in ascertaining that the dispute is not a spurious, hypothetical, or illusory dispute, crafted merely with a view to wriggle out of liability. In doing so, the Supreme Court has implicitly imported the 'bona fide' standard which appeared in the definition of 'dispute' in the earlier Insolvency and Bankruptcy Bill, 2015. The decision allows the CD to claim the existence of a dispute on the notice of payment by the operational creditor, even if it has not actively pursued it before the CIRP, so long as it is able to satisfy the AA of the genuineness of the dispute.

E - Endless Delay, A Persistent Issue?

Timely Resolution and preservation of value in underlying assets is one of the main objectives of IBC. It has always been projected as a law which promotes the timely completion of the insolvency process, well in line with its other objective of maximizing the assets' value. This desire is also reflected in the provisions of the IBC which originally envisaged the completion of the insolvency process within 180 plus 90 days in Section 12. In practice, however, the insolvency regime is still plagued by endless delay in completion of CIRPs. Many attribute this to the delay which occurs at the adjudication stage, where litigation in most cases causes the CIRP to extend beyond the time limit. This undesirable state of affairs is what prompted the Supreme Court to exclude the time taken in litigation from computing the 270 days limit in ArcelorMittal India Private Limited v. Satish Kumar Gupta.^[6]

Worried that the ruling would only exacerbate the situation of delays, the Government, acting with great alacrity, amended the IBC in 2019 to provide for an upper limit of 330 days for completion of the CIRP but clarified that this limit would be inclusive of both the time taken in legal proceedings and any extensions granted by the Adjudication Authorities. The failure to complete the CIRP within this time limit would attract liquidation which was clearly an unfeasible option for all stakeholders involved in the CIRP.

In laying down a non-derogable time limit, the Government was clearly motivated by the desire to preserve the value of assets which naturally depletes if the CIRP goes on indefinitely. But it possibly disregarded the fact that non-compliance with the deadline, even inadvertently, would push the CD towards liquidation which has an equally devastating effect on the CD. This effectively made the remedy worse than the ailment and led to a challenge to the validity of the provision before the Supreme Court in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta^[7] (Essar Steel).

The central argument against the provision was premised on the well-known maxim :actus curiae neminem gravabit— an act of Court shall prejudice no one. Since the time limit brooked no exception for situations where the delay was occasioned by the NCLT/NCLAT's inability to complete the CIRP without any fault of the litigant, it was considered to be a violation of Article 14 (right against non-arbitrary treatment) and Article 19(1)(g) (right to carry on business). However, instead of striking down the provision in its entirety, the Court chose to strike down only the word 'mandatorily' and to read it down as 'ordinarily.' This was done to balance both the need for speedy disposal along with the need to promote resolution of the CD in cases where the delay was not attributable to it.

The effect of this judgment is that, ordinarily, a CIRP should be concluded within the 330 days limit. But if any extension has to be granted by the AA, it can only be granted where it is shown that a short period is left for completion of the CIRP and that the time taken in legal proceedings is attributable to the pendency of the action before and/or inefficiency of NCLT/NCLAT itself. While the judgment has the merit of introducing some flexibility in what would otherwise have become an unfair provision in practice, two issues still remain unaddressed: One, the Court has not devoted any discussion to the standard that has to be satisfied in convincing the NCLT/NCLAT that they themselves have occasioned the delay. Second, it has provided little guidance on any limit to the extensions that can be granted beyond the 330 days limit. In absence of any limit, the ruling may end up aiding exactly what the 2019 amendment had set out to tackle.

F - Financial Creditor

One of the most important stakeholders in the CIRP are the 'Financial Creditors.' This is because they hold the key to unlocking a new life for the CD. This influential status stems from the primacy that the IBC gives to them as the voting members of the CoC and in priority of their claims. Given that it is only the financial creditors who are capable of assessing the viability of the company and who can place it in a long-term context of revival, the IBC accords them this status. Since the financial creditors have lent capital, on which the company's existence substantially depends, they have a major say in determining its future course of action. As members of the CoC, they wield significant influence in decisions such as approval of the resolution plan ( it is only when 66% of the CoC has approved a resolution plan, can it move forward to the AA for approval), modification of the capital structure, creation of security interests and undertaking related party transactions.

However, in 2019, a ruling of the NCLAT in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited^[8] had threatened this coveted position of financial creditors when it treated the operational and financial creditors at par by holding that the CoC had no role in deciding the distribution of claims from resolution plans and had to only decide the feasibility of bids. This ruling had the effect of diluting the cardinal principle of preference to secured creditors and implied that there was no difference between secured and unsecured creditors in distribution of proceeds from the resolution plan.

This immediately prompted legislative intervention in the form of an amendment in 2019 itself, which restored the primacy of secured financial creditors by enabling the CoC to take into account the order of priority given in Section 53 and the value of a security interest of a secured creditor in the distribution of proceeds, in approving the resolution plan. Further, in order to prevent any disadvantage to operational creditors, the Parliament amended Section 30(2)(b) to state that the resolution plan had to provide the higher of the liquidation value or resolution value to them.

This position was also affirmed by the Supreme Court decision in Essar Steel where it held that it was only the CoC, composed entirely of financial creditors, that could decide the feasibility and viability of resolution plans. This is premised on the reasoning that financial creditors, who are willing to take haircuts on their loans and place their claims in a long-term context of the company's revival, are better placed than operational creditors to take commercially-sound decisions. However, this commercial wisdom of the CoC is not immune from judicial review and the AA has to still ensure that the decision of the CoC reflects a plan to keep the CD alive as a going concern, maximise the value of its assets and take into account the interest of all stakeholders, even the operational creditors. But as long as a CoCs decision in accepting one resolution plan over the other is motivated by the objective of maximising the value of the company and interests of operational creditors with due regard to its capacity and needs to continue as a going concern, the AA would have its hands off and cannot second guess the commercial decisions taken by the CoC.

In the backdrop of Covid-19, financial creditors face yet another challenge in recovering their dues and one which is unlikely to be solved in the Courts. The Ministry of Finance has recently announced that it plans to suspend fresh insolvency filings under the IBC for a year and exclude Covid-19 related debt from the definition of 'default.' With the minimum threshold to initiate an insolvency already raised from one lakh rupees to one crore rupees, these measures indicate the Government's intention of prioritising the continuity of businesses over resolution under IBC, in already damp market conditions. The combined effect of this on financial creditors would be adverse, to say the least, considering that the measures foreclose the opportunity to seek resolution under the IBC for a significantly long time. Additionally, this may very well serve as an escape route for undeserving debtors who may have had an impending default, even before Covid-19, which has now been given protection from recovery. Some see the proposed suspension of the IBC as a positive measure since the CoC would unlikely to have received any bids for the CD, given the serious financial pressure that companies are under. It is also being considered as a blessing in disguise for strengthening alternatives such as pre-pack insolvencies. While discussions on the need for a pre-pack insolvency regime have predated Covid-19, it is likely to gain more prominence after the suspension ends and there is an upsurge in the number of insolvencies.

Also, F- Fraudulent Transactions

"Three businessmen go for dinner, where each tries to prove his financial worth by offering to pay the bill. One of them says that he should pay as his company had a great financial quarter. Another one says that he has recently got a huge amount as inheritance from a rich aunt that he never know he had, therefore, being cash rich, he should pay. And the last one, who also happens to be a promoter of a company, replies, tongue-in-cheek, that he should pay since his company is going under insolvency next week!"

With an insolvency on the horizon, unscrupulous promoters sometimes acting in the capacity of directors of the CD may seek to misappropriate assets to the detriment of other creditors. The IBC recognises this possible mischief and seeks to regulate/curb the carrying-on of business which is done with an intent to defraud the creditors of the CD or for any fraudulent purpose. Under Section 66 of the IBC, the RP is empowered to apply to the AA in case it finds the occurrence of any fraudulent transactions. On the application, the AA may direct any persons who were knowingly parties to such transactions to make contributions to the assets of the CD and claw back those monies. The provision goes a step further in enabling the AA to direct the director or the partner of the CD to make contributions to its assets. But to what extent can the RP uncover such antecedent actions of the directors /partners?

Section 66(2)(a) of the IBC spells out what is usually called the 'Twilight Period,' which is : the period before the insolvency commencement date, when the directors knew or ought to have known that there is no reasonable prospect of avoiding the commencement of the insolvency process for the CD. The directors/partners are required to exercise due diligence in carrying on the business in the twilight period in order to minimize any potential loss to the creditors. Any failure to do so or any negligent or reckless conduct attracts the application of the provision. It can be argued that the provision imposes additional duties on the directors to ensure that the creditors' interests are protected now that the company has entered the zone of a possible insolvency.

The reason for this protection is clear—once the company is on the verge of insolvency, it has to cater to the interests of its creditors, who will only benefit if there are enough assets for a prospective resolution applicant to bid for it or are enough for satisfying their claims in case of liquidation. Thus, transactions selling assets at an undervalue or prioritizing the interests of one creditor over the other are some of the transactions which the provision seeks to regulate.

Apart from civil liability under Section 66, fraudulent transactions may also invite criminal liability under Section 69 of the IBC. Like Section 66, where the directors may escape liability by showing that they exercised due diligence in minimizing loss to creditors, Section 69 also allows the officer to show that he had no intent to defraud the creditors at the time of commission of the acts. However, unlike Section 66, the provision has a look-back period of five years before the insolvency commencement date which allows the officer to escape liability for any acts done before this period. On the contrary, the twilight period in Section 66 is not expressed in numerically certain terms and relies on the 'subjective' knowledge of a potential CIRP, that a director or partner may have had in the build-up to the CIRP. There is, therefore, little room for disputing the liability to contribute to the assets of the CD under the provision. Many of these fraudulent transactions come up in forensic investigations commissioned by RPs.

G - Group Insolvency

Aristotle once famously said that the whole is more than the sum of its parts. This cannot be more relevant than in the case of group companies where, more often than not, the entire group as a single economic entity is more valuable than the individual companies which make it. A question which arises here is whether this logic can be stretched to apply to the insolvency of companies which make up the group. Theoretically, it can. Group insolvency, as it is called, can be understood as a consolidated insolvency process for related companies which are part of a larger group. Practically, however, the IBC does not address this.

Seen from a jurisprudential standpoint, group insolvency seeks to balance two important imperatives: on one hand, the separate legal personality of even those companies which are closely inter-connected in a group, and on the other hand, recognizing that in spite of this distinct personality, a consolidated insolvency process is advantageous for all stakeholders.

Even though there is no legal framework supporting group insolvency, this has not prevented NCLT benches and the NCLAT from engaging with this issue.^[9] In fact, these decisions formed the backdrop to the Report of the Working Group on Insolvency^[10] which was released in September, 2019. A breakdown of group insolvency into 'Procedural Co-ordination' and 'Substantive Consolidation' by the Working Group has guided both its explanation and recommendations. 'Procedural Co-ordination' mechanisms aim to coordinate the different insolvency processes of various group companies, without actually disturbing the division of assets and substantive claims of creditors of each of the group companies. This mechanism reduces costs and time associated with different insolvency processes.

In going a step further than mere coordination, 'Substantive Consolidation' aims to consolidate the assets and liabilities of group companies so that they can be treated as a single economic unit for the insolvency process. This typically targets those corporate groups where separate personality of group companies is used to escape liability and where the assets and operations of the group companies are otherwise inseparable.

Notwithstanding its benefits, the introduction of a framework for 'Substantive Consolidation' may ruffle feathers in the market because it disregards the separate legal personalities of the group companies and combines their asset as part of a single insolvency, sidelining creditor expectations in the process. The Working Group has taken note of this and has therefore recommended a phased implementation of the recommendations with 'Procedural Co-ordination' and provisions dealing with perverse behaviour of group companies to be considered in the first phase and 'Substantive Consolidation' and Cross-Border Group Insolvency in the second phase. This is a good step especially when the general cross-border insolvency framework is still at a nascent stage. Since the recent amendment to the IBC in 2020 has not dealt with group insolvency at all, it will be interesting to see how the Parliament implements these suggestions in the future.

H - Homebuyers

Home buyers constitute the major source of finance for builders in housing projects. Much of the financial needs of builders are met by the booking amounts/payments made by the homebuyers. With this being the position, homebuyers clearly had an interest in the insolvency process of companies engaged in construction of housing projects. But the IBC posed an initial hurdle: whether such buyers qualified as 'Operational' or 'Financial' creditors and if they constituted a separate class of creditors, what was the extent of their rights under the IBC. There were judicial attempts to enable homebuyers to stake a claim in the insolvency process.^[11] This was also sanctified by an amendment in 2018 which conferred upon them the status of 'financial creditors' and treated the amount raised by them as a 'financial debt.'

Objections against the inclusion of homebuyers as financial creditors were quick to be made; there was no clarity on when a 'default' occurred; it was also argued that they could not be treated equally with secured financial creditors. Additionally, real estate developers who were clearly distressed by the amendments challenged them as violative of the Constitution. Fortunately for the homebuyers, the Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India^[12] (Pioneer) rejected the challenge and upheld the amendments allowing them to occupy a place in the CoC and to be part of the decision-making process concerning the company's future.

However, this amendment had an unintended and unseen consequence: it now effectively empowered even a single homebuyer to initiate CIRP and bring an entire project to a grinding halt. This turned the IBC to a mechanism to redress individual grievances which it was never meant to do, especially when such a mechanism already existed under the Real Estate (Regulation and Development) Act, 2016 (RERA).

In light of the above, the Parliament has recently amended the IBC and introduced a minimum numerical threshold of not less than 100 allottees or 10% of the total number of allottees, whichever is less, of a real estate project to initiate insolvency. This move, many homebuyers feel, sets them back and poses an insurmountable burden to look for the requisite number of homebuyers to initiate insolvency. Real estate developers, on the other hand, feel that the amendment will ensure that only bona fide applications are filed and that they are not driven to insolvency only on the basis of individual grievances.

Homebuyers are pulling out all the stops in trying to wish the amendment away. In January this year, they approached the Supreme Court which ordered the AAs to maintain status quo with respect to applications filed before the amendment, till the constitutional validity of the law was decided. They could not, however, register a success before the Standing Committee on Finance which did not recommend dropping the clause from the Bill, despite the dissenting views of three members.^[13] All eyes are now on the Supreme Court which is going to adjudicate the constitutional challenge this year and has rich jurisprudence from earlier to borrow upon in deciding the validity of the amendment.

Divided opinions aside, the amendment reinforces the view that the IBC is not meant to redress individual grievances, a remedy for which already exists under RERA. Prescribing a minimum threshold does not in any way dilute the original intent of the IBC which is to provide them a place in the CoC when the real estate company goes under insolvency. Notwithstanding what actually happens in practice, the IBC was never intended to be used as a coercive tool to compel a company to deliver on its promises or to repay the amount taken. There are other remedies for this. As Justice Nariman puts it in the Pioneer verdict, it is only when a homebuyer has completely lost faith in the ability of the current management to complete the project and wants it to be completed by a different developer, should he invoke the remedies under IBC. Seen in this context, a company cannot be thrust into insolvency just because a single homebuyer feels that it should be managed by somebody else. Such a radical decision should be the result of at least a minimum consensus among the homebuyers, especially when the insolvency route also involves the risk of liquidation of the CD . This is precisely what the latest amendment echoes.

To be continued….