Insolvency Code Amendment Passed By Lok Sabha Treats Home Buyers As Financial Creditors [Read Bill]

The Lok Sabha has passed the Insolvency and Bankruptcy Code (Second Amendment Bill) 2018. One of the significant features of the Bill is that it recognizes home buyers, who have invested money in real estate projects for allotment of residential flats, as financial creditors. This is sought to be done by expanding the definition of 'financial debt' as given in Section 5(8) of the Code. The amendment seeks to include an explanation after clause(f) of Section 5(8) as follows :

"any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing".(emphasis supplied)

Amounts having the commercial effect of borrowing are treated as 'financial debt' as per Section 5(8)(f). Therefore, any amount invested by a person in a real estate project for allotment of apartments will be deemed as "financial debt".

The effect of this will be that an apartment allottee will come within the sweep of "financial creditor" as defined in Section 5(7). Therefore, a home buyer, either by himself of with others, can initiate insolvency proceedings against a defaulting builder by filing application as a "financial creditor" under Section 7.

The amendment also proposes to introduce special process for micro, small and medium enterprises, by introducing Section 240A.  The newly proposed section empowers Central Government to issue notification specifying special process for such enterprises.

The Bill further states that corporate rescue plan should get the approval of Competition Commission of India, if the plan contains a proposal for combination( as per sub-section(4) inserted in Section 31).

The minimum percentage of votes in the committee of creditors for approval of resolution is lowered from 75% to 66% as per amendment proposed to Section 12.

The newly proposed Section 238A makes Limitation Act 1963 applicable to proceedings before the Adjudicating Authority, NCLAT, DRT and DRAT

The Bill was introduced in Lok Sabha by Union Minister of Finance Piyush Goel on July 31, who said that the amendment addressed issues in insolvency resolution processes. Opposition members however flagged concerns about the Bill and criticised that the Government had taken the Ordinance route to introduce amendments, without referring the Bill to the Standing Committee on Finance.