Will Recent Amendments in IBC Lead To Rise In Completion Of Infra Projects?

Many real estate companies have gone into CIRP or have to shed huge funds to settle with such allottee(s) to safeguard them from the realm of CIRP
Will Recent Amendments in IBC Lead To Rise In Completion Of Infra Projects?
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Senior Partner, Singh & Associates
5 min read
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When the Insolvency and Bankruptcy Code, 2016 (Code) was introduced, it was the presumption that same will be used majorly by financial lenders or operational creditors who have large dues. However, with the passage of time, it was witnessed that the Code was used by almost everybody who was eligible under the definition provided with respect to operational debt or financial debt as provided under the Code and who have the debt of more than the default amount (i.e. INR 1 lakh only before the recent amendment) against the corporate debtor.

Barring few especially in case of an operational creditor the most common reason for using the Code was to arm twist the corporate debtor so that the debt be paid as who want to lose the company and this tact was actually worked.

Though the Code was clear as to who all will qualify as an operational creditor or as a financial creditor but still many creditors who were not able to get them fit as an operational creditor or financial creditor proceeded with filing the cases before the judicial forums. One such type of creditors was the allottee of any real estate project. Later on, by way of an amendment under Section 5(8)(f), allottee was given the status of financial creditor.

Immediately, after that there was a flood with respect to applications which were filed under the Section 7 of Code 2016 from these allottees who were having claim over and above INR 1 lakh against the real estate companies. Interestingly, as per the author’s research the number of applications under Section 7 of the Code against the real estate companies by financial lenders due to default is less than the number of applications filed by allottees.

Though the inclusion of allottee as a financial creditor was challenged before Supreme Court, which the Apex Court had not accepted and upheld such inclusion but provided some guidelines basis which the application can be rejected even if filed by allottee. Such relief or guidelines were not of much help.

As the Apex Court has also upheld the inclusion, many real estate companies have gone into CIRP or have to shed huge funds to settle with such allottee(s) to safeguard them from the realm of CIRP.

Keeping the view of the situation that the allottee(s) are using the proceeding under Code 2016 as recovery proceeding or an arm twist technique, again an amendment was made in the Code (in Section 7) qua the class of creditors including allottee. Vide this amendment, even though the Application can be filed by allottee(s) as a financial creditor but an application for initiating corporate insolvency resolution process against the corporate debtor is required to be filed jointly by not less than one hundred (100) of such allottees under the same real estate project or not less than ten per cent (1/10) of the total number of such allottees under the same real estate project, whichever is less.

In other words, a kind of relief was given to real estate companies as obviously it will not be easy for an allottee intending to file the application under Section 7 of the Code, as he has to travel a path of organizing atleast 100 allottee or 1/10th of the total allottees of a particular project who can support such allottee’s intent and agree to file it jointly as per the new amendment.

Though, it will not be wrong to say, immediately after the amendment introduced with respect to allottee(s) to be a financial creditor and upheld of same by Hon’ble Supreme Court, the real estate companies have started towards completion of the projects or negotiating with its allottees for further modus operandi of completion.

Interestingly, the relief with respect to default amount to file the application under the Code should be INR 1 crore or more, how will be of help to real estate company is not clear as since as per the amendment introduced in case of allottees it should be joint application by 100 or 1/10th allottee which ever is less in a particular project, so the total amount in such case will be over and above the threshold limit of INR 1 crore unless the interpretation of the judiciary is otherwise and it will consider the individual allottee threshold in such case.

The recent suspension of the proceedings under the Code 2016 have given them more time to act upon as barring few there will not be many projects which can take the plea of the proviso introduced in Section 10A of the Code, that against those who defaulted during the suspension period no proceedings under the Code 2016 can ever be initiated.

In conclusion, it will not be incorrect to say that the amendments made in I&B Code, have forced to complete the projects in much faster pace as nobody would like to exit from the Company especially where there is a large land bank still available.

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